The customer is king
Almost three out of 10 borrowers in the UK have their mortgage with one of Lloyds Banking Group’s numerous brands. Joanne Atkin talks to Mike Jones, director of intermediaries at LBG, about how the bank copes with such a large scale operation
A key strategic challenge in today’s financial arena is the relationship between customers and financial services – it has changed, says Mike Jones. Over the past 20 years the industry has sold financial products to customers, but Jones believes we are moving to an environment where more customers are actively buying rather than being sold to.
Jones says this is partly driven by customer demand, partly driven by technology and partly driven by the regulator. He believes you must always start with the customer and it’s important that products are presented in an informed and attractive enough way so that people can provide for their future.
“In our world the regulators view of the future is clearly guiding the market,” says Jones. “The Retail Distribution Review will impact on how people get advice, the price they pay for it and the way providers will be remunerated – all these things are shaping the investment market. And it’s similar with the Mortgage Market Review where the same will apply to some extent.”
“Technology with more people using the internet will become a huge force for change. Some products will easily work in that world and others are more complex. The British public has become comfortable with banking online particularly with products that feel commoditised, for example, car insurance.
“The better online websites guide you on more than just price. More people are dealing remotely on the internet and they know what they are looking for – that will be a huge force for change. Providers will seek to operate effectively in the online market.
“But it’s more difficult to take that to an online mortgage market as it’s a more complicated product. Less people have the level of confidence to go from the beginning of the mortgage process through to the end on their own. All of our online mortgages here at LBG end up with a conversation on the phone at some point with one of our advisers.”
Some of the key operational issues facing financial institutions again boils down to what customers want and how they want it.
“Being as big a player as we are, we have to be able to respond to consumers coming through different channels - internet, telephone, branches or intermediaries,” says Jones. “The advantage we’ve got is that we are a scale player in each of those channels. Whichever route the customers want to come to us we can gear up and down. A phenomenon of recent times is the amount of business that gets researched through the internet even if it is not done online.”
Changes to regulation can demand a significant amount of effort. For such a large organisation, the scale of LBG’s mortgage processing operations means that what might seem like small changes in the operating environment are actually big changes.
Jones cites the example of the Key Facts Illustration (KFI): “The KFI draws on so many different parts of our IT infrastructure, so fairly simple changes to the content of a KFI are big operational changes to enact. Look at what is going on with the European Standardised Information Sheet (ESIS) and the potential that it might replace a KFI, it’s an entirely non-trivial exercise if we ever have to go down that route.”
One IT platform
Integrating the brands within LBG in terms of IT infrastructure has been a huge job but the technology is heading towards one platform.
Jones explains: “In terms of the technology for basic banking - current accounts and savings - this is now all on one infrastructure and so are the sales platforms. If you go into a Halifax, C&G or Lloyds TSB branch you are going into the same sort of IT architecture. This was an enormous exercise and completed in autumn 2011.
“In terms of mortgages, we have aligned all of our sales platforms over the last year. All bar BM Solutions which operates separately as it operates buy-to-let business through intermediaries only and historically comes from a different legacy.
“The back office architecture for administering all existing mortgages was a combination of historic platforms and they are moving to a Lloyds TSB heritage later this year. When that’s done it will be more simple to operate and easier for people to work with us and to control the peaks and flows of business. If you are on two different platforms it is more difficult to move people from one to the other, even virtually. We will be able to do that far more easily in the future.
“The mortgage front office sales system that LBG is moving to is the Halifax platform simply because it’s better than the Lloyds legacy system. It has been upgraded and plugged into the Lloyds back office system. The vast majority of the back office will be finished towards the end of this year but there is still some outstanding work which is due to complete next year.”
LGB has been putting together bigger teams in a smaller number of places to rationalise the physical infrastructure.
Jones explains: “Having got teams of a decent scale we will get them multi tasking and capable of working virtually in a different site even though they are still based in their own office. That will be the big leap forward in our back office processing when we move the back office onto one platform.
“If you think about telephone enquiries for mortgages, we handle that in a number of different sites. We can deal with the work as it comes in by routing it around the country - but that is invisible to customers.”
Lloyds TSB used to have contact centres in India but repatriated them about five years ago and does not do any outsourcing that touches customers. LBG outsources some of its IT development, which Jones says is quite common now within financial services.
“We manage much of our IT development abroad. We have project managers in the UK but the code is being written abroad in India, where we have long standing relationships,” he adds.
Market intelligence is extremely important to financial services firms and LBG is no exception. Jones says financial services is a dynamic market and it’s fascinating to see how fast things can change. The group benchmarks against competitors, and conducts research among customers and brokers.
