Press
Mortgage Solutions 11th Sept 2006
To have and to hold?
Another lender has announced it intends to introduce a retention fee for mortgage intermediaries but some competitors are urging brokers to practice caution.
Skipton Building Society has become the latest lender to announce it is considering introducing retention fees for remortgages – in a move that echoes Halifax in July. But key industry figures are already advising caution as it joins several other high-street names that have now also voiced their intention to follow suit.
Skipton is moving ahead at quite a pace, and has undertaken a cost-benefit analysis due to be completed by the end of 2006, at which point it will be able to assess whether it is prepared to make the move or not. However, Paul Darwin, head of intermediary sales at Skipton Building Society admits the final decision will partly be made on whether other lenders also take on retention strategies in order to secure their mortgage books. Darwin says: "If a group like HBOS makes this kind of move, other lenders are bound to follow. Using retention fees is a win-win situation; brokers are paid fairly for their time for remortgages, and lenders retain valued existing borrowers."
Commenting, James Carter, IFA at Virtue Financial says it is clear customer retention is something an increasing number of lenders are looking at as the remortgage market continues to dominate the market. He said: "Woolwich already has a scheme that is working very well. A retention fee does help – we are still giving advice and we are still taking on liability for that advice. This is certainly something more and more lenders will be looking to do."
Strategic thinking
It appears to be inevitable that others will, or are already making the move to implement retention strategies. Halifax announced in July that it would be 'aggressively defending' its mortgage book. It will be paying full procuration fees on retention business and offer the same mortgages to new and existing customers. Accord Mortgages and Woolwich offer retention incentives while Abbey, Scottish Widows Bank and Alliance & Leicester have confirmed that they too will be looking at the market. With 155 lenders in the market and 19 lenders thought to be pending, it is little wonder that lenders are looking at securing client levels according to Stephen Knight executive chairman of GMAC-RFC. But this strategy could have potential regulatory implications that advisers must be aware of, according to Knight.
However, the topic of retention is not new. In March 2004, the Miles Review on pricing structure in the UK mortgage market expressed concern that UK mortgage customers are reliant on swapping from one short-term deal to another –crudely known as 'rate tarts', customers are moved, depending on exit fees and contractual constraints, from one rate to another. In his report Professor Miles said: "Two-year fixed-rate deals were priced in line with two-year swap rates. If we take money market rates of interest as an indication of the marginal cost of funds, these discounted and two-year fixed-rate deals seem to offer lenders virtually no profit margin. Many lenders did charge fees on these products. It is not likely that the excess of those fees over the real resource of cost of marketing and arranging a new mortgage would add more than a few basis points to the net of costs return the lenders on loans." It is no wonder, perhaps, that more lenders are focused on retention – and are willing to pay brokers for it.
Alan Cleary, managing director of new lender Edeus, explains the problem that existing mainstream lenders have. He says if a typical prime deal at 0.25% above the base rate has an average life span of 2.6 years, once the costs of the intermediary, processing, servicing and any additional costs are deducted, there is little left for the lender.
Mainstream problems
And while Knight is very clear that he has no major commercial interest in the area of mainstream remortgaging, stating this mainly affects the high street lenders whose bread and butter is precisely this area of the market, he warns though that it is precisely these lenders – who may or may not choose to jump onto the retention strategy bandwagon – that are in danger of entering a procuration fee war. He queries the consequences of such actions: "I am not saying that lenders should not offer this but are they ready for the consequences of a procuration fee war from those lenders who require the mainstream business?"
More worrying, according to Knight is the potential for the less savoury broker to abandon clients to one lender. He says: "One could argue that, a very busy broker in a buoyant market being paid 30 basis points for leaving the client where he is rather than 30 to 35 basis points for moving the client could be tempted for the option where he has to the least work."
The Financial Services Authority has not made any specific comments on the increase in debate on retention fees. Robin Gordon-Walker, spokesman for the regulator, says: "If advice has been given, the broker has to give evidence that he has shopped around and given best advice according to the mortgage conduct of business. That is all we can say."
Knight also points to treating customers fairly and says if you look at the best buy tables and the top 10 two-year fixed rate deals, they are priced below the cost of funds and are likely to not be the best priced option.
Knight is not without his supporters. Cleary says the payment of retention fees could be a move that will reduce the size of the remortgage market and extend the life of loans with one lender. He adds: "What about these lender's back-books? The problem for them is that they can not equalize their back-books along with the new business. Therefore, it is simpler for them to pay brokers a retention fee."
Whatever is being offered by lenders, there is an obligation, as embodied in the treating customers fairly initiative, to make sure that the client is receiving best advice. As Gordon-Walker says, the intermediary must evidence this, as part of the regulatory obligations as embedded in MCOB.