Should the mortgage industry follow other markets and aim for seven-day switching or is this an unrealistic and undesirable goal?
The mortgage market is readying itself for quicker switching times following a government consultation on speeding up the process so that remortgages are completed within a week.
There is plenty of appetite to improve efficiency and an acceptance of the need to move with the times. However, there are also dissenters, who insist that the complexity of the market and the drive to ensure responsible lending via thorough checks mean it cannot be compared to the current account, energy and mobile phone sectors, which were also part of the Government’s consultation. In these less complex sectors, faster switching times have in fact already been achieved.
What is more, because of the number of stages and parties involved in the mortgage process, there is some ambiguity in defining seven-day switching.
These details are still under discussion. If, eventually, the term is defined as seven days from application to loan completion, many claim this will be an unrealistic target given the affordability, legal and valuation checks required. If, however, it means seven days from the point at which the lender accepts the customer, others insist this already happens and consumers have nothing to gain.
The seven-day switching plans are being driven by what used to be the Department for Business, Innovation & Skills. Under new Prime Minister Theresa May’s Cabinet reshuffle, the BIS is merging with the Department of Energy & Climate Change to form the Department for Business, Energy & Industrial Strategy.
However, in a blog post last month, Council of Mortgage Lenders director general Paul Smee questioned whether the Financial Conduct Authority – which has been conducting similar work – had been consulted before the BIS unveiled its plans. Interestingly, the FCA was unwilling to comment on the subject of seven-day switching.
Yet Smee acknowledges the importance of efficiency in this digital era when transactions are expected to complete quickly or even, in some cases, instantly.
“We fully support the switching principles and our members have long recognised that speed is frequently valued highly by remortgage customers,” he says.
“Whether a seven-day target is realistic, given tasks that lenders need to complete to fulfil risk and regulatory requirements, depends on when the clock starts ticking.”
London & Country communications director David Hollingworth adds: “The headline of seven-day switching is a good one and, although it may not translate as readily into the mortgage market as it could in simpler products, the aim of easier and quicker switches is one that should be welcomed.”
The mortgage market – and smaller building societies in particular – is said to suffer from an over-reliance on paperwork instead of using slick, automated systems. This, of course, can slow down completions. In its defence, the handling of cases by human beings enables sensible decision-making and a personal touch. Nevertheless, some have called for modernisation to aid efficiency.
“The mortgage market is particularly institutionalised, with some lenders still relying on paper applications,” says Matt Sanders, head of money at comparison website GoCompare.com.
Yet speed brings its own challenges. During the credit crunch, large numbers of borrowers could not afford to pay back their mortgages due to lax lending, which sometimes stretched to more than the value of their property. Often, a desire to reduce complexity and to fast-track the process drove hasty and irresponsible lending decisions.
There are concerns that speed and efficiency should not come at the expense of diligence once again. Building Societies Association head of mortgage policy Paul Broadhead sounds a note of caution.
He says: “What we can say with some degree of confidence is that a system that encourages consumers to make quick, impulsive decisions about mortgages is likely to lead to poor, ill-informed consumer decisions.
“Refinancing your mortgage isn’t like taking out a different mobile phone or broadband contract, or changing your energy provider.”
Cherry Mortgage & Finance broker Matthew Fleming-Duffy adds: “I am sure the FCA would take a dim view of lenders reverting to fast-track application processes, particularly where the lender does not have an existing relationship with the potential mortgagor.
“The advice process – which carries with it a significant level of liability for the advisory firm – also forms a barrier to simple rate switching. For example, my network – Mortgage Intelligence will not allow me to switch a consumer with an existing mortgage onto a cheaper retention product with the same lender if they cannot prove current mortgage affordability.”
Under the proposals announced in May, “the seven-day switching period would begin when the consumer gives their consent to switch to a new provider, and the new provider accepts that customer”.
This may seem to suggest that the mortgage clock begins to tick once an offer is made and therefore after the key checks have been performed. Yet the same government statement quoted typical mortgage switch times of one to two months, which must include the affordability, legal and valuation checks.
Hollingworth says the process from application to offer typically takes between two and four weeks, depending on the efficiency of the parties involved and the complexity of the case. To bring all those checks within the seven-day period would therefore involve some major changes.
That said, the government proposals are not set in stone and the final rules may look very different.The consultation period is now closed and the Government is considering the responses. Any changes to legislation will be included in the Better Markets Bill later this year, assuming that the new administration continues where the old guard left off.
‘A solution seeking a problem’
However, some experts are concerned that the same ideal – quicker provider switching – is being applied to too many sectors.
“Extending these proposals to mortgages seems to be a classic case of a solution seeking a problem,” says Broadhead. “It makes a basic assumption that the solution to improving one market applies uniformly across all other markets, which just isn’t true.
