Will the FCA rewrite the mortgage rulebook over competition?

Old wooden grungy dark evil haunted house with evil spirits with full moon cold fog atmosphere and trees illustration.

As the FCA gears up for the sequel to the Mortgage Market Review, experts are rattled by the prospect of yet more industry upheaval, with brokers and networks cast as villains

The dust has barely settled on the MMR but the spectre of another rulebook rewrite appears to be just around the corner.

In May, the FCA published its feedback statement on competition in the mortgage market, following a call for input from the industry last October. In a surprise twist, it has announced it will carry out a “targeted market study” in Q4 2016 to address some of the concerns raised.

A key focus will be on panels in the mortgage market and whether these, along with procuration fees and the use of technology, may hinder competition. But ahead of the planned release of this potential ‘MMR: Part Two’, audience members are watching anxiously, fearing that brokers and networks will be cast as the new villains of the piece.

Competition data
According to FCA research, of the 4,600 brokers it regulates 18 per cent use fewer than 10 lenders, and among those a further 44 per cent use three lenders or fewer.

In April, FCA mortgage sector manager Lynda Blackwell told intermed­iaries at the Mortgage Business Expo in Leeds that there might be a “perfectly legitimate” explanation for the figures, such as a broker’s scope of service.

She said: “We saw instances of brokers doing 80 per cent of their business with one lender. We saw a tendency for some brokers to point the customer in the direction of a favourite product – hopefully not because of the commission it paid.”

She added: “The very rich, transactional-level data reported to us post-MMR is really helpful in identifying where potential issues may lie.”

The use of proc fees to incentivise brokers is not a new plot line. Back in 2007, when the market was at its peak, brokers faced allegations of submitting prime business through sub-prime channels in order to benefit from the hefty 1.5 per cent to 2 per cent commission on offer.

Yet following the demise of the sub-prime loan, the MMR concluded that, although there was scope for bias, the small differentials between proc fees (typically 0.31-0.35 per cent of the loan) did not justify a ban.

However, recent noises from the FCA suggest the issue of potential proc fee bias could be back on the agenda. Its latest feedback paper says: “Some brokers noted that, while there is a hypothetical risk of conflict, in practice the relatively low level of proc fees does not give rise to conflicts.

However, some respondents disagreed and were of the view that proc fees may incentivise brokers to recommend certain products over others, and that new lenders may see higher proc fees as a way to enter the market, focusing on this rather than the quality of their products.”

Warren Compliance managing director Bill Warren believes these fears are misplaced.

He says: “I genuinely believe that, following the MMR and perhaps reinforced by the recent introduction of the Mortgage Credit Directive, very few brokers are seduced by the proc fees on offer. Their overriding aim is to obtain the best deal for their client because the long-term relationship with that client is more important to the broker than ever before.

“Of course, you will find one or two who chase the lender pounds to the detriment of their clients, but very few indeed in my opinion.”

Trinity Financial product and communications manager Aaron Strutt agrees that the majority of brokers are not greatly influenced by commission and says there are other reasons why some lenders get a larger share of business.

“Our clients tend to be very rate-driven but we always try to secure a fast mortgage offer. If there is a rush to complete, we will assess the lender’s service times and advise clients accordingly,” he says.

The market will always be dominated by the top 10 lenders, according to PTFS mortgage proposition manager Victoria Jefferies.

But she adds: “We have seen more of a flattening-out of market share in recent times and product availability is becoming more spread among the lenders.”

Jefferies says it is normal for lenders to attract a larger share of business if they have launched a particularly good product or their service level is ahead of the game.

Chadney Bulgin mortgage partner Jonathan Clark says lending criteria play a big part in his decision-making process, especially when dealing with more complex cases such as contractors.

“As long as the customer ends up with the best product for their particular circumstances, there is nothing wrong with this,” he adds.

Some sectors such as new-build are served by a limited number of lenders, comprising those that understand the specific requirements and strict timings necessary for such purchases to complete, according to Stonebridge managing director Richard Adams.

Although there is little deviation between proc fees for appointed representative firms, those for directly authorised advisers vary significantly, according to Clark.

He says: “As a DA firm, one lender will pay me 0.45 per cent while another will pay 0.32 per cent for the same residential mortgage – an uplift of more than 40 per cent.”

But he adds: “A whole-of-market firm such as ours sets its stall out as researching the entire market and should never be influenced by fees, although the public would probably be a bit surprised by the present gulf.”

Last year, second charge mortgages came under the FCA’s remit for the first time. Historically, such lenders paid higher proc fees than those in the mainstream market.

Precise Mortgages managing director Alan Cleary says brokers should always provide evidence that they have recommended the most appropriate product for any given borrower.

