The Financial Conduct Authority (FCA) is to undertake a targeted market study focused on mortgage consumers’ ability to make effective choices, with a view to improving how competition works in consumers’ best interests.
The regulator will be asking whether the available tools for helping consumers make choices (such as price comparison websites, best-buy tables, advice) effectively meet their needs.
It will also be looking at the impact of increased intermediation in the mortgage sector on consumer outcomes as well as whether there are differences in the outcomes for those consumers who obtain their mortgages through mortgage brokers when compared with those who go direct to lenders.
The FCA will be considering the impact of panel and other commercial arrangements between lenders, brokers and other players in the mortgage supply chain and whether there is potential for conflicts of interest or misaligned incentives.
In FS16/3: Feedback Statement – Call for Inputs: competition in the mortgage sector, the regulator revealed that
intermediated mortgage sales, which had decreased to around 50% in 2009/10 following the financial crisis, increased to 71% by value and 67% of the number of sales in Q2 2015.
The FCA said that the evidence gathered so far suggests that consumers’ difficulties in assessing and acting on information are mainly linked to two underlying reasons. Firstly, challenges due to product complexity and a lack of transparency in relation to fees and charges, and, secondly, consumers’ behavioural biases.
The second theme that emerged from the responses to the Call for Inputs (CfI) is the role of technology in the provision of information and advice. Respondents argued that digital information tools (such as price comparison websites, online calculators and mortgage sourcing systems) and digital advice processes may have a significant impact on the incentives and behaviour of consumers, brokers and lenders.
A third theme emerging is that the mortgage sector is characterised by varied and complex relationships, and that while there are many reasons why these arrangements exist and why they can be useful, they also have the potential to distort competition.
Several respondents commented on the effect of procuration fees, with differing views. Some respondents felt that they do not give rise to conflicts of interest while others said they could result in broker interests being misaligned with consumer interests.
Many respondents were critical of relationships between brokers and estate agents. Criticism was directed in particular at situations where a consumer may be under the impression that consulting a certain mortgage broker is necessary in order to view, or submit an offer on, a property.
Respondents also commented on the relationships between brokers and providers of other ancillary services, for example conveyancers and surveyors, particularly when these services are provided by the same group of companies to which the broker also belongs. Respondents said there should be safeguards in place to ensure that consumer choice is not limited either as a result of ownership ties or commercial arrangements.
Both lenders and intermediaries expressed concern about relationships between firms in the new-build sector. Respondents claimed that developers have close relationships with certain brokers and that these brokers tend to place business with a limited number of lenders who they are confident can meet tight timeframes imposed by the developers. Respondents said this may make it more difficult for new lenders to enter the market, limiting the choice available to consumers.
The FCA is also considering whether panels are a potential barrier to entry and expansion. Respondents commented on the challenges that smaller firms in particular face in entering the market or certain segments of the market due to panel arrangements.
Lenders and lender representatives said that some smaller lenders have had problems accessing bigger broker networks and feel pressurised to accept their terms. The comments also noted that large broker networks have significant influence over the market, because they control visibility and access to lenders’ products.
Brokers commented that smaller brokers may experience difficulties in accessing products to distribute from certain lenders. Lenders need to undertake due diligence on their distributors and the cost of this is balanced against the volume to be expected from them. While one respondent commented that being part of a network may mitigate this by allowing smaller brokers to access a larger range of products, another noted that the way networks and clubs operate can by definition restrict some intermediaries’ access to certain lender products.
The FCA is to conduct more detailed scoping work before issuing the terms of reference for the market study in the final quarter of 2016. It has decided to undertake a targeted market study focused on consumers’ ability to make effective choices, together with three smaller pieces of follow-up work relating to the themes emerging from the CfI.
Firstly, it will be contributing to the next phase of the Council of Mortgage Lenders (CML) and Which? work on the transparency of mortgage fees and charges, with the aim of ensuring that relevant concerns raised by stakeholders during the CfI are appropriately taken into account.
Secondly, the regulator will be acting on specific aspects of its current regulatory regime where there is a case for change to improve competition – and considering the effect of its regulatory regime in the course of its planned competition work.
Finally, the FCA says it will be working with industry to increase competition law awareness in the sector.
The FCA’s FS16/3: Feedback Statement on Call for Inputs – competition in the mortgage sector can be read here.