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Regulatory Update: MS16 / 2.2 - Mortgages Market Study Interim Report

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Background

On 4 May 2018, the FCA published its interim report into the mortgage market. Overall, the FCA found that competition in the mortgage market is working well for many consumers. However, the FCA has identified a number of ways in which the market could work better.

The FCA’s proposals are particularly aimed at helping customers find the best prices and most suitable mortgage deals on the market. The FCA also focusses on longstanding borrowers who are currently unable to switch to a better deal.

Christopher Woolard, Executive Director of Strategy and Competition at the FCA, said:

“The mortgage market is one of the largest financial markets in the UK and there have been significant changes to the market since the financial crisis in order to ensure that we do not return to the poor practices of the past.

“For many the market is working well with high levels of consumer engagement. However, we believe that things could work better with more innovative tools to help consumers. There are also a number of long-standing borrowers that have kept up-to-date with their mortgage repayments but are unable to get a new mortgage deal; we want to explore ways that we, and the industry, can help them.”

Key findings

  • 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
  • Little evidence that current commercial arrangements between firms are leading to poor consumer outcomes
  • There is no easy way for a consumer to be confident, at an early stage of the mortgage products for which they qualify – this is a significant impediment to shopping around
  • A significant minority of customers (around 30%) fail to find the cheapest mortgage for them
  • Many longstanding customers would benefit from switching away from a reversion rate but cannot, despite being up-to-date with payments

The FCA has identified a range of potential ways to make the market work better for consumers.  These include:

  • Making it easier for consumers, at an early stage, to identify which mortgage products they qualify for, to be able to assess and compare those products and, ultimately, to take out a mortgage
  • Removing barriers to innovation in the sale of mortgages, including those due to aspects of FCA advice rules and guidance
  • Making it easier for consumers to assess the strengths of different mortgage brokers.  The FCA intends to work with the broker sector to develop metrics to help consumers compare brokers
  • Helping certain longstanding borrowers who cannot switch. The FCA intends to explore options to help these customers whose most recent mortgage was taken out before the financial crisis and who are up-to-date with payments

Overall, the interim report highlights the mortgage market is working well for the majority of borrowers. The FCA has highlighted areas of perceived weakness, in particular, around customers who currently are unable to switch products.

Regulatory Next Steps

The FCA would like comments on the report returned by 31 July 2018.

Considerations for firms

Firms should be reviewing the interim report and preparing their response.

Whilst the report generally portrays a market working well for its customers, firms, would also benefit from reviewing their approach to the fair treatment of legacy customers. It is positive to see that the regulators reference to ‘removing barriers to innovation’ is included and that the FCA advice and guidance may be changed depending on feedback.

Overall, firms may find themselves treading a fine line. On the one hand, firms have obligations to lend responsibly, but at the same time, individual circumstances should be considered, especially in relation to the fair treatment of mortgage prisoners and customers in vulnerable circumstances. There is no ‘one size fits all’ approach when it comes to dealing with such customers and firms should ensure they do not adopt a ‘tick box’ approach for such consumers.

Brokers, in particular, will find it encouraging that the regulator has said that current levels of commission paid by lenders to intermediaries did not at first glance appear to be linked with customers paying more for a mortgage. Furthermore, the regulator has stated that there were no evidence more generous retention procuration fees resulted in consumer harm. The regulator also noted that using panel lenders did not directly result in consumer harm but that intermediaries placing business with a limited number of firms often sold more expensive products. Firms should continue to review their approach to remuneration and ensure that consumers continue to receive value for money for the service provided.

Other areas of note included the concerns raised in relation to procuration fees kept by mortgage clubs, information sharing and exclusivity arrangements. Although the regulator is not prioritising further investigation at this stage, firms should treat this as a potential area of further exploration by the regulator in the near future.

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