FCA to examine potential conflicts of interest as part of mortgage market study

It will look at whether the commercial arrangements lead to conflicts of interest or misaligned incentives in the mortgage market.

It also intends to look at whether advice from lenders and "tools" available to mortgage consumers, such as price comparison websites (PCWs), 'best buy' tables and mortgage calculators, are helping them to make effective decisions, according to the recently-published terms of reference for its study of the residential mortgage market. Stakeholders have an opportunity to comment on any issues raised by 12 January.  The FCA intends to publish an interim report by summer 2017, and its final conclusions early in 2018.

"As a mortgage is likely to be the biggest financial commitment most people make in their lifetime, we're keen to ensure that competition in the mortgage sector is healthy and working to the benefit of consumers," said Christopher Woolard, the FCA's executive director of strategy and competition.

The review will focus on first-charge residential mortgages, including product switching and remortgaging with another provider. It will not consider commercial mortgages, second charge or buy to let mortgages.

FCA market studies under the Financial Services and Markets Act (FSMA) can lead to a range of outcomes, including a reference to the Competition and Markets Authority (CMA) for a more in-depth investigation; and firm-specific remedies, including cancelling of permissions and financial penalties. If the FCA identifies potential infringements of other laws, such as competition law, it can also open a separate investigation itself or refer the matter to other enforcement agencies, such as the CMA.

Competition law expert Robert Eriksson of Pinsent Masons, the law firm behind Out-Law.com said: "Whilst market studies are not primarily intended to focus on the conduct of individual firms, the FCA can use information it obtains in a market study to launch future investigations against individual firms. Companies that voluntarily submit information or respond to information requests should therefore carefully consider any conduct issues and may wish to seek legal advice before submitting it to the FCA." 

"This may prove particularly prudent in this market study, as the FCA has implied that there may be on-going conduct issues in the mortgage sector. In its terms of reference, the FCA repeats and builds on some of the concerns expressed in its earlier call for input, for example regarding restrictive terms in contracts that give rise to conflicts of interest and misaligned incentives," he said.

Examples of these concerns include restrictions placed on panels of lenders and brokers; firms potentially designing products to ensure that they rank highly in 'best buy' tables or on PCWs; inducements paid by lenders to brokers, or by brokers to estate agents and PCWs influencing their behaviour and creating conflicts of interest, he said.

The FCA has also stated that it will take into account work undertaken by other organisations as part of its market study, for example the CMA's on-going work into digital comparison tools, Eriksson said. This study, which began in September, is an attempt by the CMA to "maximise the potential benefits" that consumers can gain through the use of PCWs and comparison apps, as well as to "reduce any barriers to how they work".

In its mortgage market study, the FCA intends to review whether better use of technology could help to address any problems it identifies with the mortgage market. This will include "greater use of digital channels to deliver information or advice", it said.