On 16 May 2016 the Financial Conduct Authority (“FCA”) published its feedback following a call for input from the market and consumer representatives on which aspects of the mortgage lending market may not be functioning well from a competition perspective. Having identified a number of key areas in which competition within the mortgage market could be improved, the FCA further announced that it will be carrying out additional scoping work before announcing terms of reference for a full market study in the final quarter of this year. It will also be conducting three smaller items of follow-up work in light of its findings from the call for inputs.
WHY HAS THE REGULATOR TURNED ITS FOCUS ONTO THE MORTGAGE SECTOR?
The FCA had indicated in its business plan for the 2015/16 Financial Year that it was intending to undertake a review of the mortgage lending market to identify any barriers to competition that may be adversely affecting smaller providers and, moreover, consumers.
In its press release announcing a “call for inputs” on 7 October 2015, the FCA hinted at a number of complexities to the mortgage market, particularly in terms of supply chain relationships and product information, that made it potentially susceptible to a dampening in competition to the detriment of consumer choice and value for money:
“The provision of mortgage products is characterised by a number of complex relationships, and is intrinsically linked with firms’ funding models and wider retail strategies.
Some of these relationships and activities, which are key to mortgage or house purchasing transactions, fall outside our traditional regulatory perimeter. These include (some) third party administrators, packagers, and surveyors.
We are interested in how these activities or relationships might affect competition, for instance by affecting entry, expansion, and/or the ability of consumers to make effective mortgage choices.”
It was particularly interesting to note the FCA’s desire to explore how relationships between funders and other agents within the marketplace (notably, brokerages) was affecting the marketing and provision of mortgage products at the consumer level. The FCA’s feedback statement now makes for pertinent reading for all those involved in the mortgage industry, since it foreshadows those issues and practices which the regulator is likely to target during its more comprehensive market study exercise later in 2016.
SO, WHAT ARE THE MAIN PROBLEMS THE FCA IS TARGETING?
The FCA’s feedback statement has identified four key aspects in which competition in the mortgage market may not be working effectively, namely:
- Challenges for consumers in making effective choices: the FCA reports that this is especially hampered by constraints on access to information regarding mortgage products, with intermediaries proving a significant ‘filter’ for information to consumers. The overriding concerns appear to revolve around the unique complexity for consumers of the range of mortgage products available, the eligibility requirements in relation to each, further data on price comparison websites, the complicated nature of property purchases generally and a lack of transparency as to fees and charges. Furthermore, the FCA reports, with the increased role of intermediaries in selling products and mediating purchases on behalf of customers, these problems are only escalating.
- Failure to maximise the potential for technology to improve access to information and advice for consumers: The FCA also highlighted a widespread sense among respondents that digital tools such as price comparison websites (“PCWs”), online calculators and ‘mortgage finders’ play a significant role in determining consumer choices, but that these tools could be better designed to assist consumers further. In particular, common observations included the fact that online calculators have a propensity to mislead consumers by suggesting they might be able to borrow greater amounts than they would actually be offered by a lender following a real-life application. Criticisms were also levelled at PCWs, which many respondents said displayed limited information and may well be restricted by underlying commercial arrangements of which consumers are unaware – notably, it is suspected that certain “innovative” mortgage offerings may be displayed relatively un-prominently owing to the search filters which are applied.
- Commercial relationships within lender supply chains, especially through panel systems, might be raising competition concerns: A major concern among respondents was that connections between lenders and intermediary service providers within the sector’s supply chain might be causing conflicts of interest and “misaligned incentives”, with the FCA placing particular emphasis on the relationships which brokers have with estate agents and other ancillary service providers such as conveyancers and surveyors, and with construction firms and developers in the ‘new-build’ industry. It is felt that the preponderance of the major brokering networks may be limiting both smaller lenders’ access to the marketplace and the visibility which consumers may have of the full range of available products. What is more, access for smaller lenders is further constrained by the costs of undertaking due diligence checks on lending distribution chains and a suspected lack of transparency as to the criteria for inclusion on the panels maintained by the larger lending and broking operators.
- Features of the regulatory environment may be further hindering competition: an additional concern which the FCA has identified from its call for inputs has been that, having already undertaken a number of substantive regulatory reforms in recent years (e.g. with the inception of the FCA and its partner regulator the Prudential Regulation Authority (“PRA”) as successors to the previous unitary body, the Financial Services Authority) there is reduced appetite and capacity for the industry to absorb further regulation. Indeed, responsible lending rules imposed by the FCA may even have led to a fall in overall lending volumes, especially to those customers seeking interest-only mortgages or who are unable to verify their sources of income. Other respondents also pointed to the impact of the capital requirements regime, the requirements of the Solvency II regulation and the obligations laid down in the Building Societies Sourcebook. The FCA has confirmed it will be liaising with the PRA to gain a greater understanding as to the effects of these requirements on competition and consumer choice.
So, what next for the mortgage market, and what should providers expect?
In light of the findings of its call for inputs, the FCA has decided to commence a full market study focusing on the key issue of consumer choice so as to address those areas which are currently preventing competition in the market from functioning properly in customers’ interests. In particular, the FCA’s list of outline questions for exploration through its study indicate that lenders and other providers in the sector should expect scrutiny of and, in due course, fresh regulatory recommendations and requirements in relation to:
- Adapting online tools to better equip consumers to make informed choices about mortgage products;
- Addressing any distortions of information around rates (e.g. due to undue focus on ‘headline’ rates) and particular features of various products, presumably with the aim of ensuring that consumers are not misled as to the precise nature of an arrangement being sold to them and the conditions attached;
- Limiting any adverse impact of intermediary relationships, especially in respect of any differences in treatment for those customers purchasing through mortgage brokers compared with those approaching lenders directly; and
- Combatting any conflicts of interest, ‘misaligned incentives’ or other barriers to entry or expansion leading to a reduction in consumer choice as a result of panel and other commercial arrangements between lenders, brokers and other actors in the mortgage supply chain.
As alluded to above, the FCA has also announced three smaller actions in the competition field within the mortgage sector which it will be undertaking immediately, namely: (i) inputting into workstreams regarding transparency in mortgage fees and charges currently being pursued by the Council of Mortgage Lenders and Which?; (ii) reviewing certain aspects of the FCA’s existing regulatory regime with a view to reducing any negative impact it may be having on competition; and (iii) engaging with representatives of the industry to increase awareness of competition law.
The above exercises and the FCA’s forthcoming market study promise to shape lasting change in the conduct of business across the sector.