Having been working with a number of firms recently, I have seen the extent to which the market is still adjusting to the very significant post-crisis regulatory interventions and another major overhaul is the last thing needed.
The tail of very poor lending we saw pre-crisis is still washing through the system. Lenders’ credit risk appetites are gradually increasing so there should be a gradual reduction in the numbers of ‘trapped’ borrowers with active lenders.
The report estimates that 10,000 of the 8m mortgage borrowers cannot switch products but would benefit from doing so. They are likely to be the heavily-adverse credit-impaired, interest-only borrowers with no capital repayment strategy and those who took out very high LTVs.
No-one wants those types of products to return to the market, but lenders could do more to help these customers. As I’ve now seen for myself, fear of the regulator and retrospective supervisory action plays a significant part in what lenders are willing to do. More guidance from the FCA on what’s good practice and what isn’t would be a useful start.
The digital solutions
Technological developments will also address some of the issues flagged by the FCA. The market is changing – there is no reason why an advised sale should be a lengthy and costly exercise for a customer. Quite the opposite, in fact.
Molo Finance, for example, is aiming to provide customers with quick certainty on their mortgage application via an online, 100%-compliant and fully-digital process which will improve ease of switching, reduce unnecessary costs and give value back to customers.
There may be ‘little appetite among established lenders and intermediaries to develop online advice services’ – but emerging fintechs are hungry to do just that.
One of the more challenging issues the FCA has flagged is the problem of customer inertia. Back book customers generate higher returns – and in a market where the biggest players compete aggressively on price, many smaller lenders rely on the back book to keep the lights on.
They can’t compete if they raise prices to compensate for switching those customers to better rates, but neither can they keep customers on the reversion rate and not actively prod them without the FCA intervening. It’s a really hard one and it will be interesting to see how the players on this unlevel playing field can resolve it.