Following the financial crash in 2008, the Mortgage Market Review (MMR) introduced new rules in 2014 which followed a series of connected but distinct consultations that then produced an all-encompassing Policy Statement. As part of this it is important to recall some of the content of the MMR paper and its rationale:
“For some time we have had a concern about consumers’ lack of understanding about the difference between advised and non-advised sales. Our research shows that consumers do not recognise or even value the distinction and therefore may not appreciate the different regulatory standards applying between the two.
We propose to maintain the distinction between advised and non-advised sales but to enhance sales standards in non-advised sales by extending an ‘appropriateness test’ across all sales, so that all consumers could expect the same protection, irrespective of the sales process.
We believe that in all sales where there is spoken or other interactive dialogue between the consumer and firm, the firm should assess whether the mortgage is appropriate for the consumer (i.e. advise the consumer). This will cover all forms of interactive dialogue, whether face-to-face, telephone, social media, or online propositions with the facility for live chats or otherwise.”
Our consistent view has been that consumers should have the freedom of choice and that not every consumer needs advice. But taking on a mortgage is one of the biggest financial decisions a consumer makes and the majority opt for help and support through the process. We are also concerned that creating an execution-only sales channel could be exploited as a mechanism to circumvent our rules
In deciding as part of its recent Mortgages Market Study that the market needed assistance by revising the advice and selling standards, the FCA has made various statements that it did not intend under MMR that it should be more difficult to complete execution-only business. The sections quoted above from MMR do not align with this and it is clear that the requirement to have lender management boards approve their execution-only approach was very deliberate.
In addition, in the Market Study it states that the MMR guidance was written “before online transactions in financial services markets became widespread.” However, it is clear from the above that it was very much part of the consideration.
This latest consultation has not adequately explained why customers’ understanding and needs have moved so much and so fast that the risks detailed in 2012 have evaporated. Indeed, we have had benign interest rates, low repossessions and a passively competitive market as a backdrop which is unlikely to have displayed the issues addressed in MMR.
In the current market traditional brokers have not wanted access to Execution Only. Intermediaries recognise that given the wide range of lenders and products available and in communicating with a consumer they will end up advising on the most suitable provider and product. Most lenders have found methods of mixing execution-only into their product transfer mix and have been pursuing this to the extent of over £70bn of transactions in 2018. Under MMR it was ruled that firms should not encourage consumers away from advice – so despite many lenders adopting such practices – differential pricing and telling customers about follow-on products with a simple tick box or keyboard click completion – rules are to be removed to validate the practices of lenders today.
The defence offered is that because the FCA is keeping the “interaction” rule, the changes to the execution-only rules will have limited impact. However, this is unlikely to be an effective control over either lender or consumer behaviour. This does not provide adequate consumer protection as many will be induced to follow a cheaper price or quick process without any checks on suitability. Consumers will not be helped by being given details of all the products they are eligible for on a product transfer rather than the existing version of key highlights, unless the FCA is prepared to supervise to this standard.
It is a fundamental of the current market that intermediaries provide both choice of provider and product through an advised process which delivers positive consumer recommendations. These proposals risk restricting consumer access to choice and advice as consumers are offered limited options by single providers with the promise of speed and simplicity which will be a false economy. There is also the risk that life insurance, critical illness, income protection and other insurances will not be properly introduced and discussed under an Execution Only route.
It is concerning that with all evidence in this and supporting papers relating to the purchase and remortgage market, there is no acknowledgment of the scale and significance of the huge product transfer market and the extent that this is operated predominantly on an execution only basis.
Following the initial report from the FCA we anticipated that the discussed potential changes to the affordability rules might allow the industry to fashion some solutions to the trapped borrower issue. What we thought would be relaxations to the affordability rules for a discrete population has however translated into much wider changes. These mean that all lenders will have to have a very serious look at how they wish to transact all their remortgage business in the future.
These changes risk delaying a solution for the trapped borrower. Instead of perhaps 8 lenders and a handful of broker firms working in a small project, sponsored by the FCA, with the administrators to find solutions for those who can be helped, we now face all lenders having to make decisions on how to approach this element of the market. This will necessarily take much longer as all lenders will need to look at how they engineer their entire processes rather than hot-housing a project to convert a limed number of cases. By making the rule changes a whole of market solution the FCA has risked failing to solve the prisoner issue by over-engineering its rules.
A core concern is that whilst lenders can consolidate their product fees into a new loan, the lender will not be able to permit adding broker fees to the loan where they are applying the proposed simplified affordability remortgage. This risks skewing the market against intermediaries and creating imbalance as they can be consolidated on new loans, product transfers and remortgages not using the new reduced affordability rules.
These more complex set of standards are capable of being manipulated by lenders looking to lend without applying the rules brought in under MMR. Given the wider agenda, the FCA will not have the capacity to be able to supervise and police behaviour on term extensions and whether lenders are appropriately disapplying the rules. It may be too easy to replicate the market of 2004 to 2007.
The proposals appear to work well under current market conditions for most consumers on a reversion rate or coming off a long-term deal as they should be able to secure a cheaper loan. In a market where rates are rising it may be more difficult to benefit from the reduced affordability tests. As lenders will have to keep the stricter affordability approach for new or additional borrowing this adds new layers of complexity. We are concerned that they will keep the existing MMR rules for times of rising rates or move to the new reduced rules, relying on extending the mortgage term to deliver the lending volumes they require.
These changes go to the heart of the market as more lenders look to retain their customers whilst a remortgage for many might still be the best option. These changes could give the largest lenders with current account dominance too much power in this market. Not only do we consider that these changes risk skewing the market in favour of lenders versus intermediaries, it could skew it in favour of the largest lenders. As these are remedies from a market competition study, we are concerned that these potential outcomes are themselves potentially anti-competitive.
The direct promotion of a simpler execution-only process is counter to the perceived and evidenced benefits of advice. The focus on price without a simultaneous assessment of suitability displays a lack of depth in this approach which risks the wrong conclusions. Whilst the clarifications on what is advice and what is permitted guidance and support is helpful, consumers currently benefit significantly from the advice provided in the intermediary channel supported by the flexibility of easy access to a wide choice of lenders and products. The case to shut this off on a purely price led argument is not justified.
Fewer consumers might have proper conversations about the benefits of protection policies. The risk of consumers chasing cheaper deals via execution only, so avoiding advice has not been adequately assessed with the chance of escalating complaints in subsequent years as consumers realise their mistakes. Finally, mortgage prisoners need a sharper more focussed solution than the proposals currently tabled. These proposals will deliver more significant market change than either consultation paper suggests. The final policy statement cannot just apply these ideas.