Building relationships that generate value
Over the last ten years third party administrators have headed up, down, sideways and any combination of the three. But as the financial services industry battles to untangle the excesses of the credit crunch and carve out its place in the new world the service provider and its potential clients could finally be in sync, says Andrew Jones, chief executive of HML
Like many other third party administrators (TPAs) we’ve learnt a lesson over the last few years and that lesson is to survive and thrive in 2012 things need to be very different to how they were in the past.
The mortgage market on which most TPAs grew has changed dramatically, there’s no sign of new lending rising above £130 billion a year any time soon and arrears will be a problem for lenders until the economy starts growing again.
The truth is, in order to operate a profitable TPA, the sector needs to focus on how servicers can help financial institutions make money from the assets they have.
TPAs need to diversify and offer services that generate value for clients in changeable conditions and they need to treat their clients and business partners as equals.
And that is exactly what the outsourcing industry has done.
TPAs aren’t offering a one size fits all solution to the market anymore. Vertex is in the process of building a fully bespoke administration system to launch Tesco into mortgages – it has proved challenging and we haven’t seen a Tesco mortgage yet, although it maintains they will be available later in the year.
But the move is indicative of a changing market and the flexible, tailored, supportive approach TPAs need to adopt to build relationships that generate value for all of the parties involved.
In Ireland there is a huge opportunity for lenders to harness the skills UK TPAs have refined and honed over the last five years in migration, asset sales and arrears management.
The support TPAs can offer is no longer limited to getting your mortgages to market quickly and administering them for you – now it’s about the strategic decisions being made in the board room on deleveraging assets, providing qualified, on-site arrears management expertise for clients, or being given a small portfolio of assets to administer so results can be benchmarked against an in-house option.
Benchmarking and pricing is one of the things we and our competitors have found increasingly challenging. If you are talking to one of the high street banks about outsourcing versus in-house it is a bit like comparing apples with oranges.
Infrastructure costs will generally be absorbed centrally for in-house options so an in-house quote for administering a set number of mortgages may be limited to the full time employee cost.
An outsourcer arguably has to split the infrastructure costs of their operation between numerous clients, work out how many full time employees, at what skill level, will be needed to provide the level of service specified and add all of that together to determine the cost – then it has to determine how to provide the services at a profit so shareholders are satisfied.
That means, on the face of it, any direct comparison of an outsourced service versus an in-house service doesn’t take account of the costs involved in keeping systems up to date, regulatory change, compliance or oversight so it can look more than a little expensive.
However, performance-based pricing can work for our clients because it moves them away from a pre-determined fixed cost and links their outlay with performance or financial benefit – it’s a much easier internal sell.
Before the credit crunch, the new lending department of a TPA would have been the dominant operational division.
Tucked away in a corner would have been a credit management team to deal with a minority of borrowers who couldn’t meet their monthly repayments.
Post crunch, the distribution of resources has been totally reversed.
While there is still demand for mortgages, few TPAs are currently focused on this market; instead their skills and experience have developed to deal with the challenges of arrears management and a stagnant property market.
At the beginning of this year TPAs were managing more than one in ten of all UK arrears cases.
Through that experience and evolving our analytical capability to include predictive modelling and impairment indicators, our clients know if one of their customers is likely to go into arrears and also how likely they are to cure or end up being repossessed.
This means they can work out the best way to fairly manage their customer, minimise their provisions and have the evidence they need to report to the regulator.
HML was able to save one of its clients £14 million in provisions over a two year period, money that was unnecessarily set aside to cover arrears it was able to demonstrate were unlikely to materialise.
But it isn’t just existing clients who benefit from enhanced predictive analytics. These services are useful for all sectors of the market. It helps people who are selling mortgages demonstrate to potential buyers exactly what they are buying.
It provides reassurance for buyers that they know the risks involved in their purchase and exactly how much they will have to set aside for provisions.
And it gives TPAs the opportunity to sell our traditional services to get deals moving. Last year we were approached by a seller who had a buyer for a mortgage book but the buyer was unable to migrate the assets in the timescale required by the seller.
Migration expertise is the bread and butter of the TPA industry, you need to be able to meet deadlines, be accurate and minimise risk to have any credibility in the TPA market – we were able to complete the migration in 16 weeks, the deal went ahead and all parties were happy.
Deleveraging is giving the whole sector a boost into the position of solution provider, against the hard pressed resources of in-house teams, and it gives all TPAs the opportunity to demonstrate the very real value our sector can add to any financial services business.
Many TPAs grew on the back of the sub-prime mortgage boom. The sector had the systems and infrastructure to get specialist lenders, without their own infrastructure, to market quickly.
High street banks were also in this market leveraging little known brands and distributing their products through brokers, but they typically ran their operations in-house, bolting on additions to their mainstream systems or in some cases building entirely new ones, such were the returns.
