Borrowers are failing to navigate their way to the best mortgage deals even with the help of a broker, the FCA’s latest paper suggests.
Its findings show that 30 per cent of customers are missing out on the cheapest rates, regardless of whether they go it alone or take professional advice. In addition, some brokers are placing most business with a narrow range of lenders, which the FCA calculates could leave their clients up to £400 a year out of pocket.
The FCA’s accusation in its Mortgages Market Study Interim Report that some brokers are focusing only on those lenders with which they are most familiar has provoked a mixture of bemusement and frustration in the adviser community.
While the regulator did concede that factors such as dual pricing by lenders and lack of transparency over criteria can make it harder for brokers to locate the cheapest deals for clients, there was much in the paper that appears critical of the intermediary sector. London Money director Martin Stewart estimates that most brokers consistently use around 15 to 20 lenders because most of their clients fit well within the policy parameters of the high-street banks.
He says: “It is never a case of using the lender that is most convenient for the broker. Part of the advice process that brokers go through is ensuring what is the path of least resistance for the client. Sometimes that means a recommendation that is not the cheapest rate, as the lenders with the lowest rates tend to have the worst service standards.”
Stewart argues that the regulator is too preoccupied by pricing. “The client ultimately wants a set of keys at an affordable monthly cost. The likelihood of lending is the most overpowering driver for brokers. What is the point of even trying for a rate that you have got no hope of getting?”
Intermediary Mortgage Lenders Association executive director Kate Davies also takes issue with the FCA’s apparent prioritising of price over suitability.
She questions whether the FCA’s research has really proved its point about brokers with limited lender range. Of the 14 intermediary firms it examined in detail, two were equity release specialists and therefore have a much smaller pool of lenders to choose from. Eight firms used 40 or more lenders and four used at least 20.
Davies says: “I find what it says about small panels a bit unpersuasive, to be honest. I thought, ‘Is this really a concern?’ There doesn’t seem to be much evidence that lots of intermediaries are using fewer than 20 lenders. If you are using 20 lenders you are bound to have some of the very biggest on there and the report itself says that the largest six lenders account for 75 per cent of outstanding balances. So it doesn’t feel as if consumers are being shortchanged.”
Association of Mortgage Intermediaries chief executive Robert Sinclair challenges aspects of the methodology used in gathering data for the paper. Like many others he is concerned about the focus on rate over suitability.
He says: “This is a piece of work totally focused on price with some overlay of criteria but not a very robust one. So the question that will be discussed over the next eight months or so is whether price is the only determinant, rather than suitability? If that’s the case we will have to remodel everything and rethink it all, but I’m not sure that’s what the FCA actually wants. I think some people in the competition arena might think price is the only way, but some people in the policy arena might have a different view. I’m not sure the FCA itself is convinced that it has actually got its arguments all lined up at this point.”
Sinclair also questions whether the paper will have implications for how brokers deal with dual pricing when there is a direct-only deal that works out cheaper for the client. He wonders if the FCA is hinting at a need for a new approach.
“There appear to be a number of customers that the FCA has looked at who could have got a cheaper deal somewhere else. But in some cases it is a lender who will give them a direct deal, which of course sits outside the scope of the rules. The rules allow the broker not to direct customers down that route so it becomes quite a conundrum.”
The FCA’s rationale for determining which borrowers missed out on a better deal also warrants further scrutiny, he says. “There will be some consumers who are in a purchase race or in the new-build market where certainty and speed is important and the one piece of information the FCA certainly didn’t have was what service levels were like at a certain point in time. What it had was data of when the transaction completed and it was randomly looking back at the products available between two and four months before that. That means that those products may or may not have been available depending on exactly when the advice was actually given.
“But if you look at the time period the FCA was looking at, rates were falling fairly quickly and therefore if it picked the wrong timing and the advice was given earlier than it thought, those cheaper deals might not have been available at that point.”
Sinclair also highlights the fact that it is not easy for brokers, particularly small firms and one-man bands, to remain on panel with a vast number of lenders. There are around 100 active lenders in the market, according to the FCA, but a good broker might do only around 150 mortgage deals over the course of a year, estimates Sinclair. If most of those clients are fairly typical and mainstream, the majority are likely to go to the four or five high-street lenders with the leading products at that time.
But he says: “There are two lenders in the market where it is quite hard to get on panel: HSBC and TSB are restricted in who they will use and they are both top eight lenders. On a regular basis Halifax, Santander and Nationwide Building Society go through and take people off their panel if they haven’t transacted with them in the previous six months.”
Brokers who are no longer on panel with any lender they might want to use have to go through a time-consuming process to be put back on, which would slow the process down for the borrower.
“So unless you are continually registered with a lender, most lenders will take you off panel and you have to reapply if you are giving them business. The process that the FCA started of asking lenders to make sure that they control their panels and that they know the people they are dealing with – ‘Know your Broker’ was a large piece of work it did – has created a situation where you can’t just sit on a panel for 10 years.”
Role of technology
The FCA suggests that technology could play a much greater role in helping brokers to understand which products a borrower qualifies for at a much earlier stage, but that this requires co-operation from lenders. It does not mention firms by name, but it is clear that the service on offer from Criteria Hub and Knowledge Bank comes closest to providing what the FCA describes.
The paper says: “Most intermediaries, even where they use a mortgage sourcing system (MSS), are reliant on their past experience and using specific lenders’ information tools to build confidence on likelihood of acceptance. This appears to be a barrier to effective searching that likely makes it harder to identify a less expensive yet suitable product.”
Criteria Hub director Jason Hegarty, who worked as a broker himself for many years before setting up the technology firm, says: “As soon as brokers speak to a client they are in fact-finding mode, they are asking questions and learning a little bit more about the situation as they go along.”
He says that each element of extra information about the client or the property can potentially narrow the number of lenders that are under consideration, for example, the borrower wants a mortgage until they are 87, the property is timber framed, there has been Japanese knotweed in the garden.
“So begins the process of criteria research. It is that part of the journey that is horrible for brokers at the moment because they go from lender website to lender website to try and find the answers to these questions.”
It would be bad enough, he says, if all 40 lenders on a brokers panel had all of the criteria structured and categorised the same way using the same template in the same place on the website.
“But of course the reality is there are not two lenders that share the same template or publish the same criteria. So you have got to call the lender and you will probably have to leave a message for a business development manager wait for them to call you back, by which time you are on the phone. You can really start to understand where it is very difficult for advisers, not through lack of want, to do comprehensive research to satisfy themselves that these lenders will lend and these ones will not.”
One of the ways in which Criteria Hub helps to simplify the process, Hegarty explains, is by requiring lenders to lead with a particular position. For example, in the case of knotweed, a lender could say it is potentially acceptable and provide a warning in the system which flags to the broker that there is a caveat such as it has to be a certain distance from the home.
Alternatively, if in the majority of cases the lender is likely to decline a property that has knotweed, it can lead with the position that knotweed is not acceptable, but put a note to say that it might be considered on a case-by-case basis. From a broker’s compliance perspective, not only can this help them find the best deals for their clients but it also helps them to maintain an audit trail of why they have considered or excluded certain lenders from their search. “If as a broker you can identify 10 lenders that will provide a mortgage on a particular property, that means that the borrower can get a decision more quickly. They will have greater choice and therefore potentially lower rates.”
Whether or not tools such as Criteria Hub and Knowledge Bank have the power to improve the mortgage journey, for brokers and borrowers alike, will largely depend on the willingness of lenders to share useful and detailed information on lending criteria.