The FCA launched its terms of reference (ToR) for its mortgage market study on 12 December 2016. It will be conducting the market study using its regulatory powers[1].

The market study will focus on two key issues:

  • whether consumers have the right tools (including advice from lenders or brokers, price comparison websites, best buy tables, mortgage calculators) available to them at each stage of the consumer journey to make effective decisions; and
  • whether commercial arrangements between lenders, brokers and other players lead to conflicts of interests or misaligned incentives to the detriment of customers.

The FCA is not formally consulting on the Terms of Reference, but welcomes any comments on the issues raised in this document by 12 January 2017.


The market study will focus on the activities of firms and consumers across the consumer journey for first charge residential mortgages. It will cover:

  • New mortgages for house purchases (including ported products);
  • Remortgaging with a new lender;
  • Internal product switching (with the same lender);
  • Further advances; and
  • Equity releases on lifetime mortgages.

Buy-to-let mortgages, second charge mortgages, commercial mortgages and equity releases on home reversion are all out of scope since the issues identified during the Call for Inputs (CfI) related ‘overwhelmingly’ to the first charge residential sector, due to its size, and the different characteristics of these markets. That said, the FCA does make clear that it is not precluded from considering whether any insights from this exercise are relevant to other mortgage markets.

While product switches are within scope, other variations such as changes of term, repayment method, or transfers of equity, are also excluded from the study. Issues relating to the funding of mortgages will not be considered.

Demand-side issues – tools and conduct of firms

The FCA’s goal is to improve competition in the first charge residential mortgage market for the benefit of consumers. It wants to understand whether consumers are empowered to make informed choices between products and services and to identify which products represent value for money.

The FCA is concerned that consumers are not aware of the tools that are available to help them to make effective decisions, and that those that are, cannot make best use of them. According to the FCA, this may be due to poor financial literacy, behavioural biases, or lack of engagement, or to a lack of understanding about the costs and benefits of the different options available to them in terms of the products they select or the distribution channel they use.

Furthermore, the FCA considers consumers may be hindered by behavioural bias, such as focusing on the short-term pricing elements of products or being too optimistic about their financial future. The FCA considers that the tools available to consumers do not help them to overcome these issues: they do not help consumers to cut through product complexity, and may even accentuate behavioural biases.

The FCA has said that it will also examine the behaviour of firms, in so far as they intentionally or unintentionally design products that exploit consumer and adviser biases, for example where they focus on reducing headline figures for products since consumers focus on these, while increasing other, hidden fees and charges. Whether switching reinforces behavioural biases will also be considered.


In addition, the FCA will consider whether there are opportunities for the development of better technical solutions to provision of information, including whether regulation is currently hampering such innovation. As part of this the FCA proposes to look at the benefits and risks of digitising the mortgage process.


The market study will examine the degree of intermediation[2] in the sector, and whether this is beneficial to consumers. In particular, the FCA will look at how consumers determine whether or not to obtain advice, how they choose an adviser and also what the benefits of obtaining advice are, as against the cost. The team will consider whether choice of distribution channel and / or the decision whether or not to take advice impacts consumer outcomes.

The FCA is also keen to understand the extent to which increased levels of intermediation and regulated advice have resulted from the Mortgage Market Review and whether the FCA’s rules benefit some distribution or business models over others. It will also look at whether its rules have affected firms’ ability to innovate and whether the outcomes seen are in the best interests of consumers.

Supply-side issues

The FCA will consider whether the complex commercial relationships in the sector create conflicts of interests, misaligned incentives or barriers to entry and expansion, which impact consumer outcomes. The FCA is concerned that this could result in consumers buying more expensive products than they might otherwise, or products that are unsuitable, or both.

Lenders and brokers

Responses to the CfI suggested that firms in the mortgages sector tend to be selective about the partners they choose to work with. For example smaller lenders may find it difficult to compete where large broker networks with significant influence are controlling access to lenders’ products. Such lenders may not be able to secure distribution for their products, or only on non-negotiable terms. Equally, smaller brokers may find it difficult to get access to certain lenders’ products, as the due diligence lenders need to carry out on them is not seen as worth the time and effort in light of the volume of business they are expected to generate.

Consequently, the FCA is looking at the impact of competition on any restrictions placed on brokers or lenders via panels. The market study will also look at whether there are obligations on lenders whose products brokers recommend to buy ancillary services such as property valuation services, from the broker’s group. Estate agents with in-house brokers will also be considered insofar as they refer consumers to brokers they have structural links with, or even make viewing / securing a property conditional on using such brokers.


Inducements paid by lenders to brokers will fall under the spotlight. The FCA wishes to understand whether such inducements influence advice given by brokers, and affect the number of lenders included on broker panels or which lenders they recommend, creating barriers to entry and limiting consumer choice. The FCA also intends to explore whether there is bias in the advice given by brokers based on levels of procuration fee and ‘soft incentives’.

Relationships with other parties

The relationships that price comparison websites have with lenders and brokers will be considered, as will those between lenders and mortgage sourcing systems and whether these prevent more innovative products from entering the market.


The FCA will consider the closeness of relationships specifically in the new build sector and the fact that developers tend to work with specific brokers, who in turn use a limited number of lenders. The FCA is concerned that this limits the number of firms on lender or broker panels for new build and / or restricts consumer choice.


The focus is very much on the residential first charge market in all its guises, including lifetime. The work is likely to be concentrated around origination and sale models - both structurally and in terms of the customer experience. Lenders in other mortgage markets not within scope should still monitor developments in the market study, especially where they use models which are similar.

The FCA is looking at the spectrum of consumer decision-making in the residential mortgage sector considering the role of all firms (including estate agents, developers, and price comparison websites) that impact these decisions ‘whether or not they are regulated’. It will be interesting to see how the FCA manages this, given that the majority of the remedies it can impose following a market study are regulatory in nature. If there are serious issues that need remedial action in un-regulated parts of the market, the FCA may need to make recommendations to government to take action, or decide to make a market investigation reference (MIR) to the CMA for in-depth investigation.

Publication of the Terms of Reference marks the start of an information gathering phase for the FCA. Firms can expect to receive information and data requests by the end of this year or early in 2017. Firms that do not receive a request are likely to have an opportunity to engage in the process, should they wish to do so, by responding to the findings of the interim report, by making voluntary submissions or attending roundtable events. A timeline setting out the key milestones is set out below.