“We are concerned that the BIS is in danger of duplicating the work of the FCA but without the in-depth market insight and expertise. This could inadvertently result in poor consumer outcomes and damage the mortgage market.”
The period for switching of current accounts has already been reduced to seven working days under a regime that has been in place since September 2013. Notably, however, the so-called seven-day switching in this case refers in fact to seven working days, which could extend the switching period to 11 days in total.
In the energy market, where switching provider typically took four to six weeks a few years ago, many firms have reduced the time to 17 days, with an ultimate goal of one-day switching.
Yet this market is arguably one of the simplest in which to switch because only the customer service changes, with the gas and electricity supplies, pipes, wiring and meters all remaining the same under a new provider.
Although the CML supports speed in switching, it insists current remortgage activity is healthy despite being down on previous years. It is adamant, therefore, that the market does not require a major shake-up if the goal is to increase switching volumes, as it was with current accounts.
CML statistics for 2015 show there were 338,800 residential remortgages. Although this figure has been fairly consistent since 2009 – ranging between 300,000 and 400,000 – it is dramatically lower than the number of remortgages registered ahead of the credit crunch, with 1.14 million in 2006 and 1.06 million in 2007.
Smee says: “There is already strong competition among lenders for remortgaging business, and this has been a significant feature of the mortgage market for the past two decades. We are not dealing with a market activity that’s as rare as hens’ teeth.”
Broadhead adds: “The FCA recently completed a ‘call for input’ on barriers to competition in the mortgage market. The switching process and timescales for completing a switch were not identified as areas of concern. Nor was it identified that the current process is having an impact on competition.”
It is partly the complexity of mortgage applications that leads many experts to believe it would be impossible to either enact or enforce a regime in which a client could apply for a mortgage and reach completion within seven days, or even seven working days.
“The mortgage process is unlike many other services in that much of the process is outside the lender’s control,” says Broadhead.
“The consumer needs to provide detailed information such as income verification and bank statements. Then the surveyor needs to visit the property and the lender needs to carry out its own checks to satisfy its risk appetite and fulfil its regulatory obligations. Only then is the offer issued and the legal process commences, which is also outside the lender’s control.”
Fleming-Duffy adds: “It is wholly unrealistic to expect that mortgage applications can be fully underwritten, a property valued and legal work completed within seven days. Can we really expect a consumer to come out of a near-prime deal with a specialist mortgage lender, where a view was taken on the client’s nature of employment, for example, and switch to the most competitively priced mortgage in the marketplace?”
SPF Private Clients chief executive Mark Harris says: “While in theory seven-day mortgage switching sounds attractive and makes a wonderful soundbite, the reality could be very different. Not only will borrowers rely on lenders to process the case in seven days but the bank will require a valuation of the property to be carried out.
“This will be less of an issue on lower loan-to-values as automated valuation models are available. The latter would have to become more commonplace in order to make a seven-day switch achievable.”
In the boom years before the credit crunch, lenders often referred to ‘instant offers’. These were based on the use of automated valuation models and there was far less emphasis on whether borrowers’ affordability would be properly assessed, compared with today’s post-MMR environment.
“In 2007 some lenders had reached the point where an instant offer was feasible, but a return to more rigorous underwriting since then has inevitably seen timelines extend, albeit for good reasons” says Hollingworth.
“Although fast-track and self-certification will of course not be making a return, the use of technology could still help to improve the processes over time. Who is to say that lenders won’t be able to evidence income through technology such as being able to plug in to HMRC data? Automated valuations have not gone away, which can be helpful in improving speed and reducing cost.”
The CML argues that, if the seven-day switching clock starts at the point of offer, many firms already meet that standard.
HSBC has made a big statement about its “one-day mortgage service”, employing TV adverts and other marketing materials to promote this message. It claims it “could” give a mortgage decision in just 24 hours.
Of course, the situation is rarely that simple. Its small print states: “Whether we can approve your mortgage, and whether we can do so in a day, will depend upon your individual needs and circumstances, as well as the complexity, timing and features of your application. More complex cases may take longer.”
In other words, a successful client probably requires a spotless credit history, a steady income and a standard property.
A broker who wished to remain anonymous has branded HSBC’s one-day switching as “somewhat of a gimmick”, given that a number of other lenders can provide the same service where a case has few complexities.
However, the counter-argument to that cynicism is that HSBC is taking the bull by the horns in trying to move the mortgage market into the 21st century. Even if its marketing is for corporate gain, and even if it is not alone in offering this service, at least it is striving to improve efficiency.
