Introduction
1. The Intermediary Mortgage Lenders Association (IMLA) welcomes the opportunity to respond to this call for inputs.
2. IMLA is the representative trade body for mortgage lenders who lend through intermediaries. Our 25 members include banks, building societies and specialist lenders.
Background
3. In October 2015 the FCA issued its Call for Inputs inviting responses to a number of questions by the 18th December 2015. The FCA call describes the mortgage sector is defined as the range of markets for the provision of loans secured against a property, encompasses both regulated and unregulated activities. It includes, for example, lifetime mortgages, shared ownership, buy-to-let, second charge mortgages and bridging loans. The FCA sees the provision of mortgage products as characterised by a number of complex vertical and horizontal relationships and being intrinsically linked with firms’ funding models and wider retail strategies. Some of these relationships and activities, which are key to mortgage or house purchasing transactions, fall outside of the FCA’s traditional regulatory perimeter. These include (some) third party administrators, packagers, and surveyors. The FCA is interested in 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.
4. The FCA poses some 19 questions split between demand and supply side issues plus market features including regulation. IMLA offers its response to these below.
The Response
Demand side topics
Q1: The main factors considered by consumers when choosing a mortgage product, how this varies across different types of borrowers and product type, and the elements of the mortgage decision that consumers find most difficult.
5. Clearly many consumers may start by comparing the simple monthly cost of the products. However in reality when this moves forward to actual applications and broker assessments, then the process becomes far more complex and qualified. Issues such as their credit history and score, the level of income, its stability and how it is paid become important. For many would be borrowers it is not just the cheapest price to consider it is also who is prepared to lend, who has loan at the LTV the borrower wants and who has the best affordability for their circumstances? After such criteria issues it then comes down to best price. In practice, affordability and credit score are the two of the things borrowers find most difficult to understand although the new MCD rules on giving customers reasons for declined applications will help here so they will be better equipped to make their next application (though borrowers may still not understand that a high street scorecard decline does not automatically mean lack of creditworthiness and non-availability of finance?). In addition some consumers also find undertaking a like for like cost comparison difficult as it requires them to balance off the benefits of lower rates and the costs of higher fees. In all these circumstances this is where advice becomes very important.
Q2: The extent to which consumers choose mortgages that are less suitable than other products available to them, and whether certain mistakes are more prevalent amongst some consumer groups.
6. Online research options (aggregator sites) are often encouraging customers to make decisions based on rate and then choosing to take advice from a specific lender. This may result in the customer limiting their search to the products only available from that lender and, therefore, missing out on an alternative product that may better suit their needs. IMLA members are focussed on the intermediary channel so most of their customers will have had the benefit of advice and a ‘whole of market’ search by the broker. This is the favoured channel as recent IMLA research shows (see IMLA, 2015a). However it is possible some borrowers still misunderstand what ‘whole of market’ might mean in practice.
Q3: The different providers of information and advice typically considered by (different types of) consumers, and how they are used.
7. Data to evidence this is more difficult to come by. Building society research has shown that customers typically use the following most often (and in this order): speaking to an adviser in a bank or building society, using the lender’s websites, comparison sites and expert sites. Often buyers will use many channels. They may start with web based searches, then contact a broker or lender and at some stage when they feel they have settled the focus of the search then go forward with a single lender either directly or via a broker. Much of this is about how helpful X or Y has been, the speed of the response and of course including factors such as family and friends experience. This multi-layered approach is common but of course much depends on the individual’s confidence and experience. Evidence suggests that those with the least experience or confidence often use the most limited search process favouring a single source.
Q4: Whether existing information and advice channels cater for the needs of different types of consumers. If not, which types of consumers face particular challenges.
8. In broad terms the answer must be “yes”, but clearly the less financially educated would always benefit from access to face-to-face advice and support and there are questions of time, cost, awareness and confidence that impact upon whether this happens. The detail of mortgage products is not easy to understand to which the recent WHICH/CML work on terms bears testament. There is a lot of jargon and some consumers may have little awareness of the choices of lender or product available to them. With most mortgages now being advised some of these problems are being overcome.
