Should lenders be obliged to offer existing customers the rates on offer to new customers?

Brendan Burgess

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It was so obvious to me that passing on rate cuts to new customers only was blatantly unfair and in breach of the Consumer Protection Code, that I did not bother to make out the argument. But as a few people have questioned it, I thought it worth setting out the arguments in a systematic manner.

Note: This is a long post!

Introduction


Imagine a market where lenders are obliged to pass on rate cuts equally to new and existing customers and where incentives for new business are prohibited. If a lender wants to compete for new business by cutting the rate for <80% LTV mortgages, they would have to cut the rate for their existing book of <80% LTV mortgages.

It would be much easier for the borrower to make an informed choice. They would be presented with something like the following information

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KBC is clearly the cheapest lender, unless the borrower is borrowing over €200k and less than 80% LTV.

Bank of Ireland will only get business from customers who don’t shop around. So what will happen is that Bank of Ireland will be forced to compete by cutting rates.

Any customer who is prepared to shop around, will be able to see very quickly where the best deal is for them.

Over time, another lender may become cheaper than KBC. But a borrower will not find themselves taking out a mortgage with KBC, only to find KBC cutting rates for new customers only.





If one is relying on competition alone to solve the problem, then obliging lenders to offer existing customers the rates available to new customers is essential. Otherwise, most existing customers will not benefit from any increase in competition.

It is very important that the lenders are obliged to charge new and existing customers the same rates. If not, KBC may cut the rates for new customers only. Existing customers would not benefit from competition. Of course, those who could switch, might switch. But many can’t switch, and even for those who can, it’s time consuming and expensive.

Limiting cash incentives to the cost of switching is essential is we are to rely on competition

A lender could get around the obligation to charge new and existing customers the same rate by giving new customers a cash incentive.

In the example above, Bank of Ireland would get little new business as their mortgage rates are so much higher than AIB. They can only get new business by offering 3% cash back. This would allow them to effectively offer new customers lower rates than existing customers.

So limiting cash incentives is an essential part of obliging lenders to charge the same rates to new and existing customers.

All variable mortgage rates should move up and down in line with the market and not just for some customers

When taking out a mortgage, a customer of KBC, for example, would expect that their rates would rise and fall in line with the market. Many chose variable rates instead of fixed rates because they expected rates in general to fall. They would not have chosen KBC if they had realised that they would not reduce rates in line with the market.

But we have no such controls or limits in any other industry! Why should we make an exception for the mortgage industry?

The mortgage market is different from every other market. The primary difference is the number of barriers to switching. If your phone provider increases the prices for existing customers, those customers can switch to another provider easily.

There are huge barriers to switching which are unique to the mortgage market

· The costs of switching mortgage are high – there is no cost to switching electricity supplier

· It is time consuming to switch provider – switching phone supplier is easy

· A customer needs a solicitor to switch mortgage providers – there is no cost to switching current accounts

· A borrower can’t switch if they have a bad credit record – Utility suppliers don’t check credit records

· A borrower can’t switch mortgages if their income or family circumstances have changed and they no longer meet the affordability criteria – suppliers of house insurance do not check a new customer’s affordability

There are other differences between the mortgage and other markets

· The Consumer Protection Code obliges lenders to treat customers fairly – there is no such obligation on utility providers.

· Mortgage payments are usually much larger than any other payment such as phone or electricity

· It is more difficult for ordinary consumers to understand and compare mortgage deals. Many people simply do not understand percentages. They are unable to incorporate 2% cash back into their mortgage decision. Gas prices are much easier to understand.

· When comparisons are difficult, the borrower will often default to the bank with whom they have their current account. So AIB and Bank of Ireland have almost a captive audience. There is no such tie-in with other industries.

· Most other industries pass on price increases and reductions to new and existing customers equally.

There are price restrictions in other industries

· Health insurers must offer any new product to existing customers

· Health insurers are not allowed discriminate on the basis of health. This is like telling mortgage providers that they must take on customers with bad credit records.

· We are gradually bringing in rent controls

· Some suppliers must seek government approval for price increases – An Post, Bus Eireann, credit unions, money lenders,

For most mortgage holders, their mortgage payments are much more important issues to them.

Lenders could be allowed to use very limited incentives as they use in other industries

They could be allowed to offer new customers and existing the customers the same rate, except for a reduction of up to 0.5% for up to the first 12 months. This would make the incentives comparable to other industries e.g. Virgin gives €30 off for the first 6 months and Energeia gives new customers 18% off for the first twelve months.

Wouldn’t such a restriction impede product innovation and differentiation?

