The Interim Report does not give us a complete clean bill of health, but it does acknowledge that the market is “working well in many respects” and shows “high levels of consumer engagement”, “competition on headline rates”, “consumers valuing intermediaries experience and expertise” and “little evidence that current commercial arrangements being associated with material harm for consumers”.
Altogether, quite positive, and actually, a realistic picture of the mortgage market which I know does work hard to produce good customer outcomes.
The intrinsic value of a broker
But the interim report goes further, and it brought a smile to my face with their findings about the actual value of using a mortgage intermediary.
In paragraph 8.9 the report states: “We estimate that intermediation currently reduces the average cost of initial borrowing by about £600 during the initial period”.
I read this as saying this is the benefit of going to an intermediary and receiving mortgage advice compared to consumers being left on their own to deal directly with lenders.
Now, before we get too pleased with ourselves, we need to understand the surrounding circumstances which the FCA study found.
Paragraph 5.53 explains that a large part of this “saving” is to do with the propensity of intermediaries to recommend shorter term fixed rates compared with advisers working for lenders.
People will have their own views on this – I have always said in response to criticism of intermediaries selling shorter- term fixes in order to get faster repeat business (interestingly repeated by the FCA in paragraph 5.50) that lenders can be criticised equally for selling longer-terms just to lock customers in for longer.
The truth will lie somewhere between these points – but a saving of “around £600 a year during the initial period” strikes me as intermediaries doing a good job looking after hard-pressed home buyers.
Another point which the consultation paper examines is the significant proportion of customers who could, apparently, have got a cheaper mortgage than the one recommended.
This runs at just under one third – quite a high proportion. Interestingly, the difference here between mortgage broker advisers and lender advisers is very small (see paragraph 5.17), and in fact, if you take out products which intermediaries don’t have access to, their proportion drops to around one fifth.
Tailoring the mortgage to the client
It is still quite a high proportion but I think is explained by the job that mortgage intermediaries are actually doing – that is to find a product from a mortgage lender who will take their customer, in the time frames and with the requirements which that specific customer needs.
In other words, lowest price is not always best.
Many other factors come in to play – in particular the need for customers buying houses to get certainty over their ability to borrow as quickly as possible, so as to be able to participate in their house buying chain.
There is a great deal of detail on this subject, and the FCA has done a good analysis job.
Intermediary firms should be studying this section and thinking of what it means for their process of advice and recommendation.
The real challenge
But it is in the later sections that the FCA Interim Report gets really interesting. In section 9 the FCA is challenging us to innovate in the development of tools to help customers prepare better and for intermediaries to advise better.
Tools for selecting the best intermediary to work with, and tools to allow customers and intermediaries to get much earlier certainty from lenders of the acceptability of the proposed application.
There will be much to be done here, but much is already underway by some of our most innovative technology companies.
I’ve only scratched the surface of what this report contains, but in summary, it’s both reassuring and challenging in equal measure and I think the FCA has set the right tone in saying, in effect, “good but could be better”. That’s our challenge to take away.