THE EVOLUTIONARY JOURNEY TO A TOTAL QUALITY CONCEPT IN THE

MORTGAGE SERVICING SECTOR

Destination

100%99%98%97%96%

2 3

Contents

Section 1:Section 2:Section 3:Section 4:Section 5:

About this paper

A brief introduction to HML

Quality – A vision for the 21st century

Reinventing the wheel

Definitions

This white paper, Destination 100%:the evolutionary journey to a total quality concept in the mortgage servicing sector, details HML’s continued drive to achieve total customer and client interaction quality at all times. Of course, hitting 100% all of the time is unlikely to happen, but it does not mean that we have to accept anything less - and that is the key message; we aim to shift our and the industry’s mindset to 100%.

Using the analogy of an airline, we see how HML is moving from its current individualistic quality frameworks to a single total quality concept; we believe we already have the right attitude, culture and capability to achieve this, however, the execution of this concept needs refining. An airline should never expect anything less than 100% quality for its passengers due to the safety consequences; similarly, we want to ensure our clients and customers enjoy a completely safe and fair environment when interacting with us.

What is the impetus for this total quality concept where the consumer is placed at the centre of everything we do? Not just professional pride and a strategic competitive differentiator, but a regulatory need. With the Financial Conduct Authority pushing conduct risk and its five key areas of focus - with one being producing appropriate outcomes for consumers - it is clear that everything possible needs to be done to meet and exceed these benchmarks.

This white paper will allow you to join HML on the journey to Destination 100%, and enable you to see how, andwhy, we aim to have a 0% appetite for quality risk - something that is perhaps an unusual concept in thewider financial services sector and one that is drivenby Treating Customers Fairly in practice.

Section 1:About this paper

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Tom JefferyTom is a quality assurance manager at HML and National Outsourcing Association certified. He is responsible for the Line 1 quality assurance within HML’s operational centres, including the management of Training and Competency Schemes. He collaboratively engages with clients to ensure best practice is applied by frontline staff.Tom has worked at HML since 2001.

Rachel BayleyRachel is a marketing executive at HML. After completing a journalism degree at the University of Sheffield, she went straight into the content marketing industry, where she worked at an agency for five years before moving to HML at the start of 2013. Her main responsibility is to produce external marketing copy, including white papers, press releases and blogs.

Section 1:About the authors

HML is a third-party mortgage administration company that operates in the financial services sector. It has 25 years of experience in the outsourcing industry and is based at four sites - it is headquartered in Skipton, and also has offices in Glasgow, Derry and Dublin, with approximately 1,300 employees in total.

It currently has approximately £44 billion of managed assets and 50 major clients, including banks and building societies. Mortgage administration and servicing is HML’s main service at present, although it also offers standby servicing and securitisation, business intelligence and asset trading, among other services.

In August 2013, Fitch announced that HML’s UK residential primary (prime and sub-prime) servicer ratings had been upgraded to RPS1- from RPS2+. HML’s new RPS1- primary (prime) servicer rating is the highest of any third-party mortgage administration company in the UK and Ireland. Its RPS1- primary (sub-prime) rating is the highest in Europe.

Fitch affirmed HML’s Irish residential mortgage primary servicer ratings for both prime and sub-prime at RPS2, while its UK special servicer rating was affirmed at RSS21.

In August 2013, S&P revised the outlook of HML’s primary servicing of residential mortgages in the UK from stable to positive. It also affirmed the above average rankings for HML as a primary and special servicer of UK residential mortgages, and as a primary servicer of residential mortgages in Ireland.

In addition, HML’s stable outlook was affirmed for the special servicing of UK mortgages and the primary servicing of Irish residential mortgages2.

1 www.hml.co.uk/latest-thinking/2013/08/fitch-upgrades-hml-to-rps1-for-uk-residential-prime-and-sub-prime/2 www.hml.co.uk/latest-thinking/2013/08/hml-receives-sp-outlook-revision/

Section 2:A brief introduction to HML

SKIPTON HQ(opened 2010)

DUBLIN(opened 2013)

GLASGOW(opened 2007)

DERRY(opened 2004)

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Executive summary: The FCA has placed urgency on the need for companies in the financial services sector to produce appropriate outcomes for consumers, which builds on Treating Customers Fairly. HML is aware of its responsibility to avoid regulatory conduct risk, but is also clear for the need to ensure customers are treated in a safe, fair and dignified environment.

In addition, the Financial Ombudsman Service regularly publishes the number of complaints it receives and the percentage resolved in favour of the consumer. The figures for mortgages show that between 2010 and 2013, the number of complaints rose, suggesting consumers are increasingly aware of their rights and are less willing to accept a poor customer experience.

Much like the UK Civil Aviation Authority is responsible for enhancing aviation safety performance, improving choice for customers and pursuing continuous targeted improvement in systems, culture, processes and capability, the Financial Conduct Authority (FCA)has similar remit in the financial sector.

