Key Consumer Duty developments and recent communications issued by both AMI and the FCA, with commentary on implications for mortgage intermediary firms…
The rapid march of technology is predicted to make redundant the traditional mortgage broker. If all is to be believed then we will soon see the application of Artificial Intelligence, robo-advice models, enhanced sourcing, online criteria systems, propensity modelling and direct to lender application and approval processes which will bring the demise of traditional approaches. There has been much hype surrounding the arrival of a range of tech-based innovators in our market. However I am coming to the conclusion that they have yet to escape the need for a human to talk to a human at this point in the development of systems, software and consumer trust and behaviour.
For me, the reality of technology blowing away the human element in the transaction is a long way off. The technology I have seen to date still requires broker intervention to comply with the regulatory standards which were introduced after the last financial crisis to protect both consumers from themselves and national economies from systemic risk. Stepping away from the principles and standards set out in the principles and rules delivered through the Mortgage Market Review would be a courageous step for any regulator. As at today, consumers of all ages still profess to want to talk and the new systems still need lots of development before they can achieve the true mantle of regulated advice.
The next key change that might open the door further is the arrival of open banking which will hit the UK early next year. Driven by government and the Competition and Markets Authority, it is largely dependent on the UK’s eight largest banks and Nationwide sharing customers’ data through a standard set of open APIs – application programming interfaces – a set of codes that allow different technology platforms to talk to each other.
The move is designed to accelerate change in the UK retail banking sector, particularly the current account market, allowing consumers to share their data securely between banks and with third parties. In theory, it will enable consumers to manage all their retail banking accounts with multiple providers through a single digital app. It will allow their “Bot” to talk to the Bank’s “Bot”. The UK-based open banking regime sits alongside the European Commission’s Revised Payment Service Directive (PSD2) which also forces European banks to share customer data via a standard set of APIs.
Given how soon this is due for delivery, open banking is squarely on retail banks’ radars, but has so far mostly been discussed in the context of pulling current account, savings and credit card information into one app to allow consumers to take more control of their funds as well as to compare products on the basis of their own requirements. It follows on from initiatives such as seven-day switching for current accounts. So far, little has been said on the subject of how these innovations might affect the mortgage market.
Lest I am accused of being a Luddite, I have always have been an advocate of progress. Change is the constant, and innovation and new technology has been ever present since humans rose on two legs. It is a large part of what makes us human with the ability to adapt and evolve. While I do not claim to foresee any specific outcomes, there are a number of concerns AMI would raise in relation to the dawn of open banking for mortgage customers – particularly given it comes alongside the imminent introduction of European rules under General Data Protection Regulation, which arrive in the UK from May 2018 and requires customer consent for data sharing.
Ahead of this, retail financial services providers will have to make an API available to the market by 13 January 2018 (in time for the European Directive), meaning financial services technology is likely to move forward at significant pace thereafter. Currently, some lenders are more forthcoming than others on making this interface available to third parties, including traditional mortgage brokers. Theoretically open banking will allow a technology platform to compare specific mortgage products from across the market, tailored to their customer’s profile and affordability, on a quickly, accurately and personally underwritten basis. This will undoubtedly be the case if lenders make more of their criteria visible.
Given that mortgage underwriters should be able to access a customer’s current account, savings and other debt commitments from all providers in the market securely and automatically through these APIs, affordability assessments should become far more accurate and efficiently processed. The decision will be whether the lender wants access to that level of detail and if the consumer is willing to embrace this new approach and deliver this data through a third party portal. There are already some broker and comparison firms which claim to assess the whole of the market in this way; we disagree that they do, but consider that the open banking regulation is likely to make this process much more transparent and accessible for all firms in the market.
A key concern is how this marries with Mortgage Market Review rules that stipulate the need for financial advice for a significant proportion of borrowers, particularly those deemed to be vulnerable. Age, mental or physical infirmity as well as emotional and familial considerations cannot necessarily be shared through APIs. The new FCA Financial Lives survey indicates the sheer volume of consumers who may be considered “vulnerable”. Additionally, open banking escalates AMI’s already stated concern over whether online decision trees – automated, and then branded advice – can actually constitute fully regulated advice.
AMI has already expressed concern about the language used by a number of mortgage broker firms claiming to offer online automated mortgage advice to consumers. I would reiterate these concerns and indeed emphasise other issues. There appears to be an imprecise understanding of mortgage regulation, market dynamics and the laws of consumer protection under the purview of the Financial Conduct Authority combined with a disproportionately loud public voice risks misleading consumers. All regulated firms need to comply with the rules irrespective of delivery channel and must ensure that all their communications are clear, fair and not misleading. As PurpleBricks has found, clarity around fees, charges, commissions and costs and their timing must be fully transparent.
In the investment world, fully regulated financial advice is considered as a specific personal and appropriate product recommendation based on the evidence relating to a customer’s entire financial position. Guidance constitutes information provided to a customer allowing them to make their own informed decision on what product they want. Simplified advice is a halfway house between these two and typically refers to the ‘advice’ offered by online services on limited information or for a particular isolated need or product – delivered in some cases by so-called robo-advisers. However this is an investment market concept and in mortgages we only have full advice with all the related responsibilities or execution only where the customer must know the product they want.
An investment or pensions adviser can recommend a product based on any – and often limited – information provided by the customer, meaning the recommendation is not necessarily appropriate based on a customer’s full circumstances, which may or may not include future non-financial plans such as marriage, children or divorce. From a compliance perspective, mortgage brokers are already asking themselves the question of whether even complex decision tree-based algorithms can constitute fully regulated advice on this basis. It is for this reason that AMI understands the volume of mortgages completed by robo-advisers is incidental.
There is an additional question of where regulatory responsibility and liability lies in a post-open banking world. It has been suggested this world could see traditional banking models disaggregated and disintermediated with products becoming modular and ‘marketplaces’ taking the place of traditional banking models. Not only will this have implications for financial services capital structures and prudential requirements, regulatory permissions will still need to apply, but in a world where it could be far less clear where the responsibility for advice and liability lies.
Data protection is also a significant concern, particularly given the growing prevalence of cybercrime. Clear separation of responsibilities between distributors and providers is important. Open banking is undoubtedly a positive step forwards for consumers and the industry. However, as with all progress, we would urge the regulator to be mindful of unintended consequences that could have a detrimental impact on consumer finances.
The battle between app-based approaches which may work for initial enquiries and early data gathering, must switch seamlessly to the more traditional web-based portals for more complex and secure application and offer elements. I am sure that advice will remain a human thing, with the delivery of full algorithms, that are truly advice, being at the margins with significant risks. I have no doubt that in time this will form a significant part of our market. However true robo-advice where there is no human intervention remains a long way off. My “Bot” is staying safely in its box.