FCA Mortgages Market Study: Brokers are failing to get customers the cheapest deal
The Financial Conduct Authority has accused brokers of failing to secure their customers the best deal possible.
In its Mortgages Market Study Final Report, published this morning, the regulator said brokers are being encouraged to find customers a mortgage quickly, rather than searching the market extensively to find the cheapest possible solution.
In the process around 30% of consumers miss out on cheaper mortgages that are just as suitable, costing them an estimated £550 a year.
The FCA said it’s difficult for consumers to initially identify products they qualify for, which hinders their ability to shop around – and to a lesser extent this applies to brokers.
Why it’s hard to find the best deal
A lack of clarity from mortgage lenders on whether customers pass affordability criteria results in consumers and brokers erring on the side of caution when applying for a mortgage.
Partially due to this caution some customers end up paying a higher mortgage rate for unneeded buffers. For example, 25-30% of customers pay for mortgages with a higher age limit or loan-to-value than they need.
The regulator also took a swipe at ‘limited’ sourcing systems, with brokers having to rely on their experience rather than the tools to understand how likely it is that a customer will be accepted.
Lack of lender choice
The regulator found that generally the more lenders that intermediaries place business with, the more likely they are to get consumers a value for money deal.
However owing to a number of factors brokers are looking at a limited number of lenders.
The FCA pointed the finger at intermediary panels. These cover a broad range of consumers, like the self-employed and those with poor credit history, but fail to have many lenders for a specific customer – meaning there’s little choice when it comes to finding the cheapest deal.
Also some lenders are selective in how they distribute mortgages through intermediaries, narrowing the choice of products brokers have to choose from.
The FCA called for intermediaries to provide consumers with indicative decisions in principle (DIP) from multiple lenders via an application programming interface (API), which it said works well in sectors like general insurance.
The FCA wants it to be easier for intermediaries to identify the products which consumers are likely to qualify for early on in the process. For this to happen lenders need to give an indicative decision, which wouldn’t be a binding offer.
The regulator called for consumer-facing tools to support ‘traditional methods of sale’. These should provide feedback on why a consumer isn’t eligible for a mortgage.
Meanwhile lenders going direct-to-consumers should be incentivised to improve the information they make available.
The FCA said it is wary of intervening directly and hopes market-led solutions can be developed to solve these issues.
However, it said it wants to see ‘tangible outputs’ over the coming months when it comes to firms giving and receiving mortgage qualification information.
Martin Stewart, director of The Money Group, said: “If the regulator is concerned that the consumer is missing out on cheaper deals then it is imperative that they open up the distribution channels for all advisers and stop the bottleneck of some lenders only distributing via certain preferred outlets.
“As a DA broker who is authorised by the FCA, independent of eternal decision makers and who is engaged by the client to offer the most suitable advice, I should be allowed access to any lender who offers mortgages, regardless of sales volume.
“I am bored of the current arguments, the most galling of which is ‘we are testing the market’. Well some lenders have been testing the market for three years or longer so If they don’t know what it is they are testing for by now I am not sure they ever will.”
However David Copland, TMA director of mortgages. said: “I think finding the cheapest deal seven out of 10 times isn’t bad and I believe in reality the figure is higher. I think 95% of the time the broker finds the best rate for the client because of their circumstances.”
Rob Gill, managing director of Altura Mortgage Finance, said: “It seems the FCA want to encourage innovation, such as the evolution of tech-led, execution only propositions. Like it or not, brokers are going to have to adapt their business models accordingly.”
Two trade bodies also responded.
Paul Broadhead, head of mortgage policy at the Building Societies Association, said: “It is positive to see FCA recognise that the mortgage market broadly works well although one sentiment that should be addressed is the perceived idea that the cheapest mortgage equals the best mortgage – this is always not the case.
“We recommend that borrowers seek advice before taking out a mortgage to ensure they get the best deal for their individual circumstances, not simply the cheapest product.
“While the proposed new affordability test is a positive step, there will be some borrowers that will not be in a position to switch mortgages. In order to ensure that these customers are treated fairly it is vital that the government ensures there are adequate consumer protections in place.
“The BSA will continue to work closely with FCA to make improvements to the mortgage market as customers’ demands and needs continue to evolve.”
Kate Davies, executive director of Intermediary Mortgage Lenders Association, said: “We are […] encouraged by the FCA’s view that a market solution is the best way of helping consumers to find the right mortgage.
“There is currently considerable activity in the market to develop new ways of delivering this, and whilst some of these have yet to prove their effectiveness, we believe that competition and innovation is best driven proactively by the market, rather than reactively in response to regulatory intervention.”