On April 1st 2013, the Financial Services Authority split into the FCA and the Prudential Risk Authority, with the FCA’s business plan and risk outlook for 2013/14 clear3. One of its five key areas of focus is ensuring that firms’ strategies are geared towards producing appropriate outcomes for consumers.

While our current quality frameworks and stringent adherence to Treating Customers Fairly (TCF) strive toput customers at the centre of everything we do, we know that more can be done. Much like an airline plans to constantly achieve 100% quality and doesn’t aim for anything less, HML strives to ensure a high-quality service for our clients and customers at all times. We might not always achieve 100%, but we will do everything possible to try and meet this.

In effect, organisations within the financial services sector, including third-party administrators, should strive for 0% appetite for customer service failures and conduct risk. This sentiment is made even more pertinent when you consider the stress that an individual’s financial situation can cause – with even the smallest of issues often magnified. It is clear how important it is to place customers at the centre of everything we do and be aware at all times that a poor-quality service could prove detrimental to them.

Section 3:Quality – A vision for the 21st century

3 http://www.fsa.gov.uk/library/communication/pr/2013/027.shtml

“Firms need to ensure that they are putting the consumer and the integrity of markets at the heart of their business models and strategies. This includes making cultural changes which promote good conduct; establishing oversight around the design and innovation of products and services; and ensuring they are transparent in their dealings with consumers3.”

Martin Wheatley, chief executive officer of the FCA

A look at the October 2013 debt statistics from The Money Charity highlights the situation that many households are in. The average amount each UK adult owed, including mortgages, stood at £54,141 in August. Between May and July, 1,326 people were made redundant each day, and every 17 minutes and four seconds a property was repossessed4.

Of course, it is not only important to avoid customer service and conduct risk issues due to the emotional and regulatory impact this could have, but customers have also become increasingly savvy about their rights and their service expectations have grown.

Figures from the Financial Ombudsman Service (FOS) show that for the full year 2010/2011, it received 7,060 complaints about mortgages. This climbed to 9,530 the following year and stood at 11,915 for the full year 2012/2013. Between April and June 2013 alone, 2,941 complaints were received about mortgages5.

The FOS also revealed the percentage of complaints it upheld for mortgages. It upheld 36 per cent of complaints for 2010/2011, 28 per cent in 2011/2012 and 26 per cent for 2012/2013. Between April and June 2013, 27 per cent of mortgage complaints were upheld6.

The twin drivers of customers expecting a better service and the FCA regulating to a higher degree for conduct risk and service delivery means the financial services sector will have to focus more on consumer rights. At HML, we want to get things right from the offset, rather than have to take remedial action further down the line. The recent Libor and PPI mis-selling scandals are good examples of unacceptable wider market behaviour that will not be easily forgotten by both the public and the regulator. Rebuilding trust in the sector will need radical new thinking – such as a 100% quality goal.

A study by Which? found that 42% of consumers think it is unlikely that banks will take the right action against employees who breach good banking standards7. However, it’s important that criticism isn’t solely directed towards the big banks, and that unscrupulous operators are policed with a heavy hand that isn’t automatically felt across the entire industry.

Section 3:Continued

4 http://themoneycharity.org.uk/debt-statistics/debt-statistics/5 http://www.financial- ombudsman.org.uk/publications/ombudsman- news/110/1stquarter- chart.pdf6 http://www.financial-ombudsman.org.uk/publications/ombudsman-news/110/issue110.pdf7 http://press.which.co.uk/whichpressreleases/banks-cant-be-trusted-to-fix-themselves/

“Delivering the right customer outcome is key. Ensuring this is done with professionalism,dignity and respect separates us from the rest.I recently observed a customer experience whereby on the day of the customer’s eviction, whilst understandably, they were not happy with their financial situation, they were adamantly thankful for the help and support we had provided them with their personal financialcircumstances during this difficult time.”

Tom Jeffery, quality assurance manager at HML

Q1 (Apr-June) 2013/2014

0 4000 8000 12000

Full Year 2012/2013

Full Year 2011/2012

Full Year 2010/2011

Number of mortgage complaints to FOS

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Executive summary: HML’s total quality concept or ‘wheel’ provides team leaders with all of the information they require to assess an individual’s performance as a whole, helping to prevent customer detriment from occurring in the first place. The financial services sector is traditionally reactionary, rather than preventative, and this needs to change if the customer is to be placed at the centre of everything companies do. Only then can a 0% appetite for risk be truly realised.

HML operates numerous quality frameworks that detail best practice criteria employees should follow when carrying out different processes and against which they are scored. We will use our Customer Experience Monitoring Programme quality framework as an example, which can be seen in the wheel on the next page as ‘call quality’. This details the credit management telephony process and interaction criteria and the consultant is scored against these. HML has invested in semi-independent quality assurance teams made up of quality associates across our sites, who are responsible for frontline performance assessments of credit management telephony consultants and are equipped to provide developmental feedback and coaching to improve their performance. 

