FCA launches market study into competition in the mortgage sector

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Background and summary

In October 2015, the Financial Conduct Authority (FCA) published a call for inputs to seek views on any aspect of the mortgage sector where competition may not be working well and could be improved.  In May 2016, the FCA published a feedback statement setting out the main themes that had emerged from the call for inputs as well as announcing its intention to launch a market study on competition in the mortgage sector.  On 12 December 2016, the FCA published its terms of reference to formally launch its market study.   The FCA’s terms of reference can be viewed here.

The FCA has stated that the market study will focus on consumers’ ability to make effective choices and whether, at each stage of the consumer journey, the available tools (including advice) help mortgage consumers to make effective decisions. It will also examine whether the commercial arrangements between lenders, brokers and other players lead to conflicts of interest or misaligned incentives to the detriment of consumers.  Furthermore, the FCA will be looking at whether there are opportunities for better technology solutions to any problem identified, including greater use of digital channels to deliver information or advice.

Mortgage market participants should be aware that, despite significant change in the sector and upheaval in recent years to implement the Mortgage Market Review and Mortgage Credit Directive, further change could now be on the horizon.

The scope of the market study

 The FCA has decided to focus the market study on first charge residential mortgages and has therefore excluded both second charge residential mortgages and commercial mortgages.

Within the scope of the market study is:

  • new mortgages for house purchases (including ported products)
  • remortgages (new lender)
  • internal product switch (same lender)
  • further advance
  • equity release – life time mortgages.

Furthermore, the market study will cover the activities of firms and consumers across the consumer journey (covering consumers making initial enquiries about their eligibility for a mortgage through to the initial purchase and their behaviour subsequently, including whether they remortgage or not). This does not include issues related to the funding of mortgages.  The elements of the supply chain that the FCA is interested in range from:

  • the provision of mortgages (by lenders) to borrowers
  • those activities that affect competition in the provision of mortgages, namely the provision of information and/or advice (such as through brokers or price comparison websites) and the provision of associated ancillary services, such as conveyancing and valuations.

The FCA will consider the role of all firms that impact consumer decisions, whether or not they are regulated. This includes estate agents and developers who introduce consumers to lenders and brokers.  It also includes any firm or entity that aids consumers to make decisions along this journey, including providers of mortgage sourcing systems used by brokers.

What will the market study focus on?

The study will explore two questions, to get information on both demand and supply issues:

  • at each stage of the consumer journey, do the available tools (including advice, price comparison websites and online calculations) help mortgage consumers make effective decisions?
  • do commercial arrangements between lenders, brokers and other players lead to conflicts of interest or misaligned incentives to the detriment of consumers?

In addition, the FCA will be looking at whether there are opportunities for better technological solutions to any problems identified, including greater use of digital channels to deliver information or advice.

What methods will the FCA use to carry out the study?

The FCA will use the following methods to carry out its study:

  • a review of the consumer journey when obtaining a first charge residential mortgage, working through all the stages where a consumer might seek advice or make a decision – especially how consumers determine whether or not to obtain advice and how they choose an adviser
  • an analysis of whether consumers are empowered to choose between products on an informed basis and whether consumers are in a position to understand what represents good value for money
  • a consideration of the current technological solutions and whether there are opportunities for these to be advanced, i.e. by combating any limits or barriers to the efficient delivery of information through digital channels
  • an analysis of whether the current regulatory framework favours certain distribution or business models over others and whether this creates a benefit for consumers
  • a review of the changes in distribution of mortgages since the Mortgage Market Review and the extent to which firms are able to continue to innovate and produce outcomes that are in the best interests of consumers more broadly, paying attention to the difference in outcome depending on the distribution channel used and whether or not advice was sought
  • an assessment of the extent to which consumer outcomes might be affected by conflicts of interest, misaligned incentives or barriers to entry and a review of the relationships between lenders, brokers and the providers of information to help understand whether any aspects of these relationships might be affecting competition in the sector.

What will this mean for you?

The FCA will gather information through surveys and direct requests for information from mortgage lenders, brokers and other stakeholders. This could well be an intensive and detailed exercise requiring significant resource from some legal and business teams to respond on a timely and accurate basis.

The market study also provides an opportunity for lenders and other stakeholders to make their views known, shaping the FCA’s conclusions on the functioning of the sector or concentrating the FCA’s focus on those features (including regulation) that businesses in the sector might wish to change. Therefore, whilst presenting some potential strategic risks for the sector concerned, a market study is also a tool to drive positive market developments for businesses in those markets.

Mortgage lenders will also need to provide relevant information regarding their arrangements with intermediaries. Therefore, it is important for lenders and intermediaries to review these arrangements carefully in order to ensure they are compliant with competition law and current regulation.

Potential outcomes of a market study

Since April 2014, the FCA has power to conduct market studies in the financial sector and can initiate a wide range of remedies to improve consumer outcomes and competition in the market study.  These include:

  • introducing market-wide remedies (including changing or withdrawing existing rules)
  • publishing general guidance
  • proposing enhanced industry self-regulation
  • proposing firm specific remedies for certain changes, including imposition of financial penalties, seeking injunction or restitution orders or publicly censuring firms found to have engaged in misconduct
  • commencing further investigations into possible competition law infringements
  • making an in-depth “Market Investigation Reference” to the Competition and Markets Authority.

Alternatively, the FCA may decide to take no further action for the time being. This could be because the FCA’s concerns are likely to be satisfied by upcoming legislative measures, action by the relevant firms or other circumstances (such as the bedding in of recent regulatory changes).  In such cases, the FCA may continue to monitor the market in case any concerns are not addressed over time.

Next steps

The FCA will start gathering information from stakeholders soon, including by information request. It will seek data, information and views from lenders, brokers and other stakeholders before it starts to perform market research, business model analysis, interviews and roundtable discussions.

Although the FCA is not formally consulting on the terms of reference, comments may be submitted to the FCA by 12 January 2017.  The FCA aims to publish an interim report setting out its analysis and preliminary conclusions in summer 2017, with the final report to follow in early 2018.

If you would like to discuss the market study into the mortgage sector and what it might mean for your organisation, or if you receive direct communication from the FCA and wish to understand the implications of your proposed response, please contact Trudy Feaster-Gee or Jeanette Burgess in the first instance.