Out-Law / Your Daily Need-To-Know
The UK mortgage market is working well in many respects, the UK's financial services regulator has said as it considered industry's reaction and the regulatory response to the financial crisis.
However, the Financial Conduct Authority (FCA) said it could step in to make it easier for consumers to find cheaper mortgages if lenders do not do more to develop innovative new tools to help.
The FCA's warning came in its final report at the end of a more than two year study into the UK's mortgages market. It filed an interim report in May 2018.
The FCA said that much of what it found in its market study was "reassuring", including that most mortgage customers had taken out suitable products they could afford and that more than 75% of customers switched to new mortgage deals within six months of being moved on to "a reversion rate".
However, the regulator said that some consumers still pay more than they need to for their mortgage.
"We estimate that around 30% of consumers (in 2015-2016) could have found a cheaper mortgage with the same key features (e.g. the duration of a fixed introductory rate) as the product they chose," the FCA said. "On average, these consumers paid around £550 per year more over the introductory period compared to the cheaper product."
The FCA said there are also "limitations to the effectiveness of the tools available to help consumers choose a cheaper mortgage", and called on industry to do more or face potential regulatory intervention.
"We welcome the tools that are emerging to help consumers identify the mortgages for which they qualify," the FCA said. "But these tools are still nascent; whether they can provide a comprehensive solution is untested. They will require active engagement from a range of lenders to succeed. But this has not yet happened. We are mindful of the risk of unintended consequences of intervention, but we want to see real progress in, for example, lender participation."
"Our preference remains a market-led solution. As well as continuing to monitor the traction that the new and innovative tools gain with lenders, intermediaries and consumers, we will continue to seek working group input to help identify barriers to lender participation, and agree how we will measure progress. We will also look at other sectors for potential approaches, such as the progress made by using APIs in Open Banking. And we will consider whether any FCA action (e.g. making rules or our ability to convene) would be beneficial," it said.
In its report, the FCA said it will look to update its existing mortgage advice rules and guidance in an effort to support innovation in mortgage distribution. It said that while the current rules and guidance is "effective in helping consumers get suitable mortgages", it does not ensure they take out the cheapest suitable product. A consultation on new rules and guidance is expected to be opened before the end of June.
Further remedies to help long-standing mortgage customers to switch to new products are also anticipated. The FCA is currently carrying out research in an effort to "better understand the characteristics of those consumers who do not switch" and inform potential reforms.
The regulator has also opened a consultation on changes to its responsible lending rules and guidance in an effort to help liberate so-called "mortgage prisoners" from deals they cannot switch from. These include consumers who are "up-to-date with mortgage payments but cannot switch due to a change in circumstances meaning they no longer pass lenders’ affordability tests", it said.
Andrew Barber, a financial regulation expert at Pinsent Masons, the law firm behind Out-Law.com, said the FCA's help for 'mortgage prisoners' with active lenders is to be welcomed but that significantly more 'mortgage prisoners' are with inactive lenders.
"It is estimated that the majority of 'mortgage prisoners' are with inactive lenders that are not authorised to undertake any further lending," Barber said. "The FCA's ability to help this larger group of 'mortgage prisoners' is dependent on how they can reduce the barriers for active lenders to provide a mortgage instead. The FCA's consultation on responsible lending rules may help these borrowers to switch to active lenders but we must await the outcome of their consultation before we can see how effective these changes might be."
While the largest lenders have signed up to a voluntary agreement to enable 'mortgage prisoners' to switch to alternative products they offer without having to complete an affordability test, the FCA said that some lenders had identified potential regulatory barriers to offering products to customers who have existing mortgages with inactive firms.
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