Holding on to the clients you have is a fundamental part of being a mortgage broker and your client database is a resource that should be nurtured and cherished. Brokers have recognised this for a long time, understanding that a business that spends all its time chasing new business at the expense of current clients is doomed to struggle at some point. It would seem that, given recent news and developments, lenders have also grasped the point.
Not only have lenders realised that it is vitally important to their business that they hold onto their clients, it would seem they are now prepared to admit where they get the vast amount of those clients from. No prizes for guessing that it’s the broker distribution channel delivering the majority of their volume. This is the backdrop to the decision by a number of lenders to not only review their retention strategies but to also pay brokers a fee if they keep their client with them.
But, the decision of some lenders to pay retention fees has not met with universal acclaim. Accusations have flown that these practices are somehow ‘anti-‘Treating Customers Fairly’ (TCF)’, they will encourage ‘lazy broking’ or will decimate the remortgage market. Others welcome the move as recognition of brokers’ work and predict that where a few lenders have pioneered, many more will have to follow. So, where does the market go with retention fees? Will this become widespread practice? What do brokers make of the changes and how can they ensure their advice and sales practices are compliant?
Not a new practice
The highly competitive beast that is the mortgage market right now can be no better illustrated than through the industry debate currently taking place around the payment of retention fees to brokers. It should be pointed out that this is not a particularly new practice – Accord Mortgages has been a proponent for quite a while, while Woolwich has also opted to pay retention fees. But, it was Halifax’s decision to change its retention strategy, coupled with enhancements to its technology, which really made the market sit up and take notice.
It would seem, if we are to believe recent research, that these pioneering lenders will be followed by considerably more in the very near future. Troika’s survey of 30 individuals from 17 lenders revealed that 79 per cent anticipate the payment of a retention procuration fee will some become ‘industry standard’, although they do not believe this will happen in 2007.
So, why are lenders having to look at their retention strategies? What has brought them to this point? Bill Warren, director at Complete Mortgage & Loan Services, believes that years of offering loss-leading deals to new customers, only to see them move lender following the end of the discount period, has taken its toll. He says: “More lenders, especially high-street lenders, will pay retention fees, partly to follow the rest, but partly to avoid losing more borrowers, who are now much more sophisticated and street-wise.” It has also not been lost on many that lenders are finally having to respond to a market of their creation – making it easy for borrowers to move lenders has resulted on this re-think of retention strategies.
Danny Lovey of The Mortgage Practitioner agrees that retention fees will be paid by more lenders in the near future and argues that this is recognition of the amount of business the broker channel gives them. “More lenders will opt for retention fees as it makes good business sense to them,” says Lovey. “Halifax states that 80 per cent of its business comes from the broker market. Lenders have recognised that they need to work jointly with advisers and culturally this is a big change for a prime lender.”
Yet the number of actual lenders who will pay a procuration fee if a broker keeps a client with them is still very small. Chris Pearson, head of sales and marketing at BM Solutions, a lender that has begun offering retention fees for what it calls ‘product transfers’, is not surprised that the industry believes they will become standard, but is clear on why more lenders have not opted to change their strategies just yet. “Technology is the only thing stopping retention fees becoming standard in 2007,” says Pearson. “Many lenders didn’t see
retention fees coming and are behind the game in terms of technological investment and development.”
Critics and supporters
Even with perceived industry opinion suggesting that retention fees will become standard, there are some notable critics of lenders who have chosen to offer retention fees. The management team at edeus, for instance, have deemed retention fees as dangerous and voiced concerns that they are not what they seem and will have an impact on the remortgage market. Others have suggested that retention fees encourage ‘lazy broking’ or are simply ‘money for nothing’. Research among brokers has also suggested that the adviser market itself is split on whether the fees are a good thing or bad.
The Association of Mortgage Intermediaries (AMI) has been supportive of the payment of retention fees but has been quick to warn members that brokers must work for their money. “Payment of retention fees by certain lenders should not be used as a means to give the client less than a full, professional service,” says Rob Griffiths, associate director of AMI. “In fact, a retention fee should not come into an intermediary’s thoughts until the full mortgage process – the factfind, market research, etc – has taken place. If at the end of the process, the adviser’s recommendation to the client is to stick with their current lender, and they can fully document and justify how they reached that recommendation, we see no reason why a broker should not be paid a retention fee. After all, they have done the work.”
