The FCA recently published its final report following the Mortgages Market Study. The FCA explained its final findings and provided an update on the proposed remedies which will impact on lenders and intermediaries, as well as consumers.
FCA findings have a material impact on a number of UK householders as mortgage debt accounts for over 80% of total UK household liabilities. The FCA reported also that the regulated residential mortgage sector is currently worth at least £1 trillion, with approximately 8 million outstanding mortgage accounts in 2016.
What are the key findings?
Broadly speaking, the FCA found that the mortgage market is working well in many respects. In particular, the FCA identified high levels of consumer engagement and that consumers are generally getting mortgages that are suitable and affordable.
That said, the FCA pointed out a few potential areas of concern:
- Many customers miss out on cheaper deals that are just as suitable.
- It is difficult for certain customers to find the right intermediary.
- There are longstanding customers on a relatively high reversion rate who do not or cannot switch. The FCA estimated that about 800,000 consumers are paying a relatively high reversion rate and do not switch when they could.
- A small number of customers on a relatively high reversion rate, who are up-to-date with their existing payments, are unable to switch to a cheaper mortgage (the so-called ‘mortgage prisoners’ problem’). This is mainly due to regulatory changes following the financial crisis, and in particular changes to requirements around affordability assessments.
The FCA has decided to address these issues via market-led solutions rather than rule changes. It engaged with various industry leaders, such as consumer organisations, lender and intermediary trade bodies and has set up working groups to explore how to address the relevant problems.
For example, the FCA set up a working group of lender, intermediary and fintech trade bodies in July 2018 to discuss how to develop innovative tools which could help customers identify more easily what mortgages they qualify for. The FCA will continue to seek working group input to identify barriers to lender participation in developing such innovative tools and how to address those barriers. In doing so, the FCA will look at developments in other sectors, such as the use of an application programming interface (API) in Open Banking.
Furthermore, the FCA has proposed the following steps and remedies:
- a consultation paper (CP19/14) which sets out proposed changes to responsible lending rules and guidance (i.e. to help those borrowers who are up-to-date with payments and do not seek to borrow more).
- consulting later this year on proposals to change its mortgage advice rules and guidance to help remove the barriers those rules may create to innovation in mortgage distribution;
- a proposal for the Single Financial Guidance Body to develop a tool which could help consumers to compare different intermediaries.
The FCA has also begun research on the characteristics of those customers that do not switch (and could potentially benefit from switching). Once the FCA has finalised it, it will decide how to choose the most suitable remedies to address the issue of switching. It is feasible that the FCA will want to engage with important consumer champions, such as price comparison websites, to further its work in this area.
How could this affect my business?
Since the FCA was granted competition law enforcement powers in April 2015, it has continuously proved that it takes its statutory objective to promote competition very seriously.
The FCA is currently carrying out several market studies and market reviews to improve competition in various industries and sectors, such as investment platforms and general insurance.
The final report in the Mortgages Market Study (published more than 2 years since the launch of the market study) demonstrates once again that consumer interest is at the heart of the FCA mission. In particular, the FCA aims to solve the issue of switching to help those consumers who could potentially benefit from it. Furthermore, the watchdog has been trying to show its openness towards solutions which seem to work well in other sectors, such as API in Open Banking.
It remains to be seen what the FCA is ready and willing to do to boost innovation in the mortgages sector. Although the final report was quite clear that the FCA is advocating for more industry-led solutions, the possibility that the FCA decides to amend its mortgage advice rules and guidance cannot be completely ruled out. The FCA may decide to intervene more forcefully to address the alleged inertia in lender participation to develop certain innovative tools and their unwillingness to share (potentially sensitive) information with their commercial partners (see para 3.24 of the final report).
The FCA’s findings may have a substantial impact on lenders, intermediaries and also consumers of mortgage products.