Residential mortgages sector in spotlight
On 12 December, the FCA launched a market study into first charge residential mortgages. The formal review follows a “call for inputs” issued by the FCA in October 2015, relating to the broader mortgage sector.
The review will focus on the information available to consumers at each stage of the mortgage purchasing process, the impact of the current regulatory framework on the level of intermediation in the sector, and the relationships between lenders, brokers, and the providers of information (e.g. price comparison websites (“PCWs”) and providers of other services (e.g. estate agents, surveyors or conveyancers).
The new market study is part of a trend towards increasingly proactive use of competition powers by the FCA. In the last three years, the FCA has undertaken several market studies; in early 2016, the FCA launched its first competition law investigation, which is being conducted in accordance with the FCA’s role as concurrent competition enforcer in the financial sector. For more detail about the FCA’s recent enforcement trends, see our article 'The competition powers - is your firm prepared to be on the receiving end?'.
Two questions in focus
The FCA states that its study will focus on the following two questions:
1. At each stage of the consumer journey, do the available tools (including price comparison websites, best buy tables, mortgage calculators and advice from a lender or broker) help mortgage consumers make effective decisions?
The FCA states that it wants to understand whether consumers are empowered to choose on an informed basis between products and services, and if they are in a position to understand whether these represent good value for money.
The review will also assess whether there are opportunities for better technological solutions to any problems identified, including where there are any barriers to efficient delivery of information or advice through digital channels.
The FCA is keen to understand that impact of its current rules on levels of intermediation in the sector and whether the framework favours some distribution or business models to the detriment of others. It will look at changes in distribution since 2009, including an assessment of whether FCA rules have affected firms’ ability and incentives to innovate, and whether they have led to outcomes that are in the best interests of consumers. The FCA states that it is particularly interested in understanding whether consumer outcomes differ depending on the distribution channel they use and on whether or not they use advice.
2. Do commercial arrangements between lenders, brokers and other players lead to conflicts of interest or misaligned incentives to the detriment of consumers?
The FCA plans to consider the extent to which consumer outcomes might be affected by conflicts of interest, misaligned incentives or barriers to entry or expansion associated with commercial arrangements, including the use of panels.
More generally, it will consider the relationships between lenders, brokers, and the providers of information (e.g. PCWs) and providers of other services (e.g. estate agents, surveyors or conveyancers) and whether these may be affecting competition in the mortgage sector.
Timing and potential outcomes
There is no strict timetable for the FCA to publish its final report and recommendations. It has, however, indicated that its report should be published in early 2018. If the FCA concludes that the market is not functioning well, it may intervene using a number of remedial measures of varying severity, including by:
- publishing general guidance;
- promoting industry self-regulation where market participants may be better placed to develop solutions;
- imposing firm-specific remedies such as varying or cancelling a firm’s permission, public censure or imposing financial penalties;
- imposing market-wide remedies including rule making, changing or withdrawing existing rules;
- referring one or more issues to the Competition and Markets Authority for a ‘Phase II’ market investigation - the CMA has a wide range of powers available to it at the end of a Phase II investigation which can include the implementation of transparency measures or requiring companies to sell parts of their business to improve competition;
- opening an individual competition investigation under the Competition Act 1998. Market studies are a valuable source of information for potential breaches of the competition prohibitions – for example, Ofgem opened an investigation into alleged competition law breaches by SSE plc following a review of the electricity connections market.
The FCA has invited comments and evidence from interested third parties by 12 January 2017, with the intention of publishing their interim findings in the summer of 2017.