HML adopts a risk approach to call assessments, meaning those considered underperforming (less than 90% effective against our Customer Experience Monitoring Programme) or within their probation receive more development support than those performing (above 90%). This method provides quick-loop feedback to individuals to ensure quick learnings can be applied to benefit future customer service interactions. Any customer that is impacted by poor service identified through the programme is then managed through a ‘We Will Always’ programme that ensures swift remedial action if there is evidence of potential or material detriment.

However, to ensure best practice is achieved end-to-end, more focused key performance indicators (KPIs) and Management Information is required to gain a wider picture of a customer’s experience and whether the right outcomes are delivered. Our vision for the future of quality in the third-party mortgage servicing sector is one which is centred on the consultant and the customer and which brings together all KPIs to provide a complete overview of individual performance, customer outcomes and experience, as well as the impact on internal controls. Although this capability currently exists now, the primary concept of the wheel is to bring these KPIs collectively together for frontline management and their teams.

This will involve a continual journey to refine, improve and assess; doing so will enable us to ensure that the customer continues to remain at the centre of everything we do. Much like passengers have to go through various checkpoints at an airport, such as security and passport control, before they can board the plane, our total quality concept will provide team leaders with all of the quality indicator information at once so they can see an individual’s performance as a whole. It is no use only checking passengers’ security credentials once the plane is in the air; similarly, it is no use to a consultant telling them they have performed well when processing a piece of post when only to learn two weeks later the customer has had a complaint upheld about the consultant’s attitude over the phone.

We believe our ‘new wheel concept’ is an innovative way to manage operational performance quality within the financial services sector, which traditionally reacts to events, rather than prevents customer detriment. HML is currently on the journey to realise our vision for a total quality concept. If the concept was rolled out tomorrow, the initial month’s data would be reactionary because most indicators are received after the event, for example, upheld customer service-related complaints. The development of the wheel will lead to a redesign of our existing Training and Competency Schemes to take more account of the elements making up the wheel. With the appropriate quality operations, you can cultivate an environment whereby the following month, having given the individual their feedback through an ongoing loop, they will have improved their performance. Thus, the ‘wheel’ leads to a preventative total quality concept.

Section 4:Reinventing the wheel

HML has equipped itself for the journey to Destination 100% by arming itself with a culture, data and measurement processes, which all place the customer at the centre of a total quality service. The different quality frameworks are pulled together for the first time, moving from a linear approach to a holistic consultant-based assessment. Much like every aspect of a flight must be a good experience for the passenger – from departing on time and quality meals to polite cabin crew and a range of in-flight entertainment – every part of a customer’s contact with HML must be of a high quality.

This concept aligns to our attitude of ‘Right First Time’ so we envisage a future for the third-party administration sector and wider financial services industry whereby a quality experience and appropriate outcomes for customers are achieved from the outset. This vision is shared by the FCA, and while it will no doubt be a continual journey, it is one HML is serious about equipping itself to be a success and will carry on championing the 100% quality goal.

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Section 4:Continued

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Treating Customers Fairly (TCF): TCF was introduced by the FCA in 2006 in order to produce improved outcomes for retail consumers. There are six outcomes within TCF:

Outcome 1:Consumers can be confident that they are dealing with firms where the fair treatment of customers is central to the corporate culture.

Outcome 2:Products and services marketed and sold in the retail market are designed to meet the needs of identified consumer groups and are targeted accordingly.

Outcome 3:Consumers are provided with clear information and are kept appropriately informed before, during and after the point of sale.

Outcome 4:Where consumers receive advice, the advice is suitable and takes account of their circumstances.

Outcome 5:Consumers are provided with products that perform as firms have led them to expect, and the associated service is of an acceptable standard and as they have been led to expect.

Outcome 6:Consumers do not face unreasonable post-sale barriers imposed by firms to change product, switch provider, submit a claim or make a complaint.

TCF helps HML achieve quality consistency.

Quality frameworks:A framework which details the best practice criteria employees should follow when carrying out different processes and against which they are scored.

Conduct risk:This is the potential risk that detriment is caused to customers as a result of the inappropriate execution of business operations.

Operational losses:In the context of this white paper, operational losses are financial or reputational damage caused due to an individual, system or process failure, while losses can also come from external events and threats.

Training and Competency(T&C) Schemes:T&C Schemes detail the skills employees need to possess and the tasks they need to be able to complete in order for them to be classed as competent. Under FCA regulations, the aim of such schemes is to ensure that customers are dealt with by employees who are competent.

The three main areas of T&C are assessing competence, maintaining competence and record keeping.

Section 5:Definitions

“Customers are the most important aspect of what we do. Staff interact with customers in many different ways. It is essential that all ofthose touchpoints, not just some, are fed into analysis of both individual staff and overall business performance. HML can only reach Destination 100% if we are fully equipped for the journey ahead.”

Mark Metcalfe, director of operations controland governance at HML

NOTES

www.hml.co.ukwww.hml.ie

www.twitter.com/HMLcorporate

www.twitter.com/HMLIreland

www.linkedin.com/company/hml