Client retention is an issue which has divided opinion in the mortgage market for many years.
For intermediaries, Utopia is a client bank which remains 100 per cent loyal. In this fantasy world, clients return time and again to their financial adviser whenever they need to purchase financial products and new business prospecting only kicks in when clients die. 100 per cent client loyalty may not be achievable in the real world, but it is an objective which brokers continue to strive towards.
You would be forgiven for thinking that the same Utopian ideal exists for lenders. Churn, which has been a major issue in the mortgage industry, has cost lenders millions of pounds over the years and a large portion of time, effort and marketing budget is spent in an effort to stem the outflow of existing business. All lenders want to hang onto their clients – or at least you would think so.
In the majority of instances that is true, but there are a couple of instances where client retention is not necessarily a high priority. The first is when the majority of lending is done off balance sheet. If a lender is generating new business and then either securitises the loans or sells the portfolio within a couple of years from origination, then client retention is not really a priority.
In fact, it is very difficult for such lenders to consider long-term retention strategies, because they are not in a position to formulate future products which may ultimately be another institution’s responsibility.
The second instance has specifically been bought about by the credit crunch and, again, affects those lenders who are limited by their balance sheet capacity. In recent weeks we have seen a number of lenders dramatically reduce their new business activities because of funding constraints.
For them, client retention is not an issue; in fact in the short-term a highly effective client retention strategy may only compound their problems. This does not mean, of course, that such lenders will be actively encouraging borrowers to remortgage elsewhere and they will be mindful of their need to treat customers fairly, but the reality is that the unusual circumstances in which they currently find themselves do not act as a catalyst to the development of sophisticated client retention strategies.
Causing a divide
For the rest of the lending community client retention is an important issue and, like intermediaries, lenders are eager to do as much as possible to dissuade borrowers from remortgaging.
However, there is one key issue which continues to divide lenders and intermediaries: client ownership. Brokers and lenders both like to think they own their client relationships and this concept of ownership is core to the way in which many organisations have approached the task of developing their client retention strategies to date.
For lenders, long-term client relationships are essential to future profitability especially when, over the past few years, they have relied heavily on short-term, low, or even no margin fixed rate deals to win new business.
Lenders need to retain borrowers at the end of the fixed rate term in order to generate worthwhile profits, and borrowers being churned onto better deals elsewhere as soon as the current one ends has a negative impact on future profitability.
20 years ago the average life of a prime mortgage was seven years. Today, it is little more than three years, and the trend is downwards. This tide has to be stemmed and lenders recognise the need to include intermediaries in their future client retention plans, because brokers now account for approximately two-thirds of all new mortgage referrals. Lenders cannot, therefore, afford to bite the hands that feed them, by circumventing brokers and cutting them out of the client relationship.
Sharing data
One of the step changes that’s taken place in the thinking of many lenders has been the need to include brokers in their retention strategies and be willing to share client information and even develop systems, as HBOS has done, which enable brokers to manage their clients’ mortgage accounts on its behalf.
HBOS’ retention strategy was blamed for the recent dip to 8 per ceent in its market share but this had more to do with the competitiveness of its products than the principle of being willing to share client information with brokers.
Sharing client data does not mean lenders are necessarily willing to hand over the client relationship to intermediaries on a plate. Indeed, the concept of client ownership is, in reality, a very naïve and arrogant one.
It’s the customer who ultimately decides who they deal with and on what terms. Lenders and brokers are only empowered to make borrowers aware of the options available to them and advise them accordingly. The client makes the final decision.
However, it’s not unreasonable for lenders to make borrowers who are coming to the end of fixed rate deals aware of the options available to them. Lenders have to notify borrowers that their monthly payments will change when they revert to a standard variable rate and this is a logical time to inform them about other products which may be suitable for the future.
It’s also a good time for borrowers to be made aware that, if they feel they would benefit from professional financial advice, they can speak to the broker who originally advised them.
By presenting clients with options in this way, lenders are giving brokers the chance of a bite at the cherry. There is nothing stopping brokers from also contacting clients as they approach the end of a fixed rate deal. After all, they should know when the deal is due for renewal and they should be diarising key dates and contacting their clients at the appropriate time.
When reviewing clients’ future needs, brokers have an obligation not only to take into consideration headline charging rates, but also redemption penalties, fees and charges – which have risen significantly in the past couple of years – and the hassle factor involved in moving a mortgage.
Most borrowers have no great appetite for filling in mortgage application forms every couple of years and, all things being equal, would prefer to leave their accounts where they are. The decision to stay put or remortgage is rarely one which is driven purely by rate and both brokers and lenders need to bear this in mind as they develop their retention strategies.
Procuration fees
A major issue in the debate about retention strategies is procuration fees. If a broker reviews a client’s future mortgage needs and comes to the conclusion they are better off leaving their mortgage with their existing lender, should the broker be paid a fee for this advice and, if so, on what basis should the fee be paid – upfront or as a trail fee?
Most agree that brokers should be paid a fee for retention business. There is also a desire among some lenders to move towards the payment of retention fees as they reward brokers for the longevity of the client relationship and encourage them not to churn business.
However, it is argued that trail fees simply replace one conflict of interest with another as they are designed to encourage brokers not to move their clients’ mortgage. Intermediaries have to put their client’s interests above those of lenders and they have a duty to treat customer fairly and provide them with best advice.
Product design is also an important element in lenders retention strategies. It’s all well and good lenders having strategies to communicate with borrowers at key points in the product life cycle, being happy to share data with brokers and being willing to pay attractive fees for retention business. If the products on offer are not competitive, borrowers will vote with their feet and move their mortgages elsewhere.
Products can be designed to help foster longer term client relationships. Offsetting, for example, provides borrowers with a tangible benefit for leaving their mortgages with their existing lender and, although I have not seen any data to substantiate this claim, I suspect that offset accounts are less prone to remortgaging than other classes of mortgage business.
Brokers are also keen on offset accounts, with intermediaries generating 60 per cent of all sales transactions in 2006, as opposed to just 25 per cent in 2005. I have no doubt that we will see more mortgage products being developed in the future which specifically have client retention as a primary objective.
Client retention is, I suspect, an issue to which there is not a perfect solution. The best outcome for lenders may not be ideal for brokers and vice versa. Ultimately, however, it is the client who will decide whether their mortgage account stays or moves and lenders and brokers need to remain mindful of this fact
Answer ten questions to win Amazon vouchers!
Get the daily news delivered to your inbox
Find the latest industry jobs