“We have recently carried out a review of our proc fees for second charge loans to ensure the earning potential is comparable to that of a first charge loan,” he says. “We have done this to make sure the correct product is selected across our entire first and second charge product ranges.”

Big versus small
In response to the FCA’s call for input, some small lenders spoke of problems in accessing the bigger broker networks and said they felt pressured to accept their terms. They suggested these networks had a significant influence on the market because they controlled visibility and access to lenders’ products.

Similarly, smaller brokers had access problems with certain lenders perhaps because it was not cost-effective to invest in the training required to sell their products.

Given these difficulties, it is questionable how long the status quo can persist, says Warren. “I have never been a strong supporter of panels, especially those set up by the larger networks and lenders,” he says.

“We all know the desire is to secure distribution as tightly as possible but, as consumers become more savvy, they expect their adviser to be able to access best fit. While I understand that networks, distributors and brokers seek to run panels for commercial and practical reasons, true consumer choice can only come from a whole-of-market approach.

“I wonder how long panels will last following the FCA’s recent comments. They are becoming harder to justify, I would suggest.”

London & Country director of communications David Hollingworth adds: “Because we don’t work from a panel, the customer is more likely to get the best rate. More limited choice may mean the customer doesn’t get the best rate.”

However, TenetLime managing director Gemma Harle says: “Our mortgage panel is whole-of-market: as long as a lender fulfils our due diligence criteria and the product is relevant for our customer segment, it is welcome.”

She adds: “If the FCA has concerns around restricted panels, it should deal with the respective firms under supervision, not with a broad-brush approach.”

Spicer Haart and Just Mortgages group oper­ations director John Phillips believes panels are a good thing as long as they are broad enough.

“They can give brokers access to a wide range of lenders that they may not otherwise be able to use, and often exclusive rates and better proc fees for good-quality business,” he says.

“We use Openwork’s network and it has 26 lenders on panel covering a wide range of mortgage types, which we are confident provides a whole-of-market proposition,” he says. “We can go off-panel if a product is more suitable, but that is very rare.

“I believe it is harder for some small brokers to go directly to lenders if they are not part of a network. However, there are a number of very good mortgage clubs that also provide access to a diverse range of lenders, so brokers of every size should be able to access these.”

SimplyBiz Mortgages chief executive Martin Reynolds adds: “We have never closed our panel so, if any lenders that are not on our panel feel this, we would be happy to open discussions with them.

“Panels will always create debate, whether in niche areas or across the board. The key is offering a range of solutions that will enable inter­mediaries to help their clients. The size of any panel should be dictated by this and the ability of a firm to manage this adequately.”

The largest lender in the market, Lloyds Banking Group, says its core products are available to all brokers, large or small. Its director of strategic partnerships, Esther Dijkstra, says: “In a good relationship, we don’t believe any one party should hold all the cards.”

Jefferies points out that some smaller lenders choose to limit their panel in order to control volumes.

“We have a lot of smaller lenders on our panel, some of which can offer our advisers niche offerings, but some of the smaller lenders choose to go with a more restricted offering because they need to maintain their service levels,” she says.

Sesame Bankhall Group head of lender relationships Jane Benjamin says smaller lenders risk service problems if they launch products market-wide from day one.

“This is where a network’s distribution model can help, by acting as a first port of call and enabling the lender to control the rollout of its products into the market.”

In-house conflicts
Within the evolving mortgage market narrative, typically there is no love lost between brokers and estate agents.

Stonebridge managing director Richard Adams believes the regulator should turn its attention to the restrictions applied by some estate agents regarding the brokers that buyers may use.

He says: “Perhaps the focus and accusations on panel restrictions… shouldn’t actually be placed upon the network market but on those organisations that actually limit their panels, such as some of the corporate estate agents that operate in this way.”

The FCA refers in its paper to the relationship between brokers and estate agents, stating: “Criticism was directed in particular at situations where a consumer may be under the impression that consulting a certain mortgage broker is necessary in order to view, or submit an offer on, a property.”

Hollingworth believes this is a regular occurrence. “Estate agencies undoubtedly direct people to their own firm’s services,” he says.

“Our customers tell us they feel they may lose the property if they do not use the in-house broker.”

Comparing the facts
Price comparison websites and mortgage sourcing systems are a sub-plot in the FCA’s paper. Building Societies Association mortgage policy adviser Robert Thickett says members have  highlighted this as a potential concern.

“The process by which consumers arrive at a lender can be complicated by price comparison websites as a result of the commercial arrangements they may have with major intermediary groups,” he says.

“For example, a consumer may use a comparison website to search for a suitable product and attempt to connect with the lender identified, only to find their request has been redirected to an intermediary who did not necessarily have access to that specific lender.”

The FCA notes in its feedback statement that many respondents were critical of the impact of comparison sites on consumers’ search efforts.

