After a period of quiet reflection and immersing myself in the detail it is time to give a more impassioned view of 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 that, “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. 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 rules to exclude.
Context is all. These were 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. This was a report where most of the research and (limited) analysis was completed by the end of July 2017, but not finally published until May 2018.
Of most concern from my perspective however is the all-pervading focus on price. The last financial crisis meant that Lord Turner, Lynda Blackwell and many other 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.
It is interesting that in all the time since MMR went live I have heard lots of noise about how complex it is to give advice, how long the interview process is and that consumers do not want to take this long over all transactions. What is most critical however is that all these comments come from the lender community and the fintech challengers who struggle with the rules, not from the broker world.
Finally, the focus on price as the core measure is so mis-placed. All good advisers know that whilst it is an important part of the discussion and the advice, that is not what they do. For most consumers a practical discussion on how much they might be able to borrow; where they sit on LTV banding then how to borrow optimally; debates over term and whether to fix their rate over how long; and most importantly which lenders may allow certain types of income or which costs are included in committed expenditure are all crucial debates, to optimise the amount as well as cost. It is not one dimensional.
In bringing the debate down to the cost the team, whilst accurate in their approach, have really missed the point. It is admirable to want to empower consumers to make better choices. However, weakening the protections given by MMR and considering allowing more Execution Only or Advice Light transactions cannot have my blessing. If it was that simple the price comparison websites or sourcing systems would have done it years ago. Even now as we have new criteria base sourcing systems being launched this review ignored these developments.
My red pencil has been worn away marking this work and I hope that the final report is sharper in its conclusions as we now debate what is really required.
Robert Sinclair
May 2018