Many would claim that a large part of the financial services’ sector quite likes customer inertia. Staying put or being loyal has not really been considered a positive; in fact the likelihood is that, when it comes to consumer take-up of financial products, ‘staying put’ can bolster profit margins to a greater extent than attracting new customers.
There are many within the advisory sector who would not give someone like Martin Lewis the time of day, but what you cannot deny is his influence on trying to break this inertia, and the overall spending habits of the UK’s consumers.
He identified very early on in his money-saving days that customer ‘loyalty’ fuelled the profits of many of our country’s largest institutions; that this ‘loyalty’ was often not rewarded adequately and that existing customers who, for example, did not move providers/lenders/banks/financial products were subsidising the typically more attractive offerings made to new customers.
Thus, he encouraged people to ‘shop around’ and to use the power they had as potentially new customers of competitor organisations to secure better rates with their existing provider. And if they couldn’t achieve that, he encouraged them to vote with their feet.
Partly as a result of this, we’ve seen a shift in the mortgage market – whereas back in the day, customers would be left to quietly slip onto their existing lender’s SVR in the hope they would do nothing, now existing customers are targeted and offered product transfer rates which are likely to be more beneficial to consumers than the SVR. That can definitely be seen as progress.
We’ve all seen the increase in product transfer business as a result, but the ability to move and a highly competitive market in which to move, does not necessarily translate into remortgage activity. There are still significant numbers of borrowers sat on their lender’s SVR rates and (traditionally at least) lenders have not been in a particular hurry to encourage them to move elsewhere.
That, however, might well be about to change. Last year, Citizen’s Advice made a super complaint to the Competition & Markets Authority (CMA) on this very issue – what was the lending industry doing to help those borrowers being charged higher rates as a result of them not switching? It was especially concerned about vulnerable customers in such a scenario, and also produced research to suggest that ‘older, lower income and less educated’ borrowers were far less likely to switch and were therefore being hit in the pocket far more as a result.
The CMA recently responded saying it needed to see ‘swift progress’ on a solution to this issue and wanted to know what methods the lending industry was developing in order to ‘help or protect long standing customers’. Mortgages were one of five areas in which the CMA has uncovered bad practice – the others were mobile phone contracts, broadband, household insurance and cash savings accounts.
So, what could be done? The FCA is currently researching the whole switching market and I suspect some in the industry might simply point to the fact that existing borrowers can be led to the mortgage water, but they can’t be made to drink. In other words, lenders might argue that they are presenting more competitive product options to existing borrowers but, it can’t be their fault, if they are still not taking them up.
Will this be enough to satisfy the CMA though? I suspect not and we might find the mortgage industry being taken down the route of either automatic or enforced switching, in that if there is a better product/rate that the customer is eligible for then they should be switched to it regardless.
That might get you over the hurdle of doing something concrete to help borrowers and ensure they save a bit of money each month, but it still feels unsatisfactory and could be open to some abuse, depending on what lenders deem to be the better product/rate. Saving the customer a couple of pounds off the mortgage each month by moving them to a fractionally better rate than the SVR could still be spun as an improvement.
What is missing here of course is qualified and experienced advice. Instead of lenders being allowed to automatically move existing customers to slightly better products, what the CMA should be encouraging is the provision of independent advice to these borrowers. Of course, advisers themselves market to (and target) those borrowers currently on their lender’s SVR, but a system which automatically presented advisory options to these customers, would clearly be preferential and would likely mean the borrower didn’t just get a marginally better rate, but advice and a recommendation fully suited to their wants and needs.
Again, to be truly successful, there might have to be a degree of compulsion on the part of both lender and borrower, but if the powers that be are serious about helping those who, left to their own devices, would remain on an SVR for the rest of their mortgage term, arguably paying over the odds for that finance, then such action is likely to be required.
The message the advisory sector needs to be sending is the benefits of advice here and how it opens up many more potential avenues for borrowers than a simple switch. Once again, we need to show the value of advice and insist on it being a requirement of any new attempt to deliver a solution to what has been, for many years, a perennial problem.
Rob Clifford is Chief Executive of Stonebridge