The FCA has today released its final report stemming from its Mortgages Market Study and is the final fruit of a review which has been underway since late 2016.

A mortgage represents the greatest financial commitment that most consumers will ever take on and in recognition of that, the FCA is keen to ensure that competition within the market is working for the best interests of the consumer in terms of cost, service and choice.

The good news is that for the most part, the FCA found that the mortgage industry is functioning well for consumers with a high level of engagement and that a significant majority shop around to secure the best deal available.

However, it highlighted specific areas where the industry could do better, in particular in helping so-called ‘mortgage prisoners’ – those who have historically been unable to switch to alternative providers despite being up-to-date on their repayments.  While a relatively small proportion of the overall borrowing public, the FCA nonetheless estimates that this group accounts for some 30,000 consumers who, frequently due to tighter lending criteria introduced in the wake of the financial crisis, find themselves unable to switch to a more suitable and affordable product from an alternative lender.  These criteria are to be reviewed meaning that a significant number of borrowers will now be able to access loans with much more favourable terms.

Mortgage Introducer reported brokers of failing to secure their customers the best deal possible.

“The FCA said brokers are being encouraged to find customers a mortgage quickly, rather than searching the market extensively to find the cheapest possible solution.  In the process around 30% of consumers miss out on cheaper mortgages that are just as suitable, costing them an estimated £550 a year.

The FCA said it’s difficult for consumers to initially identify products they qualify for, which hinders their ability to shop around – and to a lesser extent this applies to brokers.   A lack of clarity from mortgage lenders on whether customers pass affordability criteria results in consumers and brokers erring on the side of caution when applying for a mortgage.

“The regulator found that generally the more lenders that intermediaries place business with, the more likely they are to get consumers value for money deal.  However, owing to a number of factors brokers are looking at a limited number of lenders.  Also some lenders are selective in how they distribute mortgages through intermediaries, narrowing the choice of products brokers have to choose from.”

Innovation is also a recurrent theme in the Mortgages Market Study.  The FCA acknowledges that lenders and brokers are adopting greater innovation, albeit it at a slow rate and notes the preference from industry participants for this innovation to be market rather than regulation-led.  However, the regulator has confirmed it will monitor the uptake of new technologies across the market and will consult a working group to measure barriers to further innovation.

So where does the FCA seek greater market innovation?  First, without negating the benefits of advice, the FCA fears that some consumers seek advice where it is not needed and while in other areas of financial services it is possible to complete a transaction entirely online, when it comes to securing new loans, it is not possible to move through all stages from an initial search to acceptance of offer via one web portal.  The FCA’s own rules and guidance may be acting as a barrier her and it has committed to reviewing these while continuing to act to protect consumers.  At the same time, for this to be a success it will require widespread lender participation. However, should this be embraced by the industry, it opens up the possibility of a much smoother, frictionless journey for a consumer to secure a suitable product in one place without the need for broker intervention.  The FCA will report back further on the viability of this later in the year.

Another barrier that impedes consumers switching providers at the end of a discount period is the lack of clarity over their eligibility for new loans.  The FCA’s vision is the development of new tools either for consumers themselves or for adoption by brokers to complement a face-to-face interaction. These tools could provide tailored feedback on why a consumer is not eligible for a product and suggest ways of improving their eligibility while lender should be incentivised to provide greater transparency.  Some steps have been taken in this direction, but there is still some way to go and again, the onus lies with the lender to develop these tools further.

Another innovation the FCA seeks is a means for consumers to be able to compare intermediaries.  It recognises the importance of guidance, particularly for those negotiating with the mortgage market for the first time, however, consumers do not have a resource to compare brokers.  There are some limited tools available, but they are constrained by voluntary participation and they do not cover all active intermediaries.  An example of how this might help a consumer is an indication of the range of lenders a broker works with not the number of products they offer.  It is hoped this will incentivise brokers to use more lenders and increase competition between both lenders and brokers alike.  Other metrics should include fees and approach to remuneration, channels of communication and levels of adviser qualification.

The final report from the FCA’s Mortgages Market Study confirmed many of the regulator’s findings in its interim report released in 2018.  The mortgages industry is far from broken, which is significant given the major role it has in the overall UK economy.  But it is not an industry that can rest on its laurels and the FCA is clear in its intention to see it embrace new technologies aimed at improving the overall consumer experience and it will ensure that its own guidelines will not act as a barrier to further innovation.  The introduction of Open Banking, the ever-growing cohort of fintechs and a borrowing public now comfortable with a more digital experience of financial services should be supportive of greater technological change.  It is now up to both lenders and brokers alike to take up the challenge.

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