Q5: Re-mortgaging patterns, in particular: (a) the main prompts for re-mortgaging and (b) the main factors that consumers consider in deciding whether and when to re-mortgage and whether to so with their current lender and © The nature and relevance of different barriers to re-mortgaging. The extent to which the (perceived or real) costs of switching prevent consumers from accessing better deals
9. Most borrowers are aware of their product maturity date and start considering their options well in advance of it arriving. Borrowers receive an annual statement which also acts as a prompt. Clearly other factors include the level of equity in property, their position in the life cycle & whether the borrower has seen house price appreciation since beginning the mortgage along with their financial needs and family circumstances. The changing pattern of household movement – moving to a lower liquidity market reflecting an ageing population, higher transaction taxes and differential house price inflation means that more people are remaining in situ rather than moving. This, along with the typical short term of most mortgages, means households are looking to remortgage rather than move, and in that process the current lender is an obvious and simple solution. Those borrowers on a high LTV product who have not experienced house price inflation may find it difficult to remortgage. Revaluations may go against them and borrowers tend to over-inflate their expectations of the value of their own property. At the same time it should be noted that many lenders, as part of their product offering, not only offer very competitive product terms but also include free conveyancing and valuations/cashback. From a consumers perspective this can make the transaction relatively simple and in the majority of cases would be cheaper than the client sourcing direct.
Q6: The relevance of different behavioural biases as a barrier to the effective assessment of information, and the extent to which advice or additional information mitigate these.
10. This question is unclear.
Q7: The extent to which some types of consumers may be unable to access more appropriate (types of) mortgage products and may be unduly trapped.
11. Some lenders may view the request for interest only mortgages as an affordability issue. However, it is clear a greater understanding of the circumstances and requirements of the borrower together with a repayment strategy are needed in respect of such mortgages. Lenders will always look at the borrower’s track record with their existing lender. The focus should be on customer outcomes. Much is made of trapped borrowers though this again seems to be part of the settling down process in terms of lenders coming to terms with the new regime. We have seen the issue arise around lending into retirement and with foreign currency loans (IMLA, 2014).
Q8: Lenders’ business strategies, from sourcing funding to offering of mortgages. In particular: a. The extent to which firms reflect consumer behaviours and biases in the design of their products and deals, and whether this has increased product complexity over time;
12. Firms use customer research/insight to formulate and ratify product design. The complexity of many products is mitigated by clear product information and advice where appropriate plus regular reviews through a Conduct Risk lens. Product complexity has not increased over the medium term and following the financial crisis additional focus has been placed on clarity and fairness.
b. The degree to which firms’ ability to compete in all or parts of the mortgage sector relies on their portfolio of mortgage products and customers (including back book of customers);
13. Firms make sector competitive decisions based on risk appetite, profitability requirements and preferred customer segments. Back book considerations will only normally be influential in managing prudential concentration issues.
c. The extent to which lenders’ ability to compete in all or parts of the mortgage sector relies on their presence in other financial services activities, including in retail lending and/or banking.
14. IMLA members come from a broad range of lender types – from emerging lenders with no in-house savings operations to large scale banks with a variety of funding sources. To compete in low margin, high volume customer segments all firms need access to low cost funds and lower capital requirements and clearly this is not reality. Despite this many smaller lenders provide much needed funding to specific, often under-served borrowers at higher margins. This diversity means that most UK applicants have access to appropriate funding.
Q9: Lenders’ monitoring and reactions to changes in offers by competitors, and whether there is evidence of patterns in pricing movements.
15. On occasion lenders will react to price movements by competitors, which is healthy for customers and demonstrates competitive market forces operate. Often these price following movements are restricted to specific customer segments with other segments showing different patterns of price variation. Again, this evidences a diverse and competitive market for customers.
Q10: The range and nature of relationships between different players in the mortgages supply chain (this includes lenders, brokers, PCWs, and those providing inputs (such as data on mortgage products) to them) or related activities, and within that: a. The scope for potential conflicts of interest and whether and how these are mitigated;
16. There is no conflict. The participation of different facilitators in the housing chain ensures a higher level of competitiveness and demand for a variety of financial products and services. Lenders need to react to the demand from different stakeholders to ensure they are offering customer-facing products.
b. The impact of relationships with others outside the mortgage supply chain on the ability of brokers and lenders to compete; (for example, through the provision of leads on potential customers)
17. Leads supplied to lenders are again subject to market forces. These leads emanate from customers themselves, requiring customer consent. Again, lenders are reacting to consumer demand via third parties.
c. Whether lenders, including new entrants, have found it difficult to distribute through certain brokers/distributors, or whether brokers have not been able to supply products from certain lenders.
18. No difficulty has been experienced by new lenders as they have quickly found distribution, largely via intermediaries. Many brokers are keen to support new entrant lenders as, by design, they offer alternative solutions for their customers.
Q11: The business models of brokers, price comparison websites, and mortgage sourcing systems, and how they interact with others in the mortgage sector and might impact their ability to compete.
19. The key here is to ensure that all distributors and aggregators provide customers with clear and transparent information upon which appropriate decisions can be reached. Intermediaries, in conjunction with regulators and lenders, have made great strides to achieve this. More work is required to clarify the offering to customers from aggregators and comparison sites.
Q12: The impact of regulation on barriers to entry and expansion, where possible highlighting specific pieces of regulation and/or the types of businesses or products that are affected.
20. In the wake of the financial crisis there was clearly a wholesale shift in the scale of the regulatory framework. Broadly this was designed to ensure that regulated firms had adequate financial resources and to ensure that customers of regulated firms were treated fairly and achieved good outcomes. The objectives of this regulatory development are universally supported within the financial services industry but there remain questions of whether or not we have got the balance right. Whilst we have seen innovation and growth in the mortgage market in recent years it is perhaps notable that the most significant area of development has been buy-to-let. Whilst growth in this area has in IMLA’s view been responsible and sustainable, it cannot be a coincidence that this sector has expanded much faster than the rate of recovery in the mainstream residential market. Current government and Bank policy seems to be looking to slow the rate of development in the buy-to-let market back to the same sluggish levels of growth that have been seen in the residential market. Whilst regulation is not a single or even a primary inhibitor of growth and innovation in the residential market, it is an important component that constrains development.
Q13: The main elements of the regulatory framework and wider government policy impacting on firms’ ability to compete and/or innovate in the mortgage sector.
21. There are two key areas of constraint; the prudential framework and the conduct of business rules. Financial markets remain dominated by the largest financial institutions, often those that have been in receipt of the greatest level of subsidy from public funds in recent years. Whilst competition has slowly increased, new institutions face significant barriers. In terms of ability to compete on price the most significant amongst these is the disparity of standards relating to capital requirements in the standardised v the internal ratings based (IRB) method. This is not to say that institutions should not have differing capital requirements, it is clear that risks vary and different requirements should apply. However, applying radically different capital requirements for the same class of assets reinforces market bias in favour of the largest most established players and is a severe impediment to competition. The current structure encourages new firms to participate in specialist lending areas, many of which of themselves involve greater levels of credit or conduct risk and so the framework is self-perpetuating. At the same time conduct of business rules and FPC guidance have become increasingly prescriptive. This has resulted in firms focussing too much on the “safe” centre ground where margins have been decimated and too little in areas of consumer need where innovative solutions are critical to improved financial capability. Thus consumers are not well served in peripheral areas of the market such as those with complex incomes, the self-employed, interest only, borrowing into retirement and guarantor mortgages. Whilst none of these may be prohibited by COB regulation, the combined impact of the regulatory framework means that they are not encourage which reinforces inequality in financial services and society more generally.
Q14: Experiences of current or recent plans for entry, both successful and unsuccessful, whether into the regulated or non-regulated mortgage sub-sectors, and the main factors impacting on the success of entry plans.
22. As a trade association IMLA has limited information on individual member experience of product launches and where relevant these will be covered by individual lender responses.
Q15: The importance, and challenges, of having access to different types of funding for lenders’ ability to enter and/or expand
23. All funding markets are prone to disruption from time to time. The scale, extent and nature of the disruption will vary but it is clear from experience through the financial crisis that retail and wholesale funding markets can vary in their performance and, in extreme circumstances, markets can be closed to some lenders. It is critical therefore that lenders have access to a wide diversity of funding sources in order to sustain new lending operations through more difficult economic environments. Diversification is also important in order to allow lenders to compete as cost of funds can vary substantially over time and by source.
Q16: The extent to which economies of scale and scope for different activities (e.g. lending, advice, intermediation, provision of information) have made entry or expansion more difficult, or may have prevented
24. There is less evidence to suggest that scale in itself is a significant competitive advantage. Small and medium sized lenders have been able to develop cost effective business models through centralised administration, modern systems and processes and intermediary distribution. These factors can also allow new entrants to compete effectively with larger players. However, there are other advantages possessed by established larger lenders that are more difficult for new entrants and smaller players to replicate. Most significant amongst these are the less advantageous capital treatment under the standardised regime discussed above.
Q17: For lenders, brokers and price comparison websites, the main challenges in gaining access to consumers, mortgage products, and/or information about mortgage products (in particular those challenges not related to lenders offering direct-only deals)
25. Whilst many IMLA members have multi-channel distribution strategies, the primary route to market is the intermediary channel. Lenders have well developed processes, typically supported by on-line functionality, that ensure intermediaries and their customers have access to full information about the products and services that lenders offer. Sourcing systems (such as Mortgage Brain) provide an additional layer of information for intermediaries that will assist intermediaries in the advice process by improving access and transparency. Lenders offering products that are restricted in distribution can be less visible to consumers and intermediaries and this may limit the capability of intermediaries in delivering fully comprehensive advice on a full market basis. It is also important to recognise the way search and sourcing systems operate can often work against new entrants and/or smaller lenders
Q18: The extent, nature and relevance of different barriers to product and process innovation
26. In general terms, the UK mortgage market as a whole and the intermediary lending sector in particular, has been adept at delivering innovation and competitive mortgage solutions for consumers through intermediary distribution. There has nevertheless been a marked reduction in innovation and competition since the financial crisis and as identified above, some of this has its roots in regulatory developments. However, it is also clear that there has been a shift in the culture of the lenders themselves. Members report that an understandable focus on conduct risk throughout organisations has the perhaps unintended consequence of limiting the development of innovative solutions for consumers where these solutions feature a greater level of conduct risk. Thus areas where greater care is needed but where lending is not in any way prohibited are less well served. Areas that have clearly been difficult for lenders in recent times have included lending into retirement, lending where there is evidence of an adverse credit history, lending where proof of income is more challenging and interest only lending. Innovation in segments such as these is improving but this remains the province of smaller specialist lenders and margins as a result are relatively high for consumers. Inevitably there will be a period of adjustment to a new regulatory regime and not least in terms of how both lenders and supervisors learn how each party interprets the new regime and they forge common understanding. We are still going through that process. However this process is further complicated by the layers of regulation now in place via FCA, PRA and FPC. Lenders are having to respond to multi-layered and different interventions and requirements. Little wonder that competition has been strongest in the unregulated Buy to Let market (see IMLA, 2015b).
Q19: The extent to which specific consumer needs might currently be unaddressed and the reasons for this
27. This is addressed in a number of questions above. It is clear that the current market is very competitive for the middle market. It is much more challenging for niche sectors including those mentioned above because of a combination of the prudential regulatory framework, the conduct of business approach and the limitations that lenders place upon themselves. This outcome is largely by design, a safer financial services industry that prioritises consumer protection inevitably constrains choice for consumers. This was clear and understood when this framework was being constructed in the wake of the financial crisis. IMLA has produced research on underserved markets and the reference is given below.
Conclusions
28. It is quite clear that competition in this market is now heavily constrained by regulation whether UK, EU or international. While the regulations imposed have their own logic, by and large their impact is disproportionately felt by smaller firms and this in turn impacts upon the competitive landscape. Regulation is multi-layered and very complex as is very evident from the helpful BBA summary (BBA, 2015). Moreover this process continues with more regulation to be rolled out over the next three to four years, eg, FCA/PRA Senior Persons regime, EU EMIR review, the latest Basel Committee revisions of the Standardised approach (Basel, 2015) and much more. These regulations impose costs and constraints on firms which are in turn and in part passed onto customers. As this might suggest it is not at all clear that consumers have benefitted greatly from what has been put in place over the last decade or so. Clearly there are more safeguards in terms of financial stability and those are hugely important but in terms of choice there is little to suggest consumers now have access to more. And of course the capacity of firms to deal with this ever more complex and demanding regulatory environment varies and not least by size. This then becomes another factor in terms of the competitive landscape. It is ever harder for smaller firms to cope with the continued flow of regulatory requirements.
29. The FCA will consider whether to undertake a full market review on the basis of this and other evidence submitted. In our view a full review is not justified in terms of the costs and time it might take. Our response has highlighted some of the tensions that clearly exist and not least around regulation and its impact on competition. If there were to be further action we believe that is where the focus should lie.
Further information
30. This response has been prepared by Peter Williams, Executive Director of IMLA in conjunction with the Directors and Members of IMLA. If there are any questions or comments these should be directed to Peter Williams in the first instance on 07718120858 and consultpwilliams@btinternet.com
References
Basel Committee on Banking Supervision Revisions to the Standardised Approach for credit risk, Consultative Document, Standards, revised version, published in December 2015.
BBA (2015) Reforms since the Financial Crisis, BBA Briefing, BBA, London
European Commission (2015) Review of European Market Infrastructure Regulation, EC Brussels
IMLA (2014) The changing face of non standard mortgage lending, IMLA Research, IMLA, London
IMLA (2015a) The changing face of mortgage distribution , IMLA Research Report, IMLA, London
IMLA (2015b) Regulatory layering — assessing the cumulative impact of new financial regulations, IMLA
Research, IMLA, London
House of Commons (2011) Competition and Choice in retail banking; Treasury Committee, Ninth Report 2010–12, HC 612, April 2011.
Parliamentary Commission on Banking Standards (2013) Changing banking for good, House of Lords and House of Commons (the Vickers Report)