Around a third of borrowers were found to have paid more than necessary for a mortgage, costing a typical £550 a year extra, the regulator’s interim report on the Mortgages Market Study found.
Borrowers were more likely to end up on a more expensive deal if they had taken advice from a broker who dealt with fewer lenders, the report said.
These advisers typically have a range of go-to lenders whose criteria and eligibility they have “become very well accustomed to,” leading them to act quickly for new clients but not always find the best product for them overall, according to the FCA’s director of competition and economics Deb Jones.
Lender panels and or newer lenders with restricted availability weren’t found to have an impact.
Jones told Mortgage Solutions: “Some brokers look at a smaller range of lenders, so they get to know criteria, so they can quickly find a suitable deal.”
She added: “It wasn’t the existence of a panel that made a difference, it was the range of the business… Some brokers are turning to the same lenders over and over again.”
She denied the report advocated the cheapest mortgage as the best deal.
During the study, the regulator had access to the customer’s overall situation, including their credit file, and found that while they had usually taken a suitable product after advice, in 30% of cases there was another suitable product available that was cheaper.
The size and complexity of the market is part of the problem, according to Jones.
She said: “Choice is a great thing for consumers. There is a wide range of choice – not every consumer is suitable for.
“It’s how to filter down that choice.”
Part of the solution could be for lenders to make their criteria and eligibility more widely available, but at the moment “there is little incentive” for banks and building societies to do this, according to Jones.
She added that the report would hopefully act as a nudge in this direction.
Technology also has a part to play and the FCA will take a closer look at sourcing systems and how they support advisers to choose a mortgage ahead of the full market report, Jones said.
Helping consumers to choose and differentiate between advisers is another strand of the problem, according to the FCA.
At the moment many people choose an adviser based off a personal recommendation, but the person giving the referral does not necessarily know if the broker got them a well-priced deal in the first place, Jones said.
She added that borrowers could potentially make a better choice about a prospective adviser if it was clear whether the broker is a specialist or generalist, fees charged, range of lenders covered and complaints received.
Advisers said cost is not the only consideration in a deal, but agreed there could be some advisers that tend to rely on familiar lenders.
Martijn Van Der Heijden, vice president of strategy at digital broker Habito, said: “While there are many good brokers, the ‘personalised advice’ they can offer is too often limited in its extent.
“Reasons for this include the fee model, but also the limits of the human brain leading to shortlisting of results rather than full market scans.”
David Hollingworth from broker London & Country pointed out that lender service levels also have a big part to play in adviser recommendations.
He said: “Those buying a home are more likely to value speed and reliability more highly than a remortgage customer who has less time pressure and is therefore more focused on cost.
“Advisers will factor service into their recommendation for the client’s needs and that knowledge can be the difference between a smooth purchase and homebuyers turning grey.”
Insider knowledge versus whole-of-market
Aaron Strutt from broker Trinity Financial added: “Brokers regularly use lenders they know are going to produce fast mortgage offers with low rates and they like the process to be as smooth as possible.”
Education of brokers by lenders is another part of the issue, according to Sebastian Riemann broker at Libra Financial Planning.
He said: “Traditionally we had business development consultants who supported our business and argued our cases, but most importantly they educated us on the lenders individual criteria.
“Over time it appears that not only has the authority and quality of these BDMs deteriorated, they also seem more concentrated to those large firms where they are able to reach a grand audience with less time commitment on their part.
“A greater focus on personal development but putting the emphasis and responsibility onto the lender could bridge the gap and result in more brokers knowing more of the criteria of more of the lenders.”
Technology key to product transparency
Gemma Harle, managing director of Intrinsic’s mortgage network worried the FCA had placed too much emphasis on cost in the report but agreed there was room for improvement in the market, particularly in relation to the role of technology.
She told Mortgage Solutions: “There are 60-70 lenders with products changing all the time, not just pricing but also criteria.
“It isn’t possible for a whole of market broker to know every single product and criteria.”
She added: “Lender technology varies – the ability to source depends on technology.
“Technology has to change – it needs to move quicker, needs to be more transparent… It has a bigger part to play.”
Stakeholders will have until 31 July 2018 to comment on the interim report before final report publication at the end of the year.