With a level playing soon to be achieved, in terms of which lenders pay retention proc fees and which ones do not, what is next in the debate on broker remuneration?
Last month the Intermediary Mortgage Lenders Association (IMLA) asked a group of brokers and lenders whether trail commissions will become a feature of the market going forward, a question Mortgage Solutions has put to this week’s three experts.
Martin Reynolds, managing director of SimplyBiz, thinks it is unlikely because of the number of factors which need to be balanced in order to deliver good customer outcomes.
David Copland, director of TMA mortgage club, says trail commission could form a valuable form of a broker’s revenue stream and recommends lenders and brokers strike up a charter.
Pat Bunton, director, London & Country, believes paying for retention business is already a form of trail commission and is the furthest the market will see this type of remuneration policy developed, in the near future at least.
Trail commission has been muted many times over the years but apart from a brief incursion from Intelligent Finance we have not seen it activated in the mortgage market. My personal opinion is that I think we are unlikely to see it any time soon.
There would be a number of challenges to overcome for this to happen. It would be an interesting challenge from a regulatory position as to how a firm explained on the ESIS the fee structure, as any commission trail would be dependent upon longevity post the initial rate.
What would the fee structure look like? It may be the current fee scale plus trail or lenders may want to drop the initial rate to compensate, it could even spell the end of product transfer fees in their current format. It would also need to be debated whether trail would be on a client specific basis or based on an adviser’s firm book size with the lender. If the introducing adviser moved firms or a firm moved distributor would they be able to novate (replace or add the legal obligation – ed.) as happens in the protection market?
All challenging questions and considerations in their own right when based against good customer outcomes, which has to be the main focus at all times.
Even if all parties felt that it was a viable option, we then have the final hurdle of a technological solution. We have seen with the roll out of product transfers that having the desire to engage is only stage one – getting a technology solution adds many more months to formal launch.
It’s fair to say that trail commissions are not universally popular. Their value has been questioned in the broader financial markets by both regulators and lenders in the past.
Even today, lenders sometimes claim system issues make it difficult to track what they owe, whilst others suggest brokers would not like to see their upfront commission reduced to pay for the trail.
I, however, continue to believe paying trail commission after an initial period of 24 months is the right way to go. Fundamentally, brokers should be rewarded for doing what is best for their client.
In addition, not as a substitute, a standard rate of 40/45 bps should be paid for the first 24 months of a product’s life. Following this, a further 5pbs should be commissioned each year the client stays on the lender’s books.
This would alleviate any concerns about their being a product bias towards shorter-term promotional rates, and even up the disparity that exists with longer-term fixed rates and offset mortgages.
Of course, however, there would need to an agreement – perhaps a charter – between lenders and brokers to ensure the customer continues to be contacted at regular intervals. For example, a broker must still be in a position to advise whether it’s best for the client to remortgage, pursue a product transfer, or to remain on an SVR.
What’s more, this form of trail commission would help create lasting value in a broker’s business – it will establish a steady revenue stream. If a broker builds up a portfolio of mortgages, they will be able to track every trail commission that is owed to the business, increasing its overall value.
Personally I don’t think that trail commissions are on the agenda at the moment, nor do I see that changing as we move forwards.
What we have seen though, is the market switching to a model where lenders pay a fee for product switches and it can be argued that this is in itself a form of trail, albeit one where consumers are advised on the best switching option versus the best remortgage one
The recent trend of lenders working in partnership with intermediaries in this area of retention is really welcome and works well for customers.
I believe trail commission in its purest sense is very unlikely in the foreseeable future and if it ever was on the agenda it would be vital that it didn’t mean those who should change lenders were ignored in order to maintain trail income.
As with all things the most important starting point has to be what is best for consumers and ensuring that interests are aligned, not placed in conflict.
While there is commission in the protection space, it is really very small – typically 2.5% of premium so it is really of little consequence and at that level I can’t imagine it influences behaviours
General insurances are typically annual contracts and as with motor there has to be a question mark about whether or not just rolling these contracts over every year, rather than looking at the market price again is in customer’s best interests
My personal view is that rolling contracts over year after year is not in consumers’ best interests and this is an area where the FCA has rightly started to ask some questions.