The FCA has recently initiated a review into competition in the mortgage sector as it’s clear that the current dynamic is not working at the optimum efficiency and consumers are losing out.
My immediate reaction is that they are starting by looking in the wrong places – they have already highlighted that the focus is going to be on third party relationships such as brokers, surveyors and packagers, etc. It appears that they may have a predetermined view that some of these relationships are a little cosy and not in the best interests of the end customers. I believe that the opposite is true and that these relationships are the essential lubrication that’s actually keeping the market moving at the moment. As an example, third party servicers are helping new entrants come to market more swiftly, thereby helping provide more choice for customers.I do think that customers are losing out as the current environment isn’t really as competitive as it should be, but in order to solve this, the review needs to broaden out beyond third party relationships. The whole market dynamic is serving to put a brake on competition and its stopping people doing some of the things they should be doing. A double whammy really – the lack of a competitive environment coupled with the effect of the remnants of the MMR where we’re seeing mainstream lenders still frightened of falling foul of making mistakes and as a consequence becoming too risk averse.
For me some of the issues are closer to home, where there’s a disconnect between the FCA and their conduct and customer agenda and the PRA who are focussed more around capital adequacy and risk. The FCA and the PRA are effectively tugging in two different directions and at the moment and I think that the PRA are winning.
The bigger banks are pretty much filling their boots in the market currently, with much of the business they’re writing being low loan to value ‘vanilla lending’ for the sort of low risk customers who can tick all the boxes. They’re happy to do this as they have to hold little or no capital against it and its not far off the ‘free’ lending that suits their model by preventing too much capital becoming tied up. The big banks have the engine and the muscle power to do this and often the challengers don’t get a look in as they don’t have the scale to compete. This forces them into more niche lending where the big guys don’t want to go. A lot of the challenger banks are now geared up to do this sort of lending, but it’s often more labour intensive with additional underwriting requirements. This polarisation, where the challenger banks are picking up the scraps, doesn’t really help drive competition or customer choice in the marketplace.
As a result of this lack of competition, there a number of potential borrowers who are missing out more than most. The most obvious one is the older customer, looking to take their mortgage past the normal retirement age. People in this segment are struggling to be able to evidence they can afford the loan and as such have to jump through many hoops. They aren’t currently being catered for because lenders have taken the MMR far too literally despite the FCA now highlighting that this was never their intention. This issue will repair itself in time, but I do think the market has been set back a little.
Existing customers of lenders are also struggling more than they should and I have recently had first-hand experience of this. Despite many having a long term relationship with their lender (track record, payment history, known to the lender, evidence of an ability to service the debt), they still are finding it increasingly difficult to change product or port their mortgage in any way. Many lenders are slavishly applying MMR criteria to existing customers in exactly the same way they’re applying them to new customers, despite often having detailed evidence on their ability to service the loan. One of the consequences of this is a log jam in the property market because people will just stay put if lenders make moving up or down the ladder too hard.
Following the financial meltdown in the market, lenders undoubtedly had to tighten up their policies and procedures. But I feel that the pendulum has now swung too far the other way to the point where it’s damaging customer choice and is putting a brake on the natural flow of the market. We don’t want to go back to the bad old days, but a balance needs to be found to ensure that the customer is served properly and this can only be achieved if lenders get back to assessing risk more commercially and stop operating in a way that is designed more to appease the regulator than it is to meet the needs of the customer.