Jones says: “We benchmark to give insight into what competitors are doing, how efficient they are, what process they use, which technology others use, how good our mortgage sales infrastructure is for brokers compared to competitors.
“We participate in a variety of industry studies that we subscribe to which, for example, tell us how good our infrastructure is compared to the market norm. That’s good insight because it is independent. Market intelligence is all about eyes and ears in terms of what competitors do, competitor pricing and product design.
“We survey many thousands of customers every month to find out what they think about recent transactions, recent sales process, how they feel generally about the organisation and what they think about our competitors. We also survey customers of other banks.
“Every quarter we survey the brokers as well to find out their views of us and other lenders. Reasons why they are satisfied or dissatisfied gives us huge clues and evidence to do something about it. It’s all very helpful.”
Jones believes organisations must respond to regulatory change by getting involved in the whole process. Engagement with the regulation is followed by being as swift as possible in implementing systems changes and simplifying processes.
He says: “The MMR is based on a series of ideas that have been consulted upon, that have come out of proposals. The first thing is how do you engage with your regulator in shaping the agenda and shaping the proposals?
“I think we have gone through a good process in the sense that a number of the ideas were contentious and difficult but through consultation we are getting to a much more sensible place.
“There are still questions, such as the issue of what is a professional in the mortgage market, but how do you define that? More needs to be done on that and issues about advice more generally. But it’s been a good process of engagement from the regulator and the industry. It looks like we are getting there.”
“If point one is about the consultation process, point two is about when you know what you are required to do. By agreement you must end up with enough time to implement changes effectively and that’s a big thing for us particularly as our systems become more homogenous. Mortgage processes and mortgage systems are complex and are time consuming and expensive to change.
Jones is optimistic that in the longer term the mortgage market will improve: “We are in a very unusual place with base rate running at 0.5 per cent for three years. That introduced a very strange dynamic to the mortgage and savings markets.
“When base rates do rise that will undoubtedly lead to people rethinking their mortgage arrangements, that’s when the mortgage market will significantly change. The question is when will base rate change?
“Base rates change when the economy improves. There is a point in the future when the mortgage market will pick up again to healthier levels and the UK economy will pick up again.
“For now, we’ve had a pretty good first quarter as an industry, which was buoyed up by things like the stamp duty exemption, which ended in March. But I don’t see things changing this year or next year.”
THE LLOYDS BANKING GROUP BRANDS
In terms of mortgage brands within Lloyds Banking Group there are four lenders operating in the intermediary market. These are Halifax, BM Solutions specialising in buy-to-let, Scottish Widows Bank focusing on the professional market and Lloyds TBS Scotland concentrating on the Scottish market but also works out of London.
In the branch networks, Halifax and Bank of Scotland both distribute Halifax mortgages. The Cheltenham & Gloucester mortgage is distributed though C&G and Lloyds TSB branches. The C&G mortgage stopped being distributed through intermediaries in early 2011 as it sat in the same territory as Halifax.
Then there is Intelligent Finance, which has not been active in the market for a few years but the portfolio still exists and consists of offset mortgages.
LBG does not disclose its intermediary/direct ratio of mortgage business but Mike Jones said: “The ratio is in line with the market, so that gives you a clue, but we do more intermediary business than direct and the position has been remarkably stable. The proportion within different brands naturally varies.”
As the largest mortgage lender in the UK, LBG had a mortgage market share of 28 per cent but is aiming to reduce that to 25 per cent. The bank wants both retail deposit and mortgage market share to be equal at 25 per cent so the savings share needs to rise from 23 per cent.
LBG completed £5.7 billion of new mortgage business in the first quarter of 2012 with £1.3 billion (23 per cent) of this going to first-time buyers.
The European Commission mandated that LBG dispose of 19 per cent of its mortgages and enough of its current accounts to add to a 4.6 per cent share of the UK market. This stems from the creation of the Lloyds Banking Group when Lloyds TSB took over the troubled HBOS in 2008 during the global financial crisis and is linked to competition rules. The sale must be completed by November 2013.
Known as Project Verde, the sale includes 632 branches consisting of every Lloyds TSB branch in Scotland, all C&G branches in the UK, and enough of the remaining Lloyds TSB branches to make up the percentage of current accounts and mortgages that LBG must divest.
LBG has renewed exclusive talks with the Co-operative Group to buy the 632 branches.
The bank says it is also still looking at an alternative option of an Initial Public Offering (IPO), where Verde will be a standalone bank with separate supporting corporate functions, based on LBG systems and infrastructure.