Some of those systems and brands are now moribund and give the high street banks the opportunity to test the outsourcing model alongside their in-house solution without handing over responsibility for some of their better known brands.
These mortgages will be on different legacy platforms, making them problematic to sell as a collective, while TPAs are experienced in migrating portfolios and have processes and people who are able to comfortably complete complicated transfers in short timeframes.
But it’s not just operationally where big strides have been taken.
TPAs have worked hard to align their culture, strategy and demeanour to that of their clients – we’ve worked with dedicated operational teams for a while and that means the people get to know the client and their way of doing things – the next step in this journey is to bring our clients branding onto our site as a constant reminder of who we work for and the experience they want their client to have.
As white-labelled providers, reflecting clients’ cultures is a big part of ensuring the right level of service is delivered.
Making what you deliver for clients robust, repeatable and reportable requires a significant investment in IT and TPAs are increasingly moving towards automating those processes that don’t need costly human input.
For us our software development has shifted from a traditional waterfall process to agile development. Previously a client would put in a request for a change, be given a timescale for its delivery, see nothing for months and then be presented with a finished product that meets the original brief, even if the world has moved on.
Agile development means a route for change is mapped out with key milestones and each milestone along the way is released to the system rather than as a big bang at the end of a project.
This means the brief can evolve along the way and changes incorporated to later building blocks of development to make sure what is delivered at the end still meets the needs of the clients – even if the world and the brief have moved on from the original. For us this has led to a 75 per cent reduction in project timeframes.
Experience of managing customers in a stringent regulatory environment is an easily transferable skill into parallel markets and one that Target in particular has made good use of.
At HML we’re using our scale and systems to provide some competition in the savings market and diversify our range of services.
Anyone wanting to access the savings market with an outsourcing partner hasn’t had much choice in the past. Newcastle Strategic Solutions has been largely perceived as the only choice. We are changing that by offering a tried and tested savings system that currently has more than £9 billion being administered on it.
Financial services outsourcing has been through the full economic cycle and emerged as a more mature industry.
Outsourcers are used to dealing with change, have the people, processes and technology to support major financial institutions, and the experience to offer tangible value to clients.
Looking back at HML’s marketing strap lines from the last decade, we’ve been ‘the obvious choice’, we’ve ‘got people from where they want to go to where they want to be’ and we’ve had ‘the ability in financial outsourcing.’ All relevant in their time and crucial to HML’s success, but the future is a more strategic game.
Now we’re looking at ‘value’ aligned to the strategic goals of our clients. If they are successful then so are we, but we’re not going to solely rely on our servicing skills.
Aligning strategies means we’re both going in the same direction and we have the opportunity to influence at a higher level to advise our clients.
As banks continue to cut staff costs and ageing administration systems reach the end of their lives, tailored solutions on performance-based deals become more attractive.
In modern TPAs, lenders will find a business partner with credibility, unique skill sets and a new perspective for unpredictable conditions - a service that is in sync with what the market needs now and in the future.
OPPORTUNITIES IN IRELAND
A new market increasingly targeted by outsourcers is the Irish market – the sheer scale of the problem and TPAs’ experience of arrears management makes the transition a natural one. At the end of March, 77,630 accounts (10.2 per cent of the Irish mortgage market) were in arrears of over 90 days, an increase of 9.2 per cent from just three months earlier.
However, the Irish Central Bank recently expressed concern that Irish banks lack the inherent arrears management techniques to deal with the crisis.
Organisations with the experience, infrastructure, people and insight to manage rising arrears and add value to lenders in Ireland are TPAs.
And although outsourcing is not commonplace in Ireland, Acenden, Certus and HML are all engaged in using their skills to help the Irish market.
Some of the things we have facilitated over the last six months include a project to board over £1 billion of assets to HML’s platform within a four-month timeframe for Bank of Ireland and arranging the UK’s first 48 hour standby deal to facilitate a £436.6 million securitisation from AIB.
THE TPA TRADING EXCHANGE
A by-product of servicers helping lenders to market and subsequently servicing those accounts in a form of ‘trading exchange’ has been created, with TPAs as the host.
In HML’s case, we manage around £43 billion of assets, and we typically know which of our clients are looking to sell. Our platforms are built for the seamless transfer of portfolios and we’ve managed over 90 migrations in the last three years.
As some lenders look to exit the market, they can offer attractive prices on assets to buyers by keeping the collateral with the servicer and removing migration costs.
For buyers, the advantages are clear. An independent valuation of the portfolio from the servicer based on previous and forecasted performance gives a clear view of anticipated ROI. They can then agree portfolio servicing strategies with the TPA (saving further spend on systems and people) or just pipe the IT software into their own offices and administer from there.
We’ve recently completed a deal exactly like this with debt purchaser Arrow Global, who bought a small portfolio of second charge loans from an existing client. Due to strong portfolio performance, Arrow decided to keep the loans with HML and save project costs for all three sides.