On 16 May 2016, the Financial Conduct Authority (FCA) published its Feedback Statement (Statement) following the Call for Inputs (CfI) on competition in the mortgage sector issued in October 2015. You can find more information on the CfI in our detailed briefing: FCA issues Call for Inputs as first step in review of competition in mortgage market (10 November 2015).
The CfI sought views on areas of the mortgage sector where competition may be working less effectively. Based on the responses to the CfI, the FCA has decided that:
- there is scope for improving competition in the interests of consumers and that it will undertake a targeted market study in the fourth quarter of 2016 focused on the ability of consumers to make effective choices; and
- alongside the market study the FCA will undertake three smaller pieces of follow-up work including working with industry to increase competition law awareness in the sector.
The FCA’s findings send a clear message that the FCA has identified specific concerns that competition is not working as well as it should for consumers in this sector. Furthermore, the FCA’s intention to embark on an awareness raising campaign suggests that the level and extent of competition law training and compliance may be lacking. Firms would therefore be well advised to review in particular their commercial arrangements and the extent to which they engage in information sharing, whether directly or indirectly, with competitors to determine whether they are in any way at risk of breaching competition law. The spotlight will be focused on these practices towards the end of the year, so now is the time to act.
Responses to CfI
The FCA identified four main themes emerging from the responses to the CfI:
- challenges to consumers to make effective choices and the significant role of intermediaries. In particular, some of the responses suggested:
- that there are a large number of mortgage products available on the market (over 3,600 products) and information about these products can lack transparency and be difficult to understand
- there is a risk that consumers may mis-judge the products available because of particular biases, such as a focus on short term prices
- consumers may have inaccurate views on the costs and benefits of switching
- the advice process may obstruct the ability of advisors to effectively assess whether the mortgage product is suited to consumers’ demands and needs.
- opportunities to make more effective use of technology in the provision of information and advice. For example, responses suggested that certain technologies (such as online calculators, virtual advice appointments, price comparison websites, and mortgage sourcing systems) may present information to consumers in a misleading way and not account for individual needs.
- the effect of commercial relationships. For example, the extent to which these could give rise to conflicts of interest and misaligned incentives and how panels can act as a barrier to entry.
- the impact of the regulatory framework, such as responsible lending rules, which may restrict competition and consumer choice.
The market study
A market study enables the FCA to investigate a market with a view to improving how competition works in consumers’ best interests. This market study will focus on the areas set out below:
- whether the tools available to help consumers make choices effectively meet their needs
- the impact of increased intermediation in the mortgage sector on consumer outcomes
- the impact of panels and other commercial arrangements between lenders, brokers and other players in the mortgage supply chain.
Promotion of awareness of competition law
The FCA has come to the view that it would be helpful to promote greater awareness of competition law across the sector, with a particular focus on how competition law would apply to the relevant players’ commercial relationships and interactions with one another. The FCA points to the risks of information exchange in particular, as well as the fact that certain terms in vertical agreements (e.g. between suppliers and distributors) are prohibited and that competition law places conditions on certain vertical agreements such as exclusive distribution.