In its Retail Conduct Risk Outlook paper the regulator said with some instances of consolidation at larger intermediaries in the past year, there is increased pressure on smaller intermediaries to sustain profitability.
It also highlighted funding issues as a risk to smaller intermediary firms suggesting a likely return to fiercer direct pricing by lenders in the coming year.
It said: “The additional funding pressures in the mortgage market have the potential to trigger a return of the aggressive dual pricing strategies seen in 2008 where lenders offered more competitive products in their branches. These challenges are more acute for smaller firms.”
The FSA also raised concerns about intermediaries diversifying income streams to remain competitive and profitable.
It said: “Mortgage intermediaries currently active in the market have diversified and no longer simply undertake mortgage sales, but now look to widen income streams by offering customers advice on a range of products, such as life and protection.
“Others have adopted strategies to sell niche products to the mass market with the design of some mortgage products focusing on first-time buyers and vulnerable groups, including the elderly with equity in their homes.
“These activities have elevated our concerns around suitability and quality of advice.”
The regulator added that it had concerns that developing and maintaining a sustainable and compliant business model will likely remain challenging for mortgage intermediaries, particularly for network models.
