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FCA: Little evidence commercial relationships bring worse consumer outcomes

  • 04/05/2018
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FCA: Little evidence commercial relationships bring worse consumer outcomes
The Financial Conduct Authority (FCA) says it has little concern that intermediary firms’ commercial relationships with lenders, estate agents, builders and property developers are harming consumer outcomes.



As part of its interim report into the mortgage market, the FCA found that contract terms such as procuration fees, retention fees, lender and intermediary panels were generally not producing more expensive mortgage outcomes.

Encouragingly for brokers, the FCA said current levels of commission paid by lenders to intermediaries did not appear to be linked with customers paying more for a mortgage and that there was no evidence more generous retention procuration fees resulted in harm for consumers.

It was noted that using lender panels did not have a negative impact itself, but intermediaries that placed business with fewer lenders sold on average more expensive products compared to those placing business with more lenders.

The regulator also found three areas of concern around exclusivity arrangements, the level of procuration fees retained by mortgage clubs, and information sharing – however it is not planning on prioritising further analysis or action in these areas.

Instead, perhaps as an early warning, it chose to “draw firms’ attention to these and suggest they consider their potential impact on competition”.

However, overall the FCA noted that it found little evidence that current commercial arrangements between firms were leading to poor consumer outcomes.


Restrict competition

Commercial relationships have been a significant concern for mortgage brokers with fears raised that such deals can restrict intermediary competition and consumer outcomes.

For example, as Mortgage Solutions revealed, Persimmon Homes has admitted that customers must use their tied brokers to get incentives on new build properties.

And the issue of lenders restricting their distribution to certain networks or clubs has also been cited as unfair, as clients cannot receive the same breadth of advice, regardless of the firm they choose to use.


Estate agents and builders

Although relationships between estate agents and mortgage brokers have been subject to much scrutiny, particularly regarding referral fees, this was not raised as an issue by the FCA.

“Customers taking out mortgages through an intermediary that has commercial agreements with an estate agent or developer do not, on average, pay more for a mortgage than customers of intermediaries without such agreements,” the FCA said.

“Finally, lending on new build properties is more concentrated than the wider residential market. But intermediary firms that have arrangements with developers do not sell more expensive mortgages than those intermediaries without them,” it added.


Lender distribution

With regard to lenders’ panels of intermediaries, the FCA said the vast majority of the brokers it surveyed did not consider panels of intermediaries to be a barrier to entry.

It found that panels were large and lenders typically did not restrict their panel of intermediaries, accepting business from intermediaries subject to due diligence and quality of business checks.

The FCA acknowledged that some lenders, particularly if they were smaller or relatively new entrants, may choose to work with selected intermediaries to ensure they could support volumes of business.

Where lenders removed intermediary firms from their panel, reasons included the firm submitting fraudulent or suspicious applications or the firm not submitting any or enough business to the lender during the review period. Some lenders also cited poor quality submissions.

One intermediary firm told the regulator that some lenders may restrict some products to certain distributors or geographical regions which may result in some intermediaries not being able to access these products.


Three issues

The FCA said it found a small number of arrangements and practices that potentially raised competition issues, but it did not plan to prioritise further analysis or action at this time. They are:

  • The use of exclusivity clauses and firms seeking to restrict their counterparty’s ability to contact certain groups of consumers was highlighted. The FCA chose to remind firms of their obligations under competition law, in particular the rules on the use of exclusive distribution and non-compete and non-solicitation clauses.
  • The regulator noted that clubs retaining a certain percentage of the procuration fee (typically between 0.01% and 0.02%) could weaken price competition between mortgage clubs and/or limit opportunities for new clubs with alternative pricing models. It added that it was “not clear how this practice is working in the interest of consumers”.
  • The FCA also noted that sharing data when benchmarking products was potentially concerning and that this “could generally be achieved with the exchange of anonymised, historic and aggregated data”. It added that firms should be mindful of their obligations under competition law and the rules on information exchanges when sharing information.


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