It says: “Their concerns mainly related to the limitations of the information shown by PCWs, and whether PCWs’ commercial arrangements might affect search results without consumers’ knowledge.”

It adds: “Overall, both lender and broker representatives expressed significant concern that consumers might change or limit their product choices based on the information shown.

“There was agreement that poor outcomes might result from consumers making incorrect assumptions based on information from PCWs, e.g. where they interpret a particular lender as offering the best value for money even though they might not offer a product that meets their individual requirements.”

Several respondents also commented that mortgage sourcing systems were limited in terms of the information they provided to brokers and that certain innovative products might be less prominent in the results because of the systems’ filtering criteria.

Phillips thinks sourcing systems do not restrict brokers’ choices in the mainstream market.

“In fact, they highlight the number of options available,” he says.

“With many hundreds of mortgages available, it would be impossible to search among them all to find the best option for the client without sourcing systems.

“However, where they are less helpful is in the specialist markets, i.e. complex buy-to-let, mortgages where people have impaired credit history, or for less mainstream mortgages such as new-build, bridging or commercial.”

Cleary believes there is still a lack of visibility of second charges on leading sourcing systems. He says: “The key consideration for any sourcing system is to present the capital-raising solution rather than limit the search to a remortgage option.

“Until this is done, the broker should investigate both a remortgage and a second charge solution separately and consider which route offers the best advice.”

A good sourcing system should make the broker more aware of ‘outlying’ lenders that may offer better products, according to Clark.

But he says it is too easy for brokers to get into a routine of using only a handful of lenders, particularly because employing niche options can entail familiarising oneself with more arduous submission processes or criteria.

He says: “A universal submission system or application form would largely sort this, but we know it is not coming any time soon.”

Kensington Mortgages head of marketing and communications Alex Hammond says brokers should not be over-reliant on the systems.

“The number of mortgage products is edging towards 20,000 and, while much of this variation will be in pricing, fees and LTV, which can be easily researched using a sourcing system, it is the detail within lending criteria that can influence the outcome for many customers,” he says.

“Different lenders will have different approaches to assessing credit status and income, so it is important that advisers are mindful of all their options and are able to look beyond the lenders they use most frequently.”

Mortgage Brain chief executive officer Mark Lofthouse says the firm’s sourcing system invests over 40 per cent of revenues back into product development.

“Our criteria-based sourcing has… over 200 criteria so that brokers can match the needs of their customers with the products available.

“As new product features are added by a number of lenders, such as Forces Help to Buy, these can be added and distributed to all customers in a matter of weeks.”

Nervous anticipation
As the FCA prepares to draft its latest tome, brokers and distributors think the focus should be on the commercial relationships that operate on estate agency panels and price comparison sites, rather than on their own panels.

The enormous upheaval caused by the MMR thriller is still dying away, so no doubt the industry is hoping for a gentler read this time around.

Unnecessary review will bring little consumer benefit

Robert Sinclair MS blogThe competition review published by the FCA indicates a lack of understanding of the mortgage market and of how it already operates efficiently in the consumer’s favour.

It is critical for new lenders that they can limit access to their products because it would not be helpful if they were swamped by applications, leaving potential borrowers in limbo as their limited administration teams struggled to cope.

Similarly, larger firms may wish to construct a limited panel of lenders (usually representative of the whole of the market) to ensure that their advisers are fully aware of all the products available.

While there may be an argument that smaller brokers can struggle to access the market, the use of effective commercial partnerships with both mortgage clubs and packagers means that access is generally open where the broker has a genuine desire to look right across the landscape.

The Panel of One, a direct lender, does not appear to have faced as much scrutiny.

For as long as I can remember there has been a debate on whether proc fees influence where business is placed. While I had concerns in the investment world pre-RDR, I have never had them in the mortgage market. Neither has the FCA, with Lynda Woodall as recently as May 2015 stating that it saw no provider bias in the mortgage market.

The need for an intermediary register has been agreed for a long time, with the FSA producing near-final rules in the early MMR papers for such a structure. This has never been a sufficiently serious priority for the FCA, but perhaps it will now get resurrected.

The issue, however, of firms disclosing their proc fees before advice is already part of the post-MCD requirements on brokers. It is also on every Esis or KFI.

Indeed, perhaps we should question why there are fewer disclosure requirements on lenders. There is already a lot of data on both lender and product mix established by lenders and their broker partners and this is part of commercial dialogues between firms in order to maintain an effective market. Formalising this will do little to improve consumer access or information.

The study now requires the allocation of significant time and resources to feed the FCA machine in its quest for information and data. Those in the industry see limited consumer benefit from this review or from any likely interventions. It is disappointing that the FCA does not have to commence with some formalised cost-benefit analysis, which could make the study even more focused.

Robert Sinclair is chief executive Association of Mortgage Intermediaries