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FCA on the Mortgages Market Study: Advice rules oversight must not obstruct execution-only innovation

  • 03/04/2019
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FCA on the Mortgages Market Study: Advice rules oversight must not obstruct execution-only innovation
The Financial Conduct Authority (FCA) has said its vigilance over advice rules and responsible lending should not be at the expense of innovation for execution-only customers in the first interview with the regulator since the Mortgages Market Study emerged last week.


The regulator also admitted that brokers played an important role in the market and that advice did not have an impact on the average cost of borrowing for customers.

And it added that it had not intended to infer brokers were only interested in receiving procuration fees as quickly as possible when dealing with customers.


Pro-customer choice

The FCA used last week’s final report of its Mortgages Market Study (MMS), to announce that a consultation into mortgage market advice rules will be conducted in the second quarter of the year.

Speaking to Mortgage Solutions about the MMS, FCA director of competition Sheldon Mills was not prepared to rule out opening-up advice rules to allow greater use of execution-only.

“In a sense we’re neutral in relation to the level of execution-only or broker advice done,” he said.

“We are very pro-customer choice, and pro-customers receiving the best possible value they can obtain.

“But we are willing to allow the market, and the players in the market, be they brokers, intermediaries or lenders direct, to refer customers in a way which allows them to exercise that choice well.”

Mills noted that following the financial crisis regulators had become very interested in tightening-up advice rules and ensuring there was responsible lending.

However, it appears the regulator is prepared to back-track on the emphasis of advice that has been embedded in the mortgage market since the Mortgage Market Review (MMR).

“We remain vigilant and think that’s important,” he said.

“But that should not be at the expense of innovation for consumers who have the ability and the knowledge to execute themselves or be advised by a broker – I don’t think the two things should be confused,” he continued.

“If our rules are pushing people who do not need advice into additional advice that is something we need to think about.”


Worries about customer interaction

Mills explained that a having spoken to a number of firms the regulator had found the rules around advice, particularly the perimeter guidance and interaction trigger, were not working as it had envisaged.

“For example, for a comparison or lender website, if a customer rings up because they can’t work out how to use the website or a drop down menu doesn’t have right option for them, firms were worried that this gets them interacting with the customer and that’s starting to give advice,” he said.

“That’s an example of how firms were reluctant to do what we’d envisaged and maybe the rules were not working as we’d hoped.”

He added: “The follow-on work will take account of firms’ experience with those rules and see if there’s any reason for adjustment to those rules.”


Not a review of broker services

The final report of the MMS highlighted how big a role brokers play in the market at present, dominating the majority of new sales.

One of the most frustrating elements to the broker community in the report was a finding about incentives for intermediaries, where the report noted: “There are strong financial incentives on an intermediary to quickly find a client a mortgage. But, the incentives to search extensively and find the cheapest (suitable) mortgage are weaker.”

Some brokers felt this was a critique of the advice profession and implied that they were not willing to go the extra mile for their customers.

However, Mills denied this was the case and noted the study had found intermediaries were not drawn towards recommending more expensive products that came with higher procuration fees.

“This isn’t a view on services provided by brokers, that wasn’t what this study was looking at, it’s looking at how that process works and how you get best value for mortgage customers,” he said.

He later added: “The language was not intended [to say that] and I don’t think the language says that in the way you’ve put it back to us.

“But clearly if you look at the design of the report, we are looking to assist brokers in providing a suite of products and mortgage offers to consumers and assisting with that.”


No worse outcome using tied brokers

Another point raised in the report was that brokers that used more lenders generally produced better value results for their customers, and it identified differences in how broker panels were put together.

A criticism of the FCA’s report has been that it did not go into detail or feel the need to act on the potential competition issues that may be impacting these strategies and the wider market.

“If we were to find evidence that certain arrangements or conflicts did not work in the interest of consumers in the context of the mortgage market then we would look at that closely,” Mills said.

He explained that the regulator looked into the impact of relationships between developers, intermediaries and estate agents on customer outcomes.

“We didn’t find that those intermediaries that had strong links to a developer or estate agent resulted in a worse outcome than customers who went to intermediaries without those links,” he said.


Persimmon incentive ties

However, the regulator appeared unaware that developer Persimmon had admitted to Mortgage Solutions a year ago that it prevented customers from using incentives unless they used the tied broker.

“It’s important that we are looking at end harm to customers,” Mills continued.

“We are not looking at individual contracts between developers and suppliers which may or may not raise other issues, which may not impact the market as a whole.

“If the industry feels there is significant harm occurring then they should let us know and provide evidence to us,” he added.


Black box model for lender criteria

The FCA did acknowledge that it was trying to push lenders to be more transparent about their eligibility criteria with a number of possible ways to do so.

It hoped that greater transparency would mean brokers could pursue cheaper products for their clients in the knowledge that they would be eligible for them.

Lenders are notoriously guarded over lending criteria, so one potential example cited could be to replicate other industries which have a ‘black box’ approach where data is inputted into a single location and then queried through several lenders systems and returned to give an indicative result.

“With something like that the lender would keep all their proprietary information but the customer would get a more certain yes no or maybe earlier in the process,” Mills said.

“So this isn’t about forcing lenders to put criteria on a website, it’s just about achieving greater clarity for brokers and then for their customers earlier in the process.

“The eligibility working group will be thinking through these issues and at this stage its very early to say what the outcome will be around eligibility.

“And that’s the same for the broker choice tool as well.

“We’re being open in trying to work with industry to solve the problems and I hope that’s welcomed,” he added.

To this end the industry has seen some recent developments, with Iress adding an eligibility check to the latest version of its Xplan Mortgage platform, and Mortgage Broker Tools’ Affordability calculator platform.


Mortgage prisoners

Finally, the subject of mortgage prisoners was raised, and particularly why those borrowers who have been forced into arrears as a result of being with inactive lenders are not classified as prisoners by the regulator, but their up-to-date payment cohort is?

The regulator is consulting on changes to rules in this area to potentially change how affordability assessments are carried out.

As a result, Mills said he could not comment on the difference in definition or yesterday’s sale of a further tranche of UKAR mortgages to another inactive lender.

“We’re thinking very carefully about proposals for rule changes which effectively allow people who are unable to switch who are up to date with their payments to be potentially able to switch, but I can’t say any more than that,” he concluded.


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