On 16 May 2015, the FCA published its Feedback Statement on competition in the mortgage sector, alongside its Responsible Lending Review. Walker Morris’ experts in Retail Banking Litigation (Louise Power) and Competition (Trudy Feaster-Gee) review and report.
In October 2015 the FCA issued a call for inputs (CfI), from lenders, consumers and interested parties, on how competition is operating within the UK mortgage market . On 16 May 2015, the FCA published its Feedback Statement which: (a) sets out the key themes which emerged from the CfI, explains why the FCA considers these to be important and provides a summary of the responses received; and (b) announces the FCA’s decision to undertake a market study.
Key themes emerging from the Feedback Statement
The Feedback Statement indentifies four main themes:
- Challenges facing consumers in making effective choices, particularly when it comes to assessing and acting on information about mortgage products, with intermediaries being key to the process. In particular:
- The availability of large numbers of products, not all of which will be suitable or available for certain or all consumers.
- Consumers’ behavioural biases (including common tendencies of customers to be excessively optimistic about future financial performance and to focus on the most prominent or immediate features of a product, rather than on a long-term product as a whole) can make it difficult to effectively assess different offers in the market.
- Consumers’ perceptions (which are not always accurate) about the ability to switch to different products (with their existing lender or not), and about the costs and benefits associated with switching, can inhibit effective customer choice.
- The advice process requirements imposed following the Mortgage Market Review include the fact that where advice is lengthy and fails to engage the consumer, effective assessment of consumers’ needs can be impeded.
- Opportunities to make more effective use of technology in the provision of information and advice.
- Respondents had mixed views about digital advice processes. The FCA considers that further work needs to be done to understand the effect that technology has on how well competition works, and what can be done to ensure that the potential benefits for the consumer are realised.
- The potential for commercial relationships within the mortgage sector to distort competition.
- Whilst there are many reasons why commercial arrangements exist and can be helpful within the sector, there is potential for relationships between brokers and estate agents, brokers and providers of other ancillary services (such as conveyancers and surveyors) and between developers and firms in the new-build sector, to distort competition.
- Some respondents also commented that panel arrangements can result in potential barriers to entry and expansion, especially for smaller firms.
- There is little appetite for further large-scale regulatory change within the sector. Respondents commented that certain aspects of the regulatory regime might have a negative impact on competition.
In light of these emerging themes, the FCA has decided to undertake a targeted market study focused on consumers’ ability to make effective choices, with a view to improving how competition works in consumers’ best interests. It will consider the following questions:
- Do the available tools for helping consumers make choices (such as price comparison websites, best-buy tables, advice) effectively meet their needs?
- Are there any distortions because of undue focus on particular headline charges or features?
- Is there suitable provision for specific consumer segments with less common needs/circumstances (for instance, those without online access, those with greater levels of experience and understanding who have lesser advice needs, older borrowers needing advice across a wider product range)?
- Are there opportunities for better technological solutions?
- What is the impact of increased intermediation in the mortgage sector on consumer outcomes?
- How has the Mortgage Market Review changed the market in terms of intermediation?
- Are there differences in the outcomes for those consumers who obtain their mortgages through mortgage brokers when compared with those who go direct to lenders?
- If so, what drives these differences and is there room for improvement?
- What is the impact of panel and other commercial arrangements between lenders, brokers and other players in the mortgage supply chain?
- Is there potential for conflicts of interest or misaligned incentives?
- Do any such arrangements create barriers to entry or expansion resulting in less consumer choice?
Other follow-on work
Alongside the market study, the FCA will also:
- Contribute to the next phase of the Council of Mortgage Lenders’ work with Which? on the transparency of mortgage fees and charges.
- Act on specific aspects of the FCA’s current regulatory regime where there is a case for change to improve competition.
- Work with the industry to increase competition law awareness in the sector. The FCA intends to work with the industry, starting in the second half of 2016, to promote awareness of and compliance with competition law.
The FCA states that it will consider the precise scope of the market study in the coming months, with a view to publishing terms of reference in the fourth quarter of 2016. The market study will run to the end of 2017.
Responsible Lending Review
The FCA also published its Responsible Lending Review, as part of its wider work programme within the mortgage sector. The review found:
- Overall, firms have implemented responsible lending rules in line with the FCA’s expectations.
- Some firms need to make process improvements to help them consistently assess and record their lending decisions.
- Some firms could be more proactive and consistent in making use of flexibilities and exceptions to the responsible lending requirements for existing customers.
- There is no evidence that the rules have prevented firms lending responsibly to consumer groups such as older borrowers and the self-employed. However, the FCA states that it is mindful that older consumers represent an increasing proportion of the UK population and it is important that the mortgage sector continues to develop a range of products that can meet their needs.
Market studies are one of main tools the FCA uses for examining how competition works and to assess whether it should intervene in the interest of consumers. The FCA has a wide range of remedies at its disposal to bring about any improvements regarded as necessary following its market study, including:
- Market wide remedies, such as introducing new rules or amending or withdrawing existing ones.
- Firm-specific remedies, including imposition of financial penalties, seeking injunction or restitution orders, commencing one or more further investigations into possible competition law infringements or referring possible infringements to the Competition and Markets Authority (CMA), or publicly censuring firms found to have engaged in misconduct.
- Making a “Market Investigation Reference” to the CMA for a more in-depth probe into certain features of the sector.
Since 1 April 2015, the FCA also has powers to enforce the Competition Act 1998 – the prohibitions on anti-competitive agreements and abuse of dominance – concurrently with the CMA. The FCA presently has one such case in hand and it could also take action under the Competition Act 1998, if during the course of a market study, it uncovered any behaviour which breached competition law.
Operators in the sector may wish to review their position internally, ahead of the market study, to understand current consumer outcomes and the potential for FCA review and any remedies to impact their business model (including relations with third parties), product design etc. There will be opportunities over the coming months to engage pro-actively with the FCA to seek to influence the scope of the market study.
Equally, any organisation which feels that it is currently being prevented from competing effectively in the mortgage sector may see the market study as an opportunity to present any concerns to the FCA.