Mortgage market study: FCA publishes interim reportPrint publication
On 4 May 2018, the Financial Conduct Authority (FCA) published its long-awaited interim report into the mortgage market. The FCA launched the market study in December 2016. The link to the interim report can be found here.
The market study has focused on two main questions:
- At each stage of the consumer journey, do the available tools (including price comparison websites, best buy tables, mortgage calculators and advice from a lender or broker) help mortgage consumers make effective decisions?
- Do commercial arrangements between lenders, intermediaries and other players lead to conflicts of interest or misaligned incentives that could harm consumers?
Overall, the FCA found that the mortgage market is working well in many respects (including as discussed below) and it has drawn comfort from its findings. However, the FCA believes that the mortgage market could still work better in certain respects. Therefore, the FCA is examining a number of specific, targeted measures in order to further improve competition in the market. These measures are predominantly around helping certain long-standing customers who are unable to switch to a better mortgage deal and fostering greater innovation in the industry.
The FCA found that the following aspects of the mortgage market are working well for consumers:
- High levels of choice and consumer engagement. Over three quarters of consumers switched to a new mortgage deal within six months of moving onto a reversion rate (the interest payable once an introductory rate ends).
- The availability of a range of products on offer and apparent competition on headline rates between lenders (although interest rate is not the only factor in the price paid by the consumer).
- Consumers who use an intermediary do so for a range of reasons. In particular, valuing their experience and expertise.
- There is little evidence that current commercial arrangements between lenders, intermediaries and other players in the mortgage market are leading to poor consumer outcomes:
- Current levels of commission paid by lenders to intermediaries do not appear to be linked with customers paying more for a mortgage.
- Customers taking out mortgages through an intermediary that has commercial agreements with an estate agent or developer do not, on average, pay more for a mortgage than customers of intermediaries without such agreements.
However, the FCA has identified the following areas where the mortgage market could work better for consumers:
- Navigating the market is currently difficult and many customers miss out on significant savings on the cost of their mortgage.
- Tools to help consumers choose a mortgage are currently of limited effectiveness.
- Choice of intermediary matters. However, there is little support available to help consumers choose an intermediary.
- There are barriers to switching for some consumers.
The FCA’s vision for the mortgage market
The FCA states that its vision for the mortgage market is one in which:
- Borrowers who can afford a mortgage can choose suitable and good value products and services.
- Firms have a culture of treating all consumers fairly.
- Competition and proportionate regulation empower consumers to make effective choices before taking out, and throughout the life of, a mortgage.
The FCA’s potential remedies
To support this vision, the FCA has identified a number of potential remedies:
- Making it easier for consumers to find the right mortgage. The FCA believes that the current sales process (both direct and via an intermediary) could be improved and that there are considerable opportunities for firms to enhance the services they offer, innovate and simplify the mortgage buying process. The FCA thinks that its objectives could be achieved by developing a tool(s) that enable customers to understand upfront whether they qualify for particular products, allowing them to shop around on a more informed basis, and providing additional means for applying for a mortgage. Therefore, the FCA is considering further whether mortgage lenders could make available sufficient information (in consistent format) to established and emerging intermediaries to support the development of tools that, early on in the process, give consumers a much clearer understanding of the products for which they qualify.
- Ensuring there is a wider range of tools providing consumers with choice about the support (including advice) that they receive. The FCA states that it wants a market that provides a range of tools in response to customers’ different wants and needs. The FCA recognizes that to make it easier for consumers to find the right mortgage, changes to its advice rules and guidance may be required. The FCA states that it is open to revisiting its rules if they pose a barrier to its vision for the mortgage market. The FCA’s provisional view is that the removal of certain regulatory barriers to development of more effective competition in intermediation is likely to be the most effective way to achieve this, although strengthening the requirements on firms when giving advice is an alternative approach. Given the risks involved in removing any regulatory protections, the FCA is inviting views on how best to proceed.
- Enabling consumers to choose an intermediary on an informed basis. The FCA is looking to explore ways to enable consumers to compare the strengths of different intermediaries and shop around on a more informed basis. This could include tools that allow consumers to compare intermediaries on the basis of factors such as fees, areas of expertise, whether a panel is used, distribution/concentration of business, and number of complaints. The FCA states that it will give the mortgage intermediary sector (including potential entrants) an opportunity to propose ways to achieve this.
- Ensuring fair treatment for those consumers who do not or cannot switch. The FCA intends to explore options to help certain long-standing customers who do not or cannot switch. For example, the FCA will be exploring whether to introduce a voluntary agreement with the industry to approve applications for a new mortgage deal from existing customers whose most recent mortgage was taken out before the financial crisis and who are up-to-date with payments.
Consultation process and next steps
The FCA has invited comments on its interim report by 21 July 2018. It intends to publish a final report towards the end of the year and will consult on any specific changes required to its rules.
Between now and 21 July 2018, the FCA will be engaging with the industry, consumer groups and other interested third parties to discuss potential remedies.
Please feel free to contact a member of the team listed below if you would like to discuss the interim report and what this might mean for your organisation, or should you wish to provide feedback to the FCA as part of its consultation process.