Countdown to the FCA’s mortgage competition review
13 October 2016
By John Coley
Mortgages remain a hot topic for the regulator; since 2009 the market has seen a series of thematic reviews by the Financial Conduct Authority, the Mortgage Market Review (MMR) and the implementation of the EU’s Mortgage Credit Directive.
But the work hasn’t finished yet; the FCA now has explicit responsibility for promoting effective competition in the interests of consumers, and in the coming period will publish a terms of reference for its study into competition in the mortgage market.
Judging by the FCA’s previous studies into financial products, including payday lending and credit cards, we could well see significant implications when its final report is published in 2018. So what can firms expect? We already have some clues as to the FCA’s concerns about the mortgage market and its areas of focus are likely to include:
- The ability of consumers to make effective choices. The FCA’s own research suggests that consumers can often be impinged by their own behaviour – emotions about a property can cloud rational decisions. With this in mind, the FCA will ask whether the tools available to consumers, such as comparison websites, meet their needs. The FCA calls this ‘the shopping around question’.
- The complexity of product information. Some of the tools available to consumers to aid their decisions, including online calculators, have been singled out as a potential concern.
- The impact of increased intermediation in the market. In a recent speech, Christopher Woolard, the FCA’s Director of Strategy and Competition, said that intermediated mortgage sales have increased from 50% of sales in 2010 to 67% in the second quarter of 2016. 71% of first-time buyers and 64% of re-mortgagors now use an intermediary rather than going direct to a lender and the FCA will look at whether consumers using an intermediary get a different deal from those approaching a lender direct.
- Commercial arrangements. The relationships between brokers, lenders, panels, price comparison websites – even some estate agents and builders – exist for a reason, the FCA has said. But it’s possible that some relationships could have a detrimental effect on the functioning of the mortgage market.
The FCA’s process will take time but it’s essential that mortgage firms across the value chain both get involved in and help inform the debate – the market study represents and opportunity as well as a challenge.
And there’s preparation work to be done; once its information gathering and analysis is complete, the FCA will most likely develop ‘theories of harm’ in the market. It’s important that firms are able to explain and rationalise their business against anything the FCA may raise – for example, a view that some groups of consumers, such as high risk borrowers, get poorer value than others.
The FCA’s remedies in previous market studies have ranged from severe – the price cap imposed on payday lenders – to moderate, such as a requirement for more disclosure and transparency around products and pricing. In any event the competition review will be a detailed exercise - those that are well prepared will likely have a better outcome.