Not at all. It’s just that they would have to offer their innovative and differentiated products to existing as well as new customers.

Health insurers are obliged to offer all new products to existing customers.

Would it not result in an increase in the rates for new customers?

It should result in fair rates for all customers.

At the moment even customers who are willing and able to switch get little benefit from switching because the lowest rate is 3%, well above where it should be.

A competitive market would lower this rate for all borrowers.

Would an existing customer get the rate for their current LTV or their original LTV?

There are arguments for both approaches.

The simplest would be to oblige lenders to offer the rate based on the original LTV but the mortgage offer should make this clear. “We are offering you the rate based on your LTV of 65% which falls into the category of 60% to 80%. If you reduce the LTV below 60% you will not qualify for the LTV rate appropriate to that category.”

How would this apply to fixed rates?

Lenders would be obliged to offer the same fixed rates to new and existing customers.

Some protection would need to be in place for those who do not want to fix but who can’t switch.

A lender could get around the rules by offering competitive fixed rates to attract new business, but keeping variable rates artificially high.

But if a borrower can avail of the same fixed rates as new customers, then this doesn’t matter.

It should also be absolutely clear to fixed rate customers what rate they roll over to on expiry of the fixed rate term.

But the Central Bank is addressing the problem by requiring lenders to be transparent about how they determine mortgage rates.

From the 1 February the [broken link removed] will apply

“Lenders will be required to produce and publish a summary statement of their policy for setting each variable interest rate that must include the factors that impact on the calculation of their variable rate and their criteria and procedures applicable to the setting of rates. If the lender applies a different approach to setting the variable interest rate for different cohorts of borrowers the summary statement must state that and must give the reasons for the different approach.

This summary statement will be provided to borrowers when they are offered a variable rate mortgage and also made available on the lender’s website on an on-going basis. Lenders will be required to notify affected borrowers of changes to the statement and make available an updated summary statement on their website.”

If this obliges lenders to be very specific to enable borrowers to distinguish between the different lenders, then it might help. But if they comply with it by making vague statements about market conditions, then it will be no help.

It would be better to simply oblige lenders to offer existing customers the same rates as new customers.

Obliging lenders to offer new rates to existing customers and prohibiting cash incentives will not solve all the problems

It will not solve the following problems

· Customers of lenders who are no longer active in the market who cannot switch will not benefit

· Customers with LTVs over 90% will not benefit

· Most customers will simply not bother to shop around when taking out a mortgage

· Most borrowers won’t be bothered to switch
 
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To be completed: List of current lending practices which impede competition


KBC – not passing on rate cuts to existing customers automatically, although, customers can apply for the lower rates if they agree to a significant change in their mortgage terms and conditions.

Permanent tsb not making fixed rates available to existing customers

Permanent tsb keeping the SVR artificially high and relying on customer inertia to prevent people from applying for the lower MVRs.

Ptsb and BoI keeping variable rates artificially high through 2% cash back. (EBS to a lesser extent)

Ptsb offering 0.5% discount in the first year
 
I disagree with the principle of this proposal.

The idea that lenders (or anybody else) should be prohibited or restricted from offering enhanced terms to new customers is bizarre to me. We don't restrict any other business from making promotional offers to attract new customers - why should the business of lending money be treated any differently?

We should be encouraging, not restricting, competition within the mortgage market.

There are also a significant number of definitional issues that would make this proposal impossible to implement in my opinion.
 
It was so obvious to me that passing on rate cuts to new customers only was blatantly unfair and in breach of the Consumer Protection Code, that I did not bother to make out the argument.

This is about the equivalent of saying that people who bought model of a car should be entitled to this years features for free! A mortgage is a generic term just like a car is. A financial product has to be constructed just like any other product, taking into account risks, borrower profiles etc... You can not more cherry pick the features of car you'd like to buy than you can a financial product.
 
This is about the equivalent of saying that people who bought model of a car should be entitled to this years features for free! A mortgage is a generic term just like a car is. A financial product has to be constructed just like any other product, taking into account risks, borrower profiles etc... You can not more cherry pick the features of car you'd like to buy than you can a financial product.

He's talking about rate cuts not about extra features. KBC as the example sold variable rate mortgages and then effectively fixed the rates. This is not a feature (or maybe it is).
KBC effectively gave a fixed rate for years for existing customers while cutting rates for new customers only. It wasn't sold as a newer "model". It was the same model (or advertised as the same model)
If I buy a 2015 Ford I know I can't complain when I buy a 2016 Ford. They're not the same model.
If I buy a 2015 KBC Mortgage Pack I'd know not to complain if I bought a 2016 Mortgage Pack. They weren't advertised like that though. There's only one Standard Variable Rate mortgage listed on KBCs site. You just got a different rate if you bought it years ago.

