The Mortgages Market Study Interim Report, published by the FCA focuses on areas where competition can potentially be improved for the benefit of consumers.
Recognising the crucial role played by the mortgage market in the UK economy, in December 2016 the Financial Conduct Authority launched a market study into first-charge residential mortgages, a market worth at least £1 trillion.
The study analysed over one million mortgage transactions, carried out consumer research, surveyed over 1,000 firms, and received detailed input from around 50 firms. Many are regulated by the FCA (lenders, intermediaries) while others (mortgage clubs, mortgage sourcing systems, estate agents, developers) are not.
The market study explores two main questions:
- At each stage of the consumer journey, do the available information and tools (including advice) help mortgage consumers make effective decisions?
- Do commercial arrangements between lenders, brokers and other players lead to conflicts of interest or misaligned incentives to the detriment of consumers?
The findings identified a number of ways in which the market could work more efficiently, with a particular focus on helping customers find the best-priced suitable mortgage deal.
Consumers are valuing the experience and evidence of intermediaries and current levels of commission paid by lenders to intermediaries does not appear to be linked to customers paying more for a mortgage. It is reported that over three quarters of consumers are now switching to a new mortgage deal within six months of moving onto a reversion rate.
However, the report also suggests that there is no easy way for a consumer to be confident when shopping around. With 30% of customers being unable to find the cheapest most suitable deal due to technological limitations. On average, these consumers are paying around £550 per year more over the introductory period compared with the cheaper product.
It is estimated around 30,000 customers on a reversion rate would benefit from switching but, despite being up to date with payments, cannot. Around 10,000 of these customers hold mortgages with “active” lenders that continue to lend to new and/or existing customers; the remaining 20,000 are with firms that, although authorised to lend, are no longer active. The pattern is similar whether customers used an intermediary or went directly to a lender.
Commenting on the findings Christopher Woolard, Director of Strategy and Competition at the FCA said:
“For many the market is working well with high levels of consumer engagement. However, we believe that things could work better with more innovative tools to help consumers. There are also a number of long-standing borrowers that have kept up-to-date with their mortgage repayments but are unable to get a new mortgage deal; we want to explore ways that we, and the industry, can help them.”
In summary, the FCA believes it should be made easier for consumers to find the right mortgage, and that there should be a wider range of tools providing consumers with a choice about the support and advice that they receive. Consumers choosing an intermediary should, the FCA says, be able to do so on an informed basis, and equally they should be able to switch more freely to new deals without undue barriers.
Going forward the FCA wants to give the intermediary sector (including potential entrants) an opportunity to make it easier for consumers to assess the relative strengths of an intermediary. This could involve developing useful metrics (eg concentration of business with particular lenders, or areas of specific expertise such as lifetime mortgages) and a means of making the information easy to access and to use.
Responding to the Financial Conduct Authority’s interim report into the mortgage market, Jackie Bennett, Director of Mortgages at UK Finance, commented:
“Today’s interim report highlights that, in the main, the mortgage market is working effectively for the vast majority of borrowers. The industry is committed to lending responsibly and ensuring that competition in the market works to the benefit of all customers.
“We note the FCA’s points regarding perceived areas of weaknesses within the market, particularly around customers who currently may be unable to switch products. We will be working through the FCA’s recommendations and continuing to engage closely with the regulator over the coming weeks as we respond to the consultation.”
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