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Competition review must consider effects of regulation, says CML


Published: 13 January 2016 | Author: Bernard Clarke

In the first few weeks of this year, the Financial Conduct Authority (FCA) will make a key decision for the lending industry when it decides whether or not to pursue plans for a review of competition in the mortgage market. If it goes ahead with the review, as widely anticipated, the workload in submitting a response is likely to be our biggest regulatory project of 2016.

Overall, we think that the UK mortgage market remains very competitive, and there is plenty of evidence to support that view: 

  • There are well over 100 active lenders in the market, offering thousands of mortgage products with a range of different features. The choice available means that consumers have a wide range of options.
  • As credit conditions have steadily improved, the number of active lenders in the market has continued to expand, and so has the number of products. Over the last five years or so, we have seen a resurgence of activity by small and medium-sized lenders, an expansion in their market share relative to the six largest lenders, and a number of new challenger banks entering the market.
  • Borrowing costs have continued to fall and are now at an historic low point. As a result, there is a wide choice of even more attractively priced options for mortgage customers. The latest Bank of England data shows that, over the last year, new five-year fixed rates have fallen by more than 40 basis points to 2.76%, while the average rate fixed for two years is down by almost 30 basis points to 1.9%. Over the same period, the average new base rate tracker mortgage is more than 40 basis points lower, at 2.55%. 

The CML's role in a competition review

Should the FCA decide to undertake a review of mortgage market competition, we foresee four main objectives for the CML in ensuring that any review:

  • Shows how its conclusions are derived from all the available evidence. That would mean a significant workload for us in collecting and collating all the relevant data from members, and seeking to ensure that it is properly interpreted by the regulator.
  • Focuses on the right areas, and includes a thorough and careful assessment of the impact of regulation on market competition. Encouragingly, the FCA agrees with this view. More generally, we would press for clarity on the scope of any review, and an early agreement on this to help ensure that it is undertaken as efficiently as possible.
  • Takes account of the heavy agenda of regulatory change already being undertaken by firms in the sector, and does not impose extra, unreasonable burdens.
  • Delivers appropriate outcomes. Any proposed reforms to the market should be proportionate to any competition issues that the FCA believes it needs to address.

Competition and regulation

In setting out its reasons for considering a review of competition, the FCA highlighted some market features that might give rise to concern. The regulator is keen to explore, for example, whether competition extends to all segments of the market and delivers a good outcome for all groups of consumers. It also raised questions about how competition might be affected by economic changes over time, and in particular as the market adjusts to higher interest rates. And it acknowledged the case for looking at how competition has been affected by regulatory developments.

Specifically on regulation, the FCA questioned whether the mortgage market review had affected competition. But it also said it should consider the effects on competition of its wider mortgage market programme, including the ongoing review of responsible lending, and the recently completed one focusing on mortgage advice and distribution.

We agree with this approach. In recent years, lenders have put a lot of time and money, and considerable staff and information technology resources, into ensuring that they fulfil a series of new regulatory requirements. We accept that this may have diverted some resources away from innovation that might have delivered market benefits for consumers. 

Because the mortgage market has undergone such an extended period of regulatory reform, it is also important to consider the effects on competition over time. So, as the pendulum has swung over a number of years from a more liberal regime to a tougher one, has there been a tendency to stifle, rather than stimulate, market competition?

Stability – or de-regulation?

We would argue that to promote greater competition in the future, the mortgage market would now benefit from a period of stability, without any significant regulatory intervention for a while. 

Indeed, there might be a case for modest de-regulