Mortgage rates are still at rock-bottom lows, but amid growing speculation as to when borrowing costs will eventually rise, the regulator has turned its attention to the effectiveness of competition in the market.
The FCA has called for industry feedback on barriers to competition, after first signalling the topic was on the agenda in March when it published its business plan. After the responses have been collated it will launch a formal market study between January and March 2016, which will cover both regulated and unregulated loans, equity release, buy-to-let, shared ownership, second charge and bridging loans.
The regulator says it particularly wants to explore the “complex relationships and activities” with third-party firms, which it says are intrinsically linked to some lenders’ funding models. Some of these relationships fall outside its traditional regulatory perimeter and include the use of third-party administrators, packagers and surveyors.
The FCA says it will be looking at “how these activities or relationships might affect competition, for instance by affecting entry, expansion, and/or the ability of consumers to make effective mortgage choices”.
Under the scope of the review, it lists businesses within the mortgage supply chain such as lenders, price comparison websites, brokers, sourcing systems and funding lines, as well as valuers and estate agents.
The data does not immediately suggest a problem with mortgage competition. In fact, it shows a steady improvement. Figures from moneyfacts.co.uk show the number of residential mortgage products has increased by 38 per cent over the past year from 3,559 in October 2014 to 4,896 this month.
The number of products at 60 per cent, 75 per cent and 95 per cent loan-to-value have all increased over the same period. Average two-year fixed rates have fallen from 3.51 per cent a year ago to 2.76 per cent today, while five-year fixed rates have dropped from 4.08 per cent to 3.32 per cent.
On the face of it, a picture of increasing consumer choice and falling costs hardly implies the need for a competition inquiry. However, given the number of commercial arrangements at play between the different parties in the mortgage process, it is understandable the regulator wants to subject these to scrutiny. On top of this the mortgage market is systemically important, so any dysfunction can have implications for the wider economy.
Cicero executive chairman Iain Anderson says: “Parliament gave the FCA new competition powers when it set up the new regulator and this is a logical move as part of that journey. Competition in the mortgage market – and the lending environment generally – is a key component of both conduct and macro stability. So both regulator and the Treasury view this work as a key test of their powers.”
Following the implementation of the Mortgage Market Review in 2014, Building Societies Association head of mortgage policy Paul Broadhead says it is right for the FCA to consider whether some areas have been adversely affected by the new rules. He says: “There have been headline-grabbing stories about borrowers shut out of the mortgage market ever since the MMR was first introduced, and addressing any genuine barriers to competition needs to be a priority.”
The review provides an opportunity to consider the impact of both conduct and prudential rules and how they work together.
Some argue there are issues in the market that warrant closer inspection. Prolific Mortgages managing director Lea Karasavvas says: “One of my biggest bones of contention is the pressure that some agents place on buyers to use in-house mortgage brokers, especially where those brokers are not operating from a whole-of-market panel and some major lenders are missing.
“The client should get absolute freedom of choice for the largest investment of their lifetime and to hold them to ransom is something I have long contested.”
Karasavvas believes similar practices are at play when buyers are pushed by various parties in the mortgage and purchase process to use affiliated solicitors and valuers.
He says: “The purchaser should be given total independence in all of these areas, so they know the final decision around the valuation, the legal representation, and ultimately the lender of choice is not made by a severe dilution of options.
“I hope the review addresses the role of lender valuer panels and ways in which this could be made fairer to the consumer. Valuations can dictate not only the consumer’s ability to purchase or remortgage, but also the rate available to them, as LTV is a key driver of cost.
“The valuer’s word is gospel, and far too often we are told this cannot be appealed, even when you have a stack of comparable properties and other valuers telling you otherwise.”
He is optimistic about the impact of the FCA’s work. “In my eyes the review will undoubtedly benefit the consumer and will hopefully break the shackles that many of these parties have long held over borrowers.”
John Charcol senior technical manager Ray Boulger also believes there are key areas of market dysfunction the regulator should have in its sights, such as the difficulty of getting mortgages that extend beyond the traditional retirement age. But his main concern is the clash between conduct regulation, which seeks to improve consumer choice, and prudential regulation, which often leads to choices being limited as capital requirements and other restrictions make certain areas of business unviable for lenders.
He says: “The FCA’s conduct regulations are often in conflict with the objectives of the Prudential Regulation Authority.”