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FCA release interim report into mortgage market

Thursday 10 May 2018

The Financial Conduct Authority (FCA) has published its interim report into the mortgage market, looking at ways in which the sector could work better for customers.

Originally launched in December 2016, the interim report published last week, aimed to determine whether customers could obtain better mortgage deals and if links between industry players limit choice. 

There are currently around eight million regulated, first-charge residential mortgages in the UK, with a combined value of at least £1 trillion, making the mortgage sector one of the largest retail financial markets. 

Mortgage debt accounts for over 80 per cent of total UK household liabilities, and recognising that choosing a mortgage is one of the most important financial decisions consumers have to make, the study focused on consumers’ ability to make an effective choice, given the tools available, and the possible conflicts of interest arising from commercial arrangements.

In the report, the FCA identified a number of ways in which the market could work better for customers, with proposals particularly aimed at helping customers find the best-priced suitable mortgage deal. The FCA also wants to help longstanding borrowers who are currently unable to switch to a better deal, often referred to as ‘mortgage prisoners’.

What they found was that there were high levels of choice and consumer engagement, with over three quarters of consumers switching to a new mortgage deal within six months of moving onto a reversion rate. However, a significant minority of customers (around 30 per cent) failed to find the cheapest mortgage for them.

Despite this, there was little evidence that current commercial arrangements between firms are leading to poor consumer outcomes. Even with current levels of commission paid by lenders to intermediaries, there is no indication that customers would pay more for a mortgage deal.

Although the market appears to be working well in many respects, the report unearthed difficulties when navigating the market, with a substantial number of consumers missing out on making significant savings on the cost of their mortgage. The report also identified that the available tools on offer to support customers are of limited effectiveness.

The regulator therefore proposed a range of potential improvements to make the market work better for consumers, which include:

  • Making it easier for consumers, at an early stage, to identify which mortgage products they qualify for, to assess and compare those products and, ultimately, to take out a mortgage;
  • Removing barriers to innovation in the sale of mortgages, including those due to aspects of FCA advice rules and guidance;
  • Making it easier for consumers to assess the strengths of different mortgage brokers by developing a range of tools and metrics to help consumers compare brokers;
  • Helping certain longstanding borrowers who cannot switch.

Elaborating on the final point, the FCA intends to explore options to help ‘mortgage prisoners’, for example an industry-wide agreement to approve applications for a new mortgage deal from existing customers whose most recent mortgage was taken out before the financial crisis and who are up-to-date with payments.

Christopher Woolard, Director of Strategy and Competition at the FCA, said: “The mortgage market is one of the largest financial markets in the UK and there have been significant changes to the market since the financial crisis in order to ensure that we do not return to the poor practices of the past. For many the market is working well with high levels of consumer engagement. However, we believe that things could work better with more innovative tools to help consumers. There are also a number of long-standing borrowers that have kept up-to-date with their mortgage repayments but are unable to get a new mortgage deal; we want to explore ways that we, and the industry, can help them.”

UK Finance director of mortgages, Jackie Bennett, commented: “The interim report highlights that, in the main, the mortgage market is working effectively for the vast majority of borrowers. The industry is committed to lending responsibly and ensuring that competition in the market works to the benefit of all customers. We note the FCA’s points regarding perceived areas of weaknesses within the market, particularly around customers who currently may be unable to switch products. We will be working through the FCA’s recommendations and continuing to engage closely with the regulator over the coming weeks as we respond to the consultation.”

The FCA is now consulting on its interim findings and proposed remedies. It intends to publish a final report towards the end of the year and will consult on any specific changes required to its rules.