At the heart of every business is money. Everyone wants and needs to be paid for what they do, but the best method of doing so is up for debate in the mortgage world. Trail fees have been pointed to as a better and fairer method than others, providing brokers with a continual income stream for the life of the loan. Certainly, having this form of payment is a sensible business solution from a broker’s perspective, but so far lenders have not made any moves to introduce such schemes. Yet, could trail commission be the future of the mortgage broking industry as some believe?
Brett Davidson, managing director of FP Advance, certainly thinks so. He cites the Australian mortgage market as a prime example of a country where trail commission has been successfully used for years and believes the UK is set to go the same way. He says: “In Australia, trail fees are looked at as an asset for the management of your business. The UK is starting to see lenders say why encourage the two-year mortgage churn? I think we will probably find lenders adopting a different business model and providing more long term rates that are fairly priced. Lenders are looking at trail fees because churning every two years costs a fortune.”
Yet, Mehrdad Yousefi, head of intermediary mortgages for Alliance & Leicester, feels there is no tangible evidence that paying trail fees in Australia has reduced the numbers of consumers refinancing from one lender to another: “I think there is no direct correlation. The Australian model hasn’t proved that customers stay longer with a lender or that brokers do extra business. I think it’s too early to make a judgement call as to what is the key approach to retaining customers. At the moment, only a few lenders have retention schemes. When we have concrete evidence that retention is reducing the mortgage churn as a whole, that’s when there will be a wide spread debate.”
However, Thomas Reeh, chief executive at blackandwhite.co.uk, is shocked Yousefi believes there is no evidence trail fees work. “I have worked on both sides of the globe and trail fees had a massive impact in Australia. Customers are sick of remortgaging. It’s not just the financial cost, but the emotional cost as well and that’s why people are looking for longer term value.
“The only way to having meaningful trail commission is by having good long-term deals. If there is an incentive for brokers not to churn then that’s great. Brokers in Australia earn a lot more money than those in the UK. The only reason proc fees are so low here is because mortgages keep churning and lenders keep lowering rates as a result. Yet, flexible long term mortgages are expected to cover 30 per cent of the market by 2008 and that’s being driven by customers. The balance between brokers and lenders is all out of kilter. My view is brokers need to start putting pressure on lenders to start sharing the spoils.”
Yousefi counters that while trail commission is one way forward, it is not the only way: “Whether it changes the dynamics of retaining customers, I’m not sure. The vast majority of all products are two-year products and that’s why the debate is inconclusive. Two-year products are the least profitable for lenders and paying a trail fee would make them even less so. Lenders have a difficult balancing act.”
However, David Finlay, intermediary business director for Woolwich, does not think a sea change away from the attraction of the short term discount is required, as customers are used to looking at all the options: “The benefits of trail fees for lenders is it provides an ongoing relationship with customers and brokers, as opposed to a one off proc fee payment. It could potentially encourage stronger relationships between lenders, brokers and customers. Yet, it would come down to economics and viability.”
While Finlay can see the benefits of trail commission, he does not believe a change will take place any time soon: “It’s certainly something that’s being discussed in the industry. If you look at other similar businesses like general insurance, they already have trail commission. In terms of consumers’ benefits, it may lead to less churn, as brokers will potentially look at the benefits of customer staying with a lender. Brokers would get longer term embedded value, as if they have a lifetime product, then they have a lifetime trail fee.”
Whether lenders will opt for trail fees as the preferred method of payment only time will tell. If the attraction of the two-year discount really is on the wane, then the introduction of trail fees could bring a greater stability to the lives of brokers and lenders, as customers find choosing a lender for the long term is worth it.
