Introduction

After a period of reflection over the FCA’s Mortgages Market Study, the good news is that it was really positive to see that the mortgage market is working well in many respects.  The interim report found high levels of consumer engagement, good levels of switching, a reassuring range of products on offer with apparent competition on headline rates.  Important also is that they found no evidence of commercial arrangements between firms impacting consumers adversely.  This is better than most other markets the FCA has looked at.

Of course all in the world is not perfect but the comment in Section 8.9, “We estimate that intermediation currently reduces the average cost of initial borrowing by about £600 p.a. over the introductory period” should give all brokers a warm glow about how they do their job.

Methodology

The study has a pervading focus on price, on which conclusions and remedies have been based.  It is unhelpful that suitability has not been properly considered.  Neither is it sufficient to simply add caveats and make unqualified claims that exclusions such as soft facts “do not materially affect the usefulness of our findings”, without explanation.  Suitability is the foundation of advice.  Nuanced conversations about customers’ needs and circumstances, evidenced in the actual case files rather than by comparing credit profiles to different individuals, are key to an adviser’s recommendation of a suitable product.

Of more concern is the comment that in 31% of intermediated transactions a mortgage was advised where there was a cheaper alternative equivalent product available.  A great headline for PR, but in the report immediately amended – to only 21% if direct only products are excluded and to 13% where the lender may not have been open to all brokers.  Legitimate reasons by the FCA’s own rules to exclude these products.  Why should the regulator apply remedies when their rules allow the action.

The last financial crisis meant that many good people at what was the FSA and now the FCA, took their initial discussions on a Mortgage Market Review in 2009, into final rules in 2012 and implementation in 2014.  At the core of these lengthy discussions and open consultation was the need for advised sales, firms taking responsibility for their products, services and actions and ensuring that many of the bad practices in fast moving volatile markets could not be repeated.  My concern is that after 10 years of low interest rates and a very compliant market we relax the rules at precisely the wrong time.  AMI agreed to the changes brought about in the MMR because of what we learnt from the excesses of 2004 to 2007 and that we should avoid continuing a climate where it could recur.

In any work like this context is all.  The analysis was undertaken on a sample of transactions which completed during 2016, so cover advice periods from September 2015 onwards.  Those of us who live and breathe this industry know how much the market has moved since then.  It is clear that “needs” has been interpreted in this study to mean “cheapest product”.  For the FCA to conclude that some customers “are capable of picking a well-priced mortgage product on their own; a relaxation of the requirement to receive advice may better meet their needs” shows that it has already redefined price as the basis of what a customer needs.  We do not agree that redefining advice will deliver better balanced outcomes for the majority.

Risks

Consumer vulnerability has not been adequately considered in these proposals, and a transactional view has been adopted whereas advice will also include discussions on protection, later life and wider needs.  It is weak to conclude that 20% of first-time buyers and 30% of home movers which took advice post-MMR “in all probability would not have done so before MMR” when customer files were not reviewed, instead credit profiles of “similar” individuals matched but with no evidence of comparable needs.  It is dangerous to assume that a customer who did receive advice would have ended up with the same product if they had not spoken to an adviser.  The post-MMR advice review found that the best advisers “asked sufficient questions of customers to objectively assess needs and circumstances” and that they “probed and challenged customers”.  It is during these discussions when any product that the customer had in mind beforehand might not end up being the product recommended, and to the customer’s benefit.  It is therefore contradictory to conclude on such limited information that these customers would have known to choose the recommended product without an adviser.

The market is already moving forward on the some of remedies proposed in the study, with a range of firms, both new and existing, developing a range of solutions which will improve the customer journey.  As the data reviewed dates back to 2015 and 2016 and the field-work effectively ceased in mid-2016, the progress made by the industry and by new fintech entrants in the last year is largely ignored.  Intervention in the scale proposed is therefore likely to hinder the ongoing innovation rather than propel it.  Should we commence work on eligibility tools we consider that innovation will be delayed until the group agrees its outcomes as investors would not want to be funding obsolete solutions.  We do not believe that it is the role of the FCA, or trade bodies, to intervene in commercial areas to compete with existing providers or select one firm over others to define or deliver solutions.

The proposal to re-define advice appears to stem from the FCA’s push for innovation, yet it admits that it received “little detail on any specific Handbook provisions that are a barrier”.  With many innovative solutions having been launched since the analysis was carried out and more in the pipeline, we cannot see barriers to remove.  We therefore consider it inappropriate that radical changes should be made to advice without sufficient evidence or justification.  Any comments around the “complexities” of advice are made by either new market entrants without sufficient knowledge of financial services (often wanting an ‘easier’ route to market) or by lenders with inflexible linear fact find and application processes, not by intermediaries.  The FCA should instead be trying to understand these firms’ approach to risk and provide guidance where necessary.  It should not rewrite MMR when there are no systemic or significant issues in the current advice structure.

Conclusion

There appears to be little consideration of the measures that were taken following the last financial crisis and the rationale for their implementation.  The subsequent thematic work on a range of related topics has also encouraged firms to improve practices by emphasising good and poor practice, an approach we fully support.

We have a market where many lenders choose not to sell direct, not advise or accept execution only deals.  Any market solutions must embrace all participants, not just those large lenders with huge legacy back books who need change to survive by reducing their costs at the expense of consumer advice and responsibility.

Consumers should have the right to have full regulatory protections as well as firms needing to embrace technology and change to deliver great, competitive, best priced products.  We believe the market is already impelled to change and does not require intervention.  We do not support any move to grow execution only at the expense of FCA, FOS and FSCS protections.  These would be backward steps based on price only analysis.  Customers who have enjoyed advice understand its value, and the FCA should recognise its benefits and not buy the simple direct fintech offering compromise which is opaque about its actual processes.  It is therefore unsurprising that a very competitive market has been found to be functioning relatively well.

However despite many positive conclusions, several remedies have been proposed which we consider to be disproportionate to the “harm” identified (notwithstanding the fact that these have been based on what we consider to be flawed analysis).  The conclusions ignore that FCA rules allow the exclusion of some of the deals applied in the comparison.

Finally, with the thematic work done on the mortgage market and the level of checking completed by firms, networks and lenders, we are finding it difficult to reconcile the price differences identified in the study on the scale projected.  If this was this prevalent we consider that industry data and checking would identify this.  We therefore feel that with the soft facts in case files, permitted lender exclusions (panels and direct top consumer) the case for major change is not delivered.  Indeed it would require more fundamental rule change rather than tech innovation to achieve this.  The FCA has neither proved the need for this degree of change nor delivered a cost benefit analysis to support the recommendations.

Robert Sinclair
July 2018