UK: Mortgages Market Study: FCA's Final Report Puts Consumer Information, Innovation And Freeing "Mortgage Prisoners" Front And Centre

Last Updated: 8 May 2019
Article by Virginia Montgomery, Julie Patient and Roger Tym

The FCA's final report on its Mortgages Market Study confirms that the UK mortgages market is working well in many ways. But it has found that there's room for improvement in the tools available to help consumers choose the right mortgage. It also wants to make it easier for so-called 'mortgage prisoners' - longstanding borrowers on relatively high reversion rates (the interest rate that applies once any introductory rate ends) - to switch to new deals. The FCA prefers a market-led solution to better comparison tools. The proposal for 'mortgage prisoners' will involve changes to the FCA's responsible lending rules and guidance to introduce a modified affordability assessment for eligible consumers, as proposed in its related consultation. Where lenders choose to take advantage of the new regime, many of the changes will mean a relaxation of the current affordability requirements to help set 'mortgage prisoners' free.

Helping consumers to choose the right mortgage...

Lender participation is key to the success of new tools

The FCA has found that many consumers are missing out on the best mortgage deals because there's no easy way for them (or, to a lesser extent, intermediaries) to identify products for which they qualify early in the sales process. It acknowledges that new tools are being developed to help, but emphasises the importance of lender engagement to ensure their success.

A market-led solution is the starting point, but regulatory action could still be on the cards

The FCA sees a market-led solution as the way forward on this issue. It's looking to a previously established working group of intermediary and lender trade bodies to help identify barriers to lender participation. It will also draw on other sectors for potential approaches, for example Open Banking's use of APIs, and is not completely ruling out the possibility of regulatory action.

...and the right mortgage intermediary

Improvements would help consumers to meet their needs and increase competition between intermediaries

The FCA says that it's also difficult for consumers to find the right mortgage intermediary. Current tools are limited in scope and coverage. Improving this situation would not only help consumers to find the most suitable intermediary for their needs but also spur on more effective competition between intermediaries.

Money and Pensions Service to add mortgage intermediaries to its retirement adviser directory

Following input from a stakeholder working group, the FCA proposes that the Money and Pensions Service extends and develops its existing retirement adviser directory to cover mortgage intermediaries. The Money and Pensions Service will carry out discovery work on the new tool in Q2 and Q3 2019, in consultation with the FCA and other stakeholders. The FCA will also engage with existing commercial providers of similar tools with the aim of minimising the impact of this change on them.

Making switching easier for 'mortgage prisoners'

The FCA believes that post-financial crisis changes in regulatory requirements for affordability assessments and in lending practices left some consumers on relatively high reversion rates when their introductory deals came to an end. These 'mortgage prisoners' have been unable to switch to cheaper mortgages despite being up-to-date with their payments. Most 'mortgage prisoners' are with firms that are inactive and/or not authorised to lend.

To tackle the 'mortgage prisoners' issue, the FCA is consulting on changes to its responsible lending rules and guidance to introduce a modified affordability assessment for eligible consumers. Take a look at our blog ''Mortgage prisoners': FCA proposes a regulatory key to the cell door' for more details of the FCA's proposed changes.

On-going work to tackle the 'loyalty penalty' for long-standing mortgage customers

The FCA refers to the recent Citizens Advice 'loyalty penalty' super-complaint to the CMA, which included mortgages within its scope. In response, the CMA recommended that the FCA conducts further analysis to better understand the characteristics of mortgage customers who don't switch. The FCA mentions its work to date, notably its December 2018 consultation on possible changes to mortgage reporting requirements and its discussion paper on fairness of pricing in financial services. In terms of future activity, the working group of lender trade bodies that was set up after publication of its Mortgages Market Study interim report is planning to look at what more can be done to encourage inactive consumers to switch. The FCA has also begun further research into the characteristics of inactive consumers. It aims to report back later this year on any potential remedies.

Addressing the lack of consumer-facing innovation in mortgage distribution

Current FCA advice rules and guidance are hampering innovation

The FCA comments that, in contrast to other markets, there hasn't been much progress in consumer-facing innovation in mortgage distribution, eg it's not usually possible to complete a new mortgage transaction online. Industry feedback suggested that this is partly due to the FCA's advice rules and guidance, for example the 'interaction trigger' which requires firms interacting with consumers in a new mortgage sale to provide advice.

The FCA will identify and consult on any necessary changes to its advice rules and guidance

The FCA has taken this feedback on board and will consult on specific changes to its advice rules and guidance in Q2 2019, while keeping in mind the overarching aim of consumer protection. It also reminds firms of the support available from its Innovate Department when developing new tools.

Next steps timeline

Target date/Indicative timing Action
26 June 2019 FCA consultation on changes to responsible lending rules and guidance closes
Q2 2019 FCA to consult on changes to advice rules and guidance
Q2-Q3 2019 Money and Pensions Service to carry out discovery work on new mortgage intermediaries tool
Q4 2019 FCA policy statement on changes to responsible lending rules and guidance, including final rules, is due
Later in 2019 FCA to report back on further research into characteristics of long-standing inactive consumers
In due course FCA to update stakeholders on work to help consumers to choose the right mortgage

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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