One of the potential remedies proposed as part of the mortgages market study focuses on giving consumers “greater choices of tools” to help them choose a mortgage more effectively.  As a generic objective, it sounds reasonable.  But in reality, this translates to the FCA wanting to help “ensure that customers who don’t need advice don’t have to take it” by changing the rules on advice.

Before we look at why the new competition team want to undo the work done by their learned colleagues, which was undertaken to eradicate bad practices leading up to the financial crisis and to protect consumers, we first have to look at the methodology behind these conclusions.

The analysis behind assessing the impact of the advice requirement focused on first time buyers and home movers, excluding remortgaging and product transfers.  So two thirds of transactions weren’t taken into account.  And as only successful mortgage applications were included, the remedy doesn’t consider the impact of advice (and intermediation) on securing the mortgage in the first place, as application history was excluded.

Being primarily a statistical piece of work, customer case files were not reviewed.  Instead, data was used to build a customer’s profile.  Information from product sales data was extracted, such as property postcode and date of birth, and linked to the individual’s credit file.  As algorithms couldn’t determine whether a particular individual received advice they “didn’t need”, the FCA compared “similar individuals” from those who did receive advice to those who did not, pre and post MMR.  But similar in the sense they had matching profiles of credit score, property value, LTV ratio etc. – not that they had the same needs.  This was the basis of their conclusion that 20% of first-time buyers and 30% of home movers took advice post-MMR but “in all probability would not have done so before MMR”.

With customer needs not visible in the data, which is what advice is based on, 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.

This study has looked at price only and does not hide the fact that suitability has not been considered.  However with suitability currently being the foundation of advice, simply adding this caveat masks the reality that the results are skewed.  The FCA even goes further in stating that it believes “these caveats do not materially affect the usefulness of our findings” but without explanation.

Such statements indicate a more seismic change in regulatory approach.  Although the proposal to change advice requirements is peddled as encouraging innovation, it stems from the belief that customers should be getting the cheapest mortgage, not an appropriate one.  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 they have already defined price as the basis of what a customer needs.  Is this really the world consumers want and deserve?

Aileen Lees
Senior Policy Adviser

June 2018