And it would seem that brokers agree with their trade body. “Retention fees are not a way of paying brokers for nothing and I strongly resent that,” says Lovey. “More often than not, we are doing all the work and getting nothing for it from the majority of lenders.” Alan Lakey, partner at Highclere Financial Services, is also positive about retention fees, believing they simply reward advisers for work carried out. “Lazy brokers tend to be found out eventually and they will lose client goodwill,” he warns.
Lovey points out that it is not just client goodwill that brokers must be aware of when opting for a retention fee over active intermediation. He says: “There will always be some who abuse the system and that is a matter for the Financial Services Authority and compliance departments to sort out. Those who are doing it will, no doubt, also be doing other things they should not be doing.”
Warren is adamant and has a warning for these so-called ‘lazy brokers’. “The retention fee is still a procuration fee payable for carrying out a regulatory activity and therefore the broker should undertake a full MCOB-compliant sales approach,” he says. “To my mind, if the broker offers whole of market or a range of lenders he or she must research the market to be able to recommend that the client stays with their existing lender. If the broker does not do this, I think they could certainly be challenged if the recommendation is not the best product for the borrower.”
No surprise
It will be no surprise that it will be the FSA at the forefront of any challenge to the recommendation. The payment of retention fees has already drawn the attention of the regulator and it recently revealed that it would be undertaking a review. It seems highly likely that this study will look at client cases where a retention fee was paid and is bound to ask the intermediary who accepted the fee to justify his or her recommendation.
The positive news is that those brokers who are supportive of retention fee payment are also clear on their regulatory responsibilities. Lakey cites his use of a ‘suitability letter’ to make clear to the client why the recommendation has been made to stay with the existing lender, plus it is, of course, useful if one day he needs a ‘get out of jail free’ card. Lovey is of the same ilk. He says: “I fully document my file with calculations and write a reasons for recommendation letter to my client that is on file.”
Of course, regulation is now wider than just the rules. Principles are shaping the regime and the FSA’s TCF initiative is often used as a ‘catch-all’ by some to query particular practices. Retention fees have not been spared, with some critics of the practice arguing that acceptance of these payments is somehow ‘anti-TCF’. Others believe something completely different. “We will get to a stage where any lender, which isn’t offering retention fees, may not be treating customers fairly,” he says. “Therefore, it may not be a matter of choice for those lenders who are desperately trying to stem the tide of consumer and broker opinion.”
Griffiths is not so sure that failure to pay a retention fee is ‘anti-TCF’. “While we support the introduction of retention fees, I’m not convinced that lenders who don’t offer them will feel the regulator’s wrath,” he says. “This should be seen as a move to create a better relationship between the lenders and the broker community. This is obviously a recognition that the broker channel is providing the majority of lenders with most of their business, but it has to go further than this. In its recent provider and distributor responsibilities discussion paper, the FSA seems to be suggesting that greater information exchange between lenders and brokers is necessary. There has to be an acceptance that this is a partnership and both sides must work more closely together for everyone’s benefit.”
Lovey agrees. “The intermediaries need the lenders, the lenders need the intermediaries,” he says. “I have, for some time, floated the idea, which Accord has been looking at, that lenders should keep brokers in the loop in a similar way that life insurance companies do. If a client misses a payment, the life company will tell you. If you were the broker that arranged a policy or if it has been transferred for you to service, they will be helpful to you with relevant information. Similarly, an early warning system of a missed payment would be good for the lenders as well. The broker is more likely to be able to get to the bottom of it if the client has faith and trust in their adviser.”
Faith and trust. Two feelings that clients often have in their broker. Could the same words ever be said to define the relationship between lender and intermediary? The jury may still be out on this. What we can say is that the relationship does seem to be growing closer and the introduction of retention fees seems to be one step along the road towards a better working relationship.
Running your entire business on a ‘you stay, they pay’ basis with clients though is doing them a dis-service and treading a fine line with the FSA. There’s ‘no such thing as a free lunch’; fees must be earned and there will be consequences for any broker that does not follow the rules and principles set down by the FSA.