An HSBC spokesman says: “We are working hard to cut processing times and improve and streamline our end-to-end customer journey by introducing e-docs and SMS updates for customers, giving branch managers authority to approve mortgages and testing video mortgage interviews to bring more convenience for customers, as well as improving our broker platform.”
If the mortgage market is to change fundamentally, it will not happen overnight. Should the Government decide that the seven-day switching clock must start ticking from the moment of application, there are likely to be significant protests from the industry and, even if the policy is forced through, it is likely to take years to enact.
On the other hand, if the Government expects the clock to start from the point of offer, this would also take a long time to implement because many systems would need to change, albeit the pain would be less severe for lenders.
“This initiative will require a significant amount of investment before all providers are able to fulfil the commitment confidently,” says Sanders.
A closer examination of the Government’s consultation statement may in fact hint at another motive, raising the question of just how wedded it is to seven-day mortgage switching.
Sajid Javid, business secretary at the time of the announcement in May, while talking about all the markets identified for switching, said: “The Government is committed to creating a system that works for consumers and makes markets more competitive. At the moment, the time it takes to switch depends on which service you are switching. I want to hear what consumers and businesses think of making switching quicker and more consistent across all markets.”
That statement can be interpreted as positioning the entire plan more like an exercise in improving efficiency. It suggests the Government may offer room to manoeuvre within the switching timeframe, with seven-day switching deemed a ‘nice to have’ rather than a ‘must have’.
Even if seven-day switching from the point of application is not achieved, as long as efficiencies are made and processing times shortened the exercise may be judged a success and bring the mortgage market closer to offering borrowers the switch times enjoyed by other customers.
Regulatory reforms actively discourage speed
Bernard Clarke, spokesman, Council of Mortgage Lenders
Lenders have spent years – and untold amounts of money – on reinforcing consumer protection through regulatory reforms that were not designed to encourage hasty and inappropriate decision-making.
Affordability and legal checks, and assessing creditworthiness, cannot be shortcircuited in pursuit of an arbitrary goal of seven-day switching. Nor should they be.
The BIS consultation puts mortgages alongside bank accounts and phone and utility contracts, which also looks arbitrary. In contrast, the FCA has taken what looks to be a more thoughtful approach to switching in its paper on competition in the mortgage market. Rather than focusing on how long it takes to switch, the FCA asks some rather more interesting questions – like why some consumers switch but others do not.
If a customer does not switch, is that a sign of inertia or of not being engaged with the product or the process? If the latter, there may be cause for concern. But if it is a conscious decision, based on a logical assessment that their current product fits their needs, there may not be much to worry about.
If customers are choosing not to remortgage because they do not believe that any potential savings are worth the time it takes, there may be questions for the FCA to consider.
How seven-day switching became a reality in the current account market
Current account customers have been able to switch provider within seven working days since September 2013. Previously, the process took up to a month.
Why seven-day switching was introduced
Quite simply, switching numbers were too low with many customers stuck on high-charging accounts, often with poor customer service.The Independent Commission on Banking reported in 2011 that UK bank customers switched their current accounts on average only once every 26 years.
It was the ICB’s recommendations in that report that formed much of the basis upon which the seven-day switching regime was introduced.
The Government also reported in September 2013 that 75 per cent of current account holders had never switched, with many saying this was because of the hassle and potential risks involved. In particular, it has been shown that many customers feared missed payments and a hit to their credit rating if a switch went wrong – such as a direct debit coming out of the new account before it had any money in it.
Furthermore, for many years competition among banks was lacking, giving few incentives to switch.
How it works
Under the system, a customer approaches the new bank and, once accepted, the new bank works behind the scenes with the old bank and third parties such as utility companies to complete the process. This largely involves moving the balance to the new account and transferring direct debits and standing orders.
A customer can choose their switch day as long as it is at least seven working days ahead.
Once the switch is complete, any payments sent to the old account are forwarded to the new account. Meanwhile, direct debits or standing orders that request cash from the old account are redirected to come from the new account.
This guarantee was initially in place for 13 months after a switch but was extended to three years in 2015. It is intended to alleviate the customer’s fear of something going wrong.
Has it been a success?
Payment systems operator Bacs reported last week that there had been more than three million current account switches since September 2013. To put this in context, there are around 70 million UK current accounts, so this is only 4 per cent of the total.
However, Bacs claims three-quarters of the public are now aware of the improved switching service.
Many experts say the numbers switching are low despite widespread dissatisfaction with banks. On the plus side, while there have been a lot of reported examples of switches going wrong, many studies have shown consumers who made the switch stating it had gone well.
There are also many more current account incentives to switch, with banks offering cash bribes or market-leading in-credit interest rates. This indicates that the banking industry has made its processes better and that competition has improved, but banks have not yet managed to galvanise the public into mass switching.