Speaking at the British Mortgage and Protection Senate (BMPS) on 4 September, Sarah McKenzie, head of retail banking market analysis and policy at the FCA, spoke about the regulator’s recent proposals to reform the mortgage sector and its removal of the advice trigger.
She said it was clear that mortgage advisers were trusted among consumers and they demonstrated their value, but not everyone felt the same or wanted the same experience. She said some people had the confidence and experience to make an informed decision and found friction with the execution-only process.
She said removing the advice trigger gave consumers the information needed, “rather than the advice that they weren’t necessarily looking for”.
McKenzie said the regulator wanted to empower consumers to make decisions about their mortgage and take personal responsibility over what they owe and give advice firms the confidence to deal with consumers outside the advice and sales process where appropriate.
“We believe with the higher standards and the focus on outcomes that Consumer Duty brings, now is a good time to think of that change,” she added.
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Looking beyond advice at broader changes needed to support homeownership, McKenzie said the regulator could not do this alone and needed the involvement of the sector, government, consumers and other regulators.
“We are very much open to change,” McKenzie said.
She said the regulator was “not turning back on years” of reform and the “strong work” since the financial crisis; “we only believe we can have this conversation now because there has been this focus on responsible lending and the standards that are set out in Consumer Duty”.
Stress test changes are positive but question around more formal rules
This was followed up with a panel discussion, moderated by Sarah Batham, general counsel and chief risk officer at Sesame Bankhall Group, and with guest Stephanie Charman, chief executive of the Association of Mortgage Intermediaries (AMI).
McKenzie said the stress test was an important control mechanism but added that the regulator was positively “surprised” at the speed and scale of the impact of its confirmation that lenders could be more flexible with assessments.
She said the sector needed the regulator to give some reassurance without a “huge arduous consultation process”, and said it was looking at whether this needed to be formalised in its rules.
Batham asked if a more specific change to the stress test could be applied, and McKenzie said the regulator was not looking to impose a certain number on lenders.
Debate around advice trigger removal
Around the removal of the advice trigger, Charman said: “We are concerned that this change will lead to consumer harm.”
Referring to a previous panel about driving more protection sales, Charman said this was part of the advice process and that was being removed from consumers.
Charman said the regulator’s own Financial Lives Survey suggested that many customers were not in a position to make an informed decision and said there was a reason more than 90% of people chose the advice route.
Addressing lenders in the room, Charman said: “Can you really get comfortable that you are identifying vulnerability through an execution-only route? Can you really get comfortable that you aren’t avoiding causing foreseeable harm?”
She also asked how to navigate circumstances where a customer’s application was declined and ensuring they went on to have the right conversations.
Charman said most customers who were declined by a bank went no further, adding: “That cannot lead us to a vibrant housing market”.
McKenzie said the rules were permissive and it would be interesting to see how lenders responded, adding that they do not expect a “massive overnight change”.
“Consumer Duty obligations will remain,” McKenzie said.
Batham asked how the sector could make sure customer outcomes were not fragmented, and Charman asked if professionals were always good as they could be at maintaining contact with customers.
She said this was where technology could potentially help, while keeping advice at the core.
Balancing innovation with responsible lending
Batham then asked how the sector could balance innovation without encouraging a return to pre-financial crisis behaviours.
McKenzie said the FCA issued a discussion paper so it could have these conversations and said now was the time to have the discussion because the market had shown resilience.
“There are risks with the current situation now, there are people who are disadvantaged because they are stuck renting and actually, some of those people, unfortunately that’s never going to change, but for some of those people, maybe they are actually creditworthy if we make these tweaks and adjustments,” McKenzie added.
She said the regulator needed to be careful and not think it had all the answers, as it did not see everything that professionals working in the sector did.
Charman asked if new products were truly needed or if greater awareness would be more helpful, but said there were some concepts from the past that could be brought back.