Ulster Bank do it more transparently. They have their standard variable rate mortgage and they have their Loyalty Discounted Variable. Two different models (like the car analogy). If I buy one I can't complain if I don't get the features of the other one and don't expect them.
 
An over-emphasis on a switching strategy to reward new customers encourages long-term customers who can switch to be permanently “new” customers.

What’s the point of such banking strategies if they could not hold on to long-term customers?
 
I don't agree. Banks should be able to offer products to new customers as they see fit. That is capitalism.

It has always been the case in my lifetime that banks offered new customers better products. It is why I moved banks and switched twice.
 
I disagree with the principle of this proposal.

We don't restrict any other business from making promotional offers to attract new customers - why should the business of lending money be treated any differently?

Hi Sarenco

I have listed out all the reasons here:

But we have no such controls or limits in any other industry! Why should we make an exception for the mortgage industry?
The mortgage market is different from every other market. The primary difference is the number of barriers to switching. If your phone provider increases the prices for existing customers, those customers can switch to another provider easily.

There are huge barriers to switching which are unique to the mortgage market

· The costs of switching mortgage are high – there is no cost to switching electricity supplier

· It is time consuming to switch provider – switching phone supplier is easy

· A customer needs a solicitor to switch mortgage providers – there is no cost to switching current accounts

· A borrower can’t switch if they have a bad credit record – Utility suppliers don’t check credit records

· A borrower can’t switch mortgages if their income or family circumstances have changed and they no longer meet the affordability criteria – suppliers of house insurance do not check a new customer’s affordability

There are other differences between the mortgage and other markets

· The Consumer Protection Code obliges lenders to treat customers fairly – there is no such obligation on utility providers.

· Mortgage payments are usually much larger than any other payment such as phone or electricity

· It is more difficult for ordinary consumers to understand and compare mortgage deals. Many people simply do not understand percentages. They are unable to incorporate 2% cash back into their mortgage decision. Gas prices are much easier to understand.

· When comparisons are difficult, the borrower will often default to the bank with whom they have their current account. So AIB and Bank of Ireland have almost a captive audience. There is no such tie-in with other industries.

· Most other industries pass on price increases and reductions to new and existing customers equally.



We should be encouraging, not restricting, competition within the mortgage market.

Why are we trying to encourage competition? So that the prices go towards what they would be in an efficient market. These proposals would make the market more efficient and would improve competition.



There are also a significant number of definitional issues that would make this proposal impossible to implement in my opinion.

Could you give an example of the most difficult one? We have a Consumer Protection Code that has broad general principles.The legislation or Central Bank Code could be implemented in such a way to tell the banks to implement the principle.
 
This is about the equivalent of saying that people who bought model of a car should be entitled to this years features for free! A mortgage is a generic term just like a car is. A financial product has to be constructed just like any other product, taking into account risks, borrower profiles etc... You can not more cherry pick the features of car you'd like to buy than you can a financial product.

Hi Jim

This analogy doesn't work at all for the reasons qwerty5 stated. But here are some more:

When I buy a car, my relationship with the seller is over. The price paid was once off and it was determined by the market at the time.

When I choose a non-tracker mortgage, the relationship is for up to 30 years, and the price is set by the seller at their sole discretion.

It would be a bit like agreeing to buy my petrol at a petrol station for the next 30 years but the petrol station sets the price and there are huge barriers to my switching to another petrol station. But they have separate pumps for new customers buying the exact same product.

And that is another place where your new car model analogy falls down. I am not buying a new model. It's the exact same product - it's just that the price is different and set by the seller.

Brendan
 
An over-emphasis on a switching strategy to reward new customers encourages long-term customers who can switch to be permanently “new” customers.

That is a slightly different argument. If all the banks have to offer existing customers the same rates as new customers, you might well choose to switch from BoI to AIB. One lender may choose to charge a higher rate overall but try to make up for it with clever marketing or cross-selling to their existing base.
 
I don't agree. Banks should be able to offer products to new customers as they see fit. That is capitalism.

It has always been the case in my lifetime that banks offered new customers better products. It is why I moved banks and switched twice.

The fact that it has always been the case is not a reason for it continuing forever.

I must be a lot older than you Bronte. When I took out a mortgage first all mainstream lenders charged Standard Variable Rates. Your LTV did not matter. If you borrowed 90%, you paid the same rate as someone borrowing 50%.

It was so pervasive that the Central Bank and many commentators still refer to non-tracker rates as Standard Variable Rates although no banks issues new mortgages on SVR anymore.



I don't agree. Banks should be able to offer products to new customers as they see fit. That is capitalism.

Which is why I wrote the long paper. To explain why this should not be so. I am a free-market capitalist. But I don't have an ideological position. If a group of 5 lenders supplying an essential is exploiting 300,000 citizens, then I would bring in rules to make that market more efficient so that capitalism works for both the sellers and the buyers.

Brendan
 
Could you give an example of the most difficult one?

Well how do you define what constitutes the "same mortgage product"? If a lender makes changes to its T&Cs does that differentiate future mortgages from outstanding mortgages?

I think you know my views about the appropriate measures that should be introduced to provide a degree of protection to borrowers that are not in a position to refinance their home loans.

Trying to manipulate pricing in the market (any market) by regulation always produces perverse results that are ultimately adverse to the interests of consumers.
 
Well how do you define what constitutes the "same mortgage product"? If a lender makes changes to its T&Cs does that differentiate future mortgages from outstanding mortgages?

Here is my first shot at the first draft of the legislation...

" Existing customers must be able to avail of any new mortgage rate or product offered by their lender if they meet the terms and conditions for that rate or product."

So if ptsb offers a fixed rate of 3% for 3 years, they cannot say "New customers only".

If a new lender introduces a rate of 2% for 50% LTV and maximum LTI of 2, then if an existing customer qualifies for that, then they get it.

Not sure I see the problem here. Lenders may well attempt to get around it, but the Central Bank could introduce it as a principles based code.

Brendan
 
" Existing customers must be able to avail of any new mortgage rate or product offered by their lender if they meet the terms and conditions for that rate or product."

A lender could counter this by simply amending the relevant T&Cs to provide that customers with outstanding loan balances with that lender do not qualify for the particular offer.

You are right of course that the Central Bank could introduce another vague principle based rule on your proposal. But I don't agree that they should.

Lenders should be encouraged to differentiate their product offerings and to compete aggressively for new business. If they fail to offer a competitive offering to existing customers, or they gain a reputation for doing so, then they will lose business. That's the way price discovery is achieved in a market economy - not by State diktat.

I also happen to believe that the freedom to enter into contracts with each other, on whatever terms we see fit, is an important principle in a liberal democracy.
 
Lenders should be encouraged to differentiate their product offerings and to compete aggressively for new business.

I have dealt with that here:

Wouldn’t such a restriction impede product innovation and differentiation?

Not at all. It’s just that they would have to offer their innovative and differentiated products to existing as well as new customers.

Health insurers are obliged to offer all new products to existing customers.


I also happen to believe that the freedom to enter into contracts with each other, on whatever terms we see fit, is an important principle in a liberal democracy.

I share your ideology. But I adapt my ideology to the situation where a small group of lenders are using gimmicks and complexity to trick people. This messes up the market for everyone. For example, AIB had to introduce a cash back via EBS to compete the nonsense on offer from BoI and ptsb.

Brendan
 
If you buy a car for €20k and the seller subsequently drops the price to €18k that shouldn't entitle you to a 2k refund. so if a lender subsequently drops their rates it shouldn't entitle you to a reduced rate.

I say this as a mortgage holder.
 
Is this the Control & Manage economic model á la Soviet Union? We all know how that ended.

I don't think it's reasonable to imagine that some superior person or persons can manage the economy better tha the market place. If people can't be bothered to shop around, then that's their perogative and they should not be forced to "shop around" which is in effect what you are proposing.
 
If you buy a car for €20k and the seller subsequently drops the price to €18k that shouldn't entitle you to a 2k refund. so if a lender subsequently drops their rates it shouldn't entitle you to a reduced rate.

I say this as a mortgage holder.

I have pointed out that this is a completely false analogy. Once you have paid the car, your contact with the seller is over.

With a mortgage, you could argue, that you are entering into a new deal each month.

Brendan
 
Is this the Control & Manage economic model á la Soviet Union? We all know how that ended.

I don't think it's reasonable to imagine that some superior person or persons can manage the economy better tha the market place. If people can't be bothered to shop around, then that's their perogative and they should not be forced to "shop around" which is in effect what you are proposing.

Not remotely. Lenders are free to reduce or increase their rates as they see fit. But they must offer existing customers the same rates as new customers.

It's not that complicated.

We have a range of restrictions in place to protect consumers
  • sale of goods act
  • Consumer Credit Act
  • Consumer Protection Code
  • CCMA
I don't think that anyone denigrates these as "Soviet"

Brendan
 
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