More people are remortgaging more frequently than ever before. Fuelled by short-term discount products with no extended tie-ins, customers are moving from lender to lender in search of the cheapest deal. It does not take an expert economist to predict that this pattern cannot continue without loss of profit. Lenders are therefore reaching for their thinking caps and trying to come up with new ways to keep customers for the long term.
After customers have enjoyed the freedom to shop around and advisers have got used to a profitable income stream from rebroking, lenders have a tough challenge on their hands. One of the solutions being actively discussed by lenders is the issue of trail fees. But is this the best answer?
The theory behind trail fees is that by offering advisers an initial procuration fee, followed by additional annual fees, it will encourage intermediaries to advise on the best long-term deals instead of going straight for the cheapest initial rate. At present only two lenders ‘ Standard Life Bank and Intelligent Finance ‘ offer annual renewal fees on their products (0.05% of the loan balance for the first three years), but more lenders are looking at the possible benefits and are not actively ruling them out.
The fact that this issue is at the forefront of discussions is undoubtedly due to market fears which have emerged in the aftermath of short-term discount deals. Lenders are realising that unless something changes, the market may soon be running at a loss.
Alan Dring, head of sales at Standard Life Bank, says the market is heading for a fall unless lenders reassess current deals. ‘At the moment mortgages have become charitable propositions and there has to come a time when prudence and economic sense come into play,’ he says.
Yorkshire Building Society is one of the lenders that is considering introducing trail fees in order to combat this financial instability. Tanya Mills, press liaison officer at Yorkshire Building Society, says: ‘We are looking at new ways to reward brokers for advising on long-term deals, rather than short-term discounts and one of these options is trail fees. We are encouraging brokers to find the best product in the first place so customers will not need to remortgage so soon after. Lenders cannot continue to offer new customers discounted rates with no extended tie-ins as they are not profitable at the end of the day. The mortgage market will have to change its pricing strategies as the present trends cannot be sustained.’
Although research conducted by Yorkshire Building Society has suggested that fewer than 20% of borrowers are, in fact, active rate chasers, it sees trail fees as a positive way to encourage advisers to find the best long-term deal in the first place, ensuring that the remaining 80% of borrowers are getting the benefits they deserve for their loyalty.
David Holmes, corporate affairs manager at Yorkshire Building Society, says: ‘By offering advisers continued payments each year, we feel more borrowers will be encouraged to take out the best long-term deals ‘ reducing overall costs and eliminating the hassle of shopping around. We have backed the broker market for a long time and feel that both borrowers and advisers will be able to reap benefits from this policy. The proposals are, however, only in discussion stage as yet.’
The push towards customer retention may not only be in the best interest of lenders. Although remortgaging to cheap initial rates may seem attractive for customers at first glance, Mills says other costs are also incurred and may mean clients are not getting the best deal. ‘From what we have found, the public does not want the hassle of remortgaging either and there are added costs such as surveyors to consider. Remortgaging is fine if rates are on a downward spiral, but if they increase you may not necessarily be getting the cheapest deal,’ she says.
A balancing act
But even if remortgaging is not always in the best interest of borrowers, the added income stream this business provides certainly holds value for advisers. Trail fees may provide a guaranteed future income, but the feeling among intermediaries is that they cannot compensate for the initial procuration fees gained every few years from clients remortgaging.
Michael Giblin, IFA at Falcon Group, says: ‘If I am honest, trail fees are in reality a means by which lenders can secure their own book. I do not believe they can match the commission gained by advisers from re-broking every two to three years.’
Martin Stewart, partner at Millfield Partnership, has a similar negative view. ‘Whenever the product becomes free from redemption penalties, advisers will always look to a product that is in the client’s best interest. If they are receiving an additional procuration fee from remortgaging, then they can afford to sacrifice the renewal fee,’ he says.
But the presumption that trail fees will prevent advisers rebroking for the same clients, that could have otherwise benefited from a more attractive long-term deal, is also questionable. According to Grenville Turner, head of intermediary sales at Halifax, when customers do remortgage it is often through a different adviser than the original mortgage was taken out with.
‘Lenders are not in favour of their clients being moved around by intermediaries. But there is no significant evidence that this is actually happening as it is often not the same introducer moving them over. Trail fees may work in the life and pensions markets, but the mortgage market has different economics and dynamics,’ says Turner.
The real problem with trail fees does not, however, centre on profitability or economics. It is the ethical issues surrounding trail fees advisers are finding hard to overcome. The role of an IFA is to give independent advice and the fact that lenders are trying to throw incentives to advisers in order to sway advice has not been well received.
Giblin says: ‘My function is to make customers aware of the best deals for them at any one time, so encouraging customers to stay with one lender when better deals may be available is compromising my position as an independent adviser.’
Turner suggests that customers would also find it hard to welcome a change in advice tactics. ‘We have had a few conversations with advisers and found they respond negatively, first, saying they are not willing to give up the initial procuration fees gained from remortgaging and second, that they are not sure how much clients would welcome their change in behaviour,’ he says.
Peter Brodnicki, chief executive at the Mortgage Advice Bureau, agrees and suggests that lenders would find better loyalty with clients if they offered to remortgage at no added cost. ‘There are split views about trail fees and they could cause a conflict of interest and make advisers neglect what the best deal is for the customer. If lenders want to reduce movement between lenders, they should move to a system which promises to remortgage at no extra cost to a new deal with the current lender,’ he says.
Another concern among both lenders and intermediaries is that if more trail fees are introduced, they could infringe upon industry regulations. Dring says that although more lenders are discussing the potential of trail fees, they need to make sure that advisers will still be able to comply with the Mortgage Code. ‘Market research has found that only 30% of advisers believe trail fees jeopardise Mortgage Code compliance, but any changes introduced need to be mindful of regulation,’ he says.
It seems the decision by lenders on whether or not to introduce trail fees ultimately lies with advisers. Jennifer Stoddart, senior press officer at Nationwide, which has recently scrapped short-term discount deals in a bid to stop customers remortgaging, says that if advisers believe trail fees can provide a positive solution, they will consider introducing them.
‘If intermediaries say it would be effective then we will consider it. We are actively trying to promote long-term deals to customers. But in the longer term we believe more lenders will have to follow our approach and concentrate on providing long-term value for customers,’ says Stoddart.
Those lenders who have not yet committed themselves to trail fees appear to have similar views ‘ it does not matter what incentives are offered to advisers, the only way to retain customers is by providing the best products and ongoing service in the first place.
Yvonne White, media relations manager at Coventry Building Society, says: ‘We are also trying to focus on customer retention, but we would hope that after a couple of years customers would choose to stay with us on our own merit.’
Turner agrees: ‘It is our job to make remortgaging less of an issue by providing customers with the best rates and service from the beginning.’
Even Standard Life Bank, which already offers renewal fees, is aware of the need to combine trail fees with the best products and service if it is to induce customer loyalty. ‘Trail fees can only work to secure long-term deals if they are linked with product development and the ability to keep customers happy through service levels,’ says Dring.
One element is certain, changes will have to be made in the mortgage market if the remortgaging trend is to be reversed. Only time will tell whether trail fees hold the answer. The only way to create true customer loyalty is if customers can enjoy consistently good value products and excellent service levels from the start. Whether trail fees can help lenders work positively towards this goal is yet to be seen.