When a billion-pound company takes a serious hit to its business, everyone sits up and takes notice. So this was the case with lending giant HBOS when it recently revealed its market share in Q1 2007 had dropped dramatically from its usual number one lending position of 15 to 20 per cent to just 8 per cent.
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The reason behind this fall was placed squarely on a poorly priced retention strategy that had failed to deliver the ‘anticipated benefits’ HBOS had expected. While its market share recovered towards its normal levels by May, the sticky issue of retention has rushed to the fore once more, as people question what lenders need to do to achieve the desired effect of holding onto customers and brokers.
The way forward?
Everyone seems to have a different take on what would and wouldn’t work. So, for lenders holding back and watching the market, and more particularly HBOS, to see how retention strategies are received, what is the way forward for the industry?
For Mark Chilton, chief executive at Homeowners Mortgages, the debate around how a broker is paid is bigger than the retention strategies themselves. He says: “Some lenders have been quietly bemoaning why customers go for two-year deals rather than five-year deals and blaming the broker. Yet, shouldn’t brokers get paid twice if they are giving over the customer for twice as long? However, as soon as that happens, the broker is positively orientated to advise on longer terms.
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“Yet, I think lenders will start offering differential procuration fees based on term. The problem with retention schemes is that they only work if the product is absolutely at the front of the market and that dilutes lenders’ profits.”
The concept of differing procuration fees based on term is not met with approval. Martin Wade, director at Mortgage Options, believes it is an unrealistic proposition and agrees with Chilton it works against the client by incentivising brokers to advise on longer term deals. The question of where a broker’s loyalties lie is clear cut for Wade, who states a broker’s first duty is always to their clients. He says: “A lot of clients struggle to see five years ahead. This idea has been floated around, but it’s not necessarily the right solution to the problem.”
Making no sense
Linda Will, managing director of Accord Mortgages, adds varying proc fees do not make sense financially for the lender. She explains: “When lenders design products, profit is determined equally and there is not more profit for a longer term. Yes, it doesn’t churn as much, but there’s no more profit and they would just pay out higher procuration fees. The procuration fee is just one of the factors, so it’s not very attractive.”
Wade adds: “We all know there is a cheaper product out there for the client and it is in every client’s interest to shop around. Lenders have gone some way to opening up their product books to existing clients, but there is a long way to go. What I would like to see offered is retention commission.
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“Lenders should open up a sensible dialogue with brokers to create a retention policy that is best for the lender, broker and client. Not moving is right for some clients, but the broker’s advice should always be based on the individual.”
Splitting loyalties
Yet, for Will, trail commission holds the greatest risk of splitting loyalties, as brokers could be rewarded on a block of business rather than an individual case. She explains: “Brokers should look at what is coming up for renewal, compare products in the marketplace and see what is best. All the retention strategies say that if the product is best in the round, then the broker should get paid for that work. I can’t see how that creates a conflict of interest.
“Retention strategies that exist at the moment are very, very clear. If it is best to move the client do, but whatever the brokers do, they should be rewarded for the work. There is no bias.”
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She points out that the failure of HBOS’ scheme proves critics of retention wrong, by displaying that brokers are not being seduced by procuration fees and are advising their clients correctly. She says: “You can’t blackmail brokers. It’s not just ‘Treating Customers Fairly’ for brokers; they would lose the client if they found out they could have got a cheaper deal. Brokers are well aware of that.
It is a much more level playing field now. Brokers are more open to retention, so lenders are.”
What no one seems in doubt of is that brokers ought to be paid for the work they do, whether a client stays with their current lender or not. It seems unreasonable to expect less and it is up to everyone in the industry to openly debate the best way of achieving what the most effective strategy is. While HBOS has taken a hit, it has learned from its mistakes, as can other lenders, for ultimately, brokers have shown they will take their clients to the best deal not the best procuration fee.
