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Mortgage analysis: The dangers of product intervention powers

The FCA’s powers to police mortgages and fears of a ‘domino effect’.

The Council of Mortgage Lenders has raised concerns about the Financial Conduct Authority’s use of its proposed temporary product intervention powers and the effect these could have on a recovering mortgage market.

Under current proposals, the FCA will have the power to ban a product for up to 12 months without a review, during which time it will consult on a permanent solution or aim to resolve the problem another way. The FSA published a consultation in December last year

on how the FCA will use these powers, which closes in April.

The CML is concerned over how transparent the FCA will be in applying these powers. The trade body says it is also unclear as to when or even how these powers will be used, and what effect they could have on market innovation and product development.

The CML is worried about the potential “domino effect” intervention could have, in particular the very broad range of justifications for intervention which could unfairly damage consumer confidence.

In its latest news and views, the trade body says: “We need transparency over how and when powers of this nature could be used and what evidence can be expected to back up the judgement calls. Is it to be applied only in rare and egregious cases? Or will it be a routine form of price supervision? And, will the communications about the introduction of temporary rules explain clearly to firms exactly why they are being imposed, so that others can learn and

adapt before their products are affected?”

As part of its consultation, the FCA published a list of possible ways the regulator will seek to intervene in products, including requiring extra qualifications to recommend certain products, a requirement for providers to design appropriate charging structures and amend promotions, and in some cases banning products or limiting product features.

Legal & General housing and public affairs director Steven Smith says: “If you give a regulator powers, people who operate in the industry need to know under what circumstances they will be used.

“Intervention is not a problem as long as it can be justified and explained. Simple intervention, which leaves more questions than answers for consumers, would not be helpful.”

Intermediary Mortgage

Lenders Association executive director Peter Williams is concerned firms do not know at this stage how much the regulator will say publicly about the products where it has chosen to intervene, and that this could result in a firm’s overall image and place in the market being damaged.

He says: “On the basis of what I have seen so far, the regulator is going to intervene quickly and review at length. These reviews could drag on for some time and, while they do, how they are communicated becomes a festering problem.

“I think some [firms have] felt this on interest-only, which is why some firms have effectively said they will not do it.”

Interest-only products, although not banned by the FSA in the Mortgage Market Review, have been associated with negative phrases such as “ticking time bomb” used by FCA chief executive designate Martin Wheatley. His comments related to the outstanding debt associated with interest-only mortgages rather than the products themselves. But they demonstrate negative product connotations can be exacerbated, particularly if consumers are not clear on why regulatory action is being taken.

A CML spokesman says: “Intervention may be seen by consumers as having much wider ramifications. It can appear to be a much broader intervention which ends up targeting the sector rather than just the specific product in question.”

John Charcol senior technical director Ray Boulger says: “The danger is the FCA comes out with some comment which gets unfair appraisal in the consumer press and, as a result, people who actually bought a product for the right reasons and had the right advice, get worried that what they have might be a problem. The FCA needs to be careful to identify exactly what the problems are in order to avoid both the media and the ambulance chasers getting on board.”

At a time when the industry is being asked for greater innovation, with higher loan-to-value products or those targeted at first-time buyers, the FCA will have to tread carefully when it comes to using its product intervention powers.

Consumers may be more inclined to assume the worst about certain products, which means if the regulator fails to effectively disclose why intervention was required this could have a severe knock-on effect on consumer confidence.

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