The FCA is due to deliver final remedies from its Mortgages Market Study in Q4, unanticipated events notwithstanding. AMI has already been vocal about a wholesale move to allow execution-only sales to re-enter the mainstream market.  It is a mistake, and one that risks the FCA’s own Mortgage Market Rules on advice being gamed.

AMI has identified worrying potential unintended outcomes from a shift towards execution-only sales.  The first is that there is likely to be increased pressure on both intermediaries and lenders to generate volume sales through the execution-only channel, particularly as it is lower cost for lenders and brokers to sell and would seem to present lower ongoing risk of inappropriate advice claims.

This could create a reason for mortgage product manufacturers to design up front offers that look attractive to customers, but which may include penalty clauses that bite at the tail end of the deal period. The experience of discount rates sold to sub-prime borrowers in the run into the financial crisis would be an apt example of this type of product design. Prudential Regulation Authority rules requiring residential affordability stress-testing would not rule out this type of abuse, particularly where deal terms are longer. At a time of very low interest rates and comparatively high house prices making longer mortgage repayment terms increasingly normal, the additional expense incurred by customers could be significant over several decades.

The question AMI would ask is whether it could result in customer harm?  There is a real challenge here, reliant on whether regulators in the future are likely to consider a scenario such as this worthy of customer compensation. Much will depend on whether the FCA and/or Financial Ombudsman Service deem lenders and/or intermediaries to be deliberately generating volumes on an execution-only basis to keep costs low and whether the bulk of this volume should have been advised.

 

Robert Sinclair
October 2019