Digital transformation including PSD2 and Open Banking are likely to accelerate the digital transformation of retail lending business models and the FCA noted this could be particularly so in distribution, as part of its annual review of the sector.
“As a result, new technology-driven firms entering the market are likely to compete for market share in a range of markets, but particularly mortgage intermediation and credit broking,” it said.
“We also expect technological developments to lead to mortgage firms reducing their reliance on traditional mortgage brokers.”
It continued by noting that many consumers will opt for the greater convenience of online services as firms reduce costs.
“This may lead to a continued reduction in physical branches and a greater shift towards online banking. It will also lead to some disruption of both mortgage and credit brokers,” it added.
The regulator also noted that it was seeing loans starting to be offered to consumers who have found it harder to get mortgages in the recent past.
It highlighted that self-employed, those on zero-hours contracts and older borrowers would become increasingly serviced.
And the FCA highlighted there was a risk of unsuitable consumer selection of fixed-rate mortgage products and that lenders are struggling to prepare their systems for cyber crime attacks.
Mortgage lending growth
The FCA agreed that growth in the mortgage sector was primarily driven by first-time buyers and remortgages and, that in the near term it expected any growth in this market to continue to be driven by these groups.
However, it also highlighted that it was aware lenders were starting to look at different customers with more complex income or employment situations.
“There are early signs that some firms are starting to offer loans to consumers who have found it harder to get mortgages in the recent past,” it said.
“We expect more firms to respond to changes in the socio-economic environment by developing products in the short to medium term for consumers on zero-hour contracts, older borrowers, and the very-recently self-employed within the framework of our existing affordability requirements,” it added.
Unsuitable products and cyber-crime
The regulator issued warnings about the risk of consumers selecting unsuitable products including fixed-rate mortgages, and raised concerns over how lenders were struggling to prepare for cyber-crime risks.
The FCA said harm can be caused by consumers purchasing or staying with unsuitable products and this was caused by an imbalance of information, misleading point of sale material, a lack of consumer engagement, and/or consumers poorly assessing their own needs.
“This can arise from material given to consumers at the point of sale that exploits their focus on their primary purchase, where providing credit is an ancillary product,” it said.
“It can also arise where consumers focus primarily on fixed rates in mortgages without also considering other options.
“This can occur in the debt management, high cost credit and mortgage markets,” it added.
And it warned that the evolving threat of cyber-crime was driven by poor security and the increasing complexity of value chains, with established firms facing difficulties adapting their systems to keep pace with advances in technology.
“The potential size of this harm is a concern as many retail lending firms hold a wide range of consumer data,” it said.
“This has led to the loss of consumer data, or firms being subject to fraudulent loans. Successful cyber-attacks also erode market confidence and could result in financial loss to consumers,” it added.