In the two years since mortgage regulation a lot has happened to improve the reputation and workings of the sector. From endowments and Financial Promotions, to ‘Treating Customers Fairly’ (TCF) and cold-calling, many issues have arisen that have garnered regulatory and general industry discussion, in addition to the affect on consumers.
Focusing on the rights of consumers, campaign watchdog Which? has often debated the different nuances within the financial services sector, highlighting bad practice and calling for changes to working practices and business models. Speaking at the Building Societies’ Association (BSA) annual lecture into ‘Current Issues in Retail Financial Services’, Which? confessed the mortgage market had seen signs of rapid improvements, but it still had a number of reservations about the market and the wider financial services sector, which threatened the future stability of the market.
Central to the Which? argument was the announcement that attention was being placed on distribution, rather than the consumer. This issue had previously been raised by Callum McCarthy, chief executive at the FSA, who admitted there was a clear divide between borrowers and providers with respect to a conflict of interest. Speaking at the Gleneagles summit in September, he said: “We have a business model based on incentives, which produce results which are unattractive to reputable providers, unattractive to their customers, and whose benefits to brokers are questionable.”
All in the past?
Paul Hunt, marketing director at Platform, admitted that past market models could have been interpreted as favouring the distributor, but it was now focused on the borrowers needs. He said: “In the past it was quite easy to regard the intermediary as a customer, but with Financial Services Authority (FSA) regulation, responsible lending and TCF, from a product development perspective the borrower must be seen as an end user. Regulation has heightened the awareness of lenders as to borrowers as the end-user, and has been reflected in product development.”
As part of his speech, the Which? chief executive, Peter Vicary-Smith, argued that the FSA had failed to deliver fairly to consumers across the financial services sector spectrum. “Much regulation is in the form of information disclosure, tonnes of information that I don’t think helps the average consumer understand much more about the products they’re buying,” he argued – a factor that Hugh Nichols, partner at Badbury Berkeley Financial Services agreed with. Nichols said: “Consumers are bamboozled by over-compliance and don’t read much of the information that is passed their way. This needs to be addressed, because at the moment consumers aren’t paying enough attention to the information.”
Vicary-Smith went on to call for a tougher FSA, a move that could be heralded by the introduction of principles-based regulation. As part of this move, Which? implied that any move to a principles-based approach should be accompanied by a cost-benefit analysis, highlighting any cost detriments that might be incurred. It also expressed its concern that the FSA’s TCF initiative, in tandem with a move to a principles-based approach, could place added power to firm directors, without ensuring that robust procedures are in place to provide a deterrent against firms continuing to exploit elements of regulation.
Financial capability
The Which? chief executive also expressed his concern over the low levels of financial capability among consumers – a sentiment shared by the FSA. The regulator had previously stated that the level of financial education and knowledge among consumers was too low, and has called for further measures to combat this, including the introduction of financial capability questions in future GCSE papers and lessons in financial planning in schools and colleges. However Vicary-Smith confirmed that some of this lack of financial understanding had been a result of increased product complexity.
Concluding the study, the organisation called for more robust, targeted regulation with better governance accountability and representation of the consumer view. It also called for greater integration between market forces, so that market competition was more transparent and fair.
Focusing on the mortgage market, Vicary-Smith, admitted that affordability and associated fees were a worry. “It is of concern that the focus on price has meant that we are starting to see a gradual upwards creep in the level of associated fees. There has been considerable disquiet about the steep rises that we have seen in mortgage exit fees,” he said.
“We also have concerns about affordability. Ensuring that these concerns don’t become problems is important. We all want to see the mortgage market working effectively and this will depend to a large extent on the success of the regulatory regime,” he added.
James Carter, IFA at Virtue Financial, praised the organisation for further highlighting industry concerns, such as the move to affordability based lending. “Lenders are taking advantage of people struggling by adding fees to products, which can be as much as 1.5 per cent. Which? is doing a good job in highlighting these issues.”
In need of a check up
Which? confirmed that the UK mortgage market appeared to be highly competitive and pointed out that most lenders and borrowers were acting in an increasingly responsible manner, highlighting the fact that vast improvements had been made. However, its growing concerns over the move to a principles-based approach and the escalating costs of exit fees means that the market still has much to consider before Which? can give it a complete clear bill of health.
