The regulator today published sector views, summarising the state of the market and highlighting areas of concern.
Its assessment of consumer credit as a whole highlighted a number of areas where consumers in financial difficulty were not being treated appropriately. In the mortgage market the FCA said there are examples of ‘overforbearance’, where borrowers with little potential to recover are kept in forbearance too long.
The FCA added that changes in the market mean some mortgage borrowers, such as interest-only customers, may suffer financial detriment from difficulties in remortgaging.
In addition, it said that external drivers of change, such as economic factors, have a direct impact on consumers when they lead to changing risk appetites among lenders, or responses to regulatory change.
“This may lead to consumers who could once afford credit having trouble accessing products and services they need,” said the report.
The regulator also raised concerns that complexity and a lack of clear information may mislead consumers about the nature or value of products, services and add-ons.
“This is compounded by the fact that some consumers also misjudge their needs. They can be over-optimistic and place their immediate needs over longer term considerations – for example, by focusing on initial monthly mortgage payments or introductory rates on credit cards.”
This issue is most acute where consumers are distressed or focused on a pressing need. However, the FCA said consumers tend to give their options less consideration when buying or renewing a financial product from their existing lender – suggesting it will focus on this area in future.
At the end of 2015, UK households owed £1.27trn in mortgages and £179bn in consumer credit. During the third quarter of 2015 there were 127 providers of new mortgage products. However, most mortgage lending is concentrated among the UK’s largest banks, with the top six lenders accounting for 77% of regulated mortgage balances market share.
Household debt has remained relatively high, and is forecast by the Office for Budget Responsibility to rise to 149% by 2021. Although high, this is still below the pre-crisis peak of 160%. In the mortgage market, lending figures have been more subdued since the crisis.
The FCA highlighted the potential impact of a rate rise on more indebted households as a concern. “A small interest rate rise could affect mortgage borrowers significantly, either directly if their rate is variable or indirectly if their rate is fixed (through a general impact on household finances),” it said.
This, it added, would be compounded if lenders changed their forbearance practices and moved more quickly to enforce debts.
In the insurance sector, the FCA said consumers are increasingly researching and comparing products and firms online. However, variations in wealth and financial capability may mean that some consumers are less well-equipped to assess their needs or access affordable products. For example, people on lower incomes are more likely to renew with the same provider.
Of the 26.7 million households in the UK in 2013, over 17 million had buildings insurance and 20 million had contents insurance.
When it comes to protection insurance, over 15 million policyholders have whole life policies, while 11.6 million have term assurance, which typically covers outstanding mortgage debt in the event of early death. Other forms of protection, such as income and critical illness cover, are less widely held, with 3.2 million and 0.8 million policies in force respectively.
Price comparison websites feature prominently in home insurance and around 25% of new business comes directly from these websites, with a similar proportion sold by retail banks and by insurers directly.
Advice plays a more significant role in the protection market. Independent advice is the largest distribution channel, accounting for just under half of new mortgage-related term assurance sales and two thirds of other term assurance products.
In the retail insurance sector, the FCA intends to focus on pricing, suitability of sales and consumer choice, competition dynamics, and fairness of access for vulnerable customers.
