The high level of remortgage activity is beginning to take its toll on the industry. After years of competing to offer the best initial incentives without penalising customers at the back end, lenders are starting to get nervous about the unhealthy effect this is having on their balance sheets.
What started out as a great idea, particularly for the consumer, and in turn for brokers who were making a tidy profit out of remortgage business, is now backfiring on lenders and hitting their own profit margins. Unsurprisingly, they are exploring the various options to remedy the situation.
One of these has been to look at the possibility of trail commission, whereby brokers fees are drip fed over the course of several years, rather than paid up front as a lump sum.
Trail fees are commonplace in other financial services markets, particularly on long-term products such as investments and pensions. But it will be highly problematic for lenders to introduce this new way of fee settlement in a market where serial switching between providers has become the norm and the average life of a mortgage with any one provider is just five years.
How will lenders be able to justify incentivising brokers to keep their clients on the same deal when it is quite apparent that there are more competitive deals available? This will surely be construed as lenders trying to manipulate the market to their own best interests. And how does this proposal sit with IFAs, who are bound by regulation to offer their clients the best available deal from all the products available? Surely, it would compromise the position of any broker or intermediary who called themselves independent.
Unless the playing field is levelled, with all lenders switching to a trail fee structure, then this practice will be bad news for the borrower, the intermediary and ultimately the lender proffering it. Borrowers could be unwittingly tied into a long-term deal that is not in their best interest. And as well as compromising their raison d’etre, brokers are unlikely to opt for the potential of a smaller fee over several years, when they can still get a substantial one-off sum from those lenders who will continue to offer upfront proc fees. If the brokers do not take the bait, the lenders who offer trail fees will simply not get the business.
Surely a more logical ‘ and ethical ‘ means of encouraging customer loyalty is to incentivise the borrower and not the broker. The products themselves should be attractive enough to retain customers over the longer term ‘ either in terms of rate, loyalty bonuses, or in providing the ability to switch to one of the lender’s other deals at no extra cost.
More importantly, lenders need to make a great deal more effort with their existing customers. According to recent research, 80% of people who remortgaged were not contacted by their former lender to persuade them to stay. It is not surprising that people feel no loyalty towards their lenders when they do not even bother with the most basic communication.
Finally, brokers are much more concerned about the service and support they receive from the lender than they are about the couple of hundred quid they might earn out of the deal, particularly with standard mortgage business. Lenders would be far better off, therefore, concentrating their energies and resources on getting both their products and their service right.