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Retention business

An increasing number of lenders are now offering mortgage intermediaries a procuration fee if they recommend their client stay with their existing lender. Some lenders have been vocal in condemning those lenders with these 'retention strategies' suggesting that this practice could have an adverse impact on the remortgage market.

AMI welcomes the move by lenders to pay intermediaries a 'retention fee' but advises all members to remember they must 'work for their money'. Brokers must ensure they go through the full advice process with their clients and if the recommendation is to stay with the existing lender, then the reasons for this recommendation must be properly documented and recorded. Essentially, if it is in the client's best interests to stay with the lender then AMI does not see why the broker shouldn't be paid for this.

Also, those firms charging a fee for advice on remortgages, who advise their clients to stay put, will need to consider if their fee attracts VAT. Where active intermediation takes place there is no VAT (6th Life Directive, Section B (a)); without intermediation, it's a professional fee and may be subject to VAT.

There has also been debate around the possibility of lenders paying trail fees to mortgage brokers. AMI members must remember that the payment of a proc fee, retention fee or trail commission should be irrelevant to the advice he/she offers their client.

AMI Factsheet

We expect a growing number of lenders to begin paying retention proc fees through 2007. To help members in this area AMI has a factsheet entitled 'Dealing with retention business'. The factsheet has been designed to help members deal with retention business and the issues surrounding regulated/unregulated contracts that may arise.

The factsheet covers the following:

  • Firstly, the compliance issues when reviewing existing mortgage arrangements.
  • Secondly, the additional issues that will be raised where a client has an existing unregulated mortgage - taken out before 31st October 2004.

 

In covering these issues the factsheet explores the following areas:

  • Initial enquiry: the issuing of Initial Disclosure Documents (IDDs).
  • Factfinding.
  • Research.
  • KFIs for retention products.
  • Pre-regulation mortgages - regulated mortgage contract or not?
  • Using a sourcing system to obtain illustrations for an unregulated mortgage.
  • Complaints and compensation.

 

The key point to remember is that if an intermediary is approached by a client (or approaches a client) with a view to reviewing existing mortgage arrangements, such a review is likely to fall into the definition of advising. This is regardless of whether or not the outcome of the review is a recommendation to move either product or lender. Intermediaries must ensure they follow FSA rules for these activities including an assessment of the suitability of the retention product comparing it with the rest of the mortgage products available within the firm's scope of service.

AMI's 'Dealing with retention business' factsheet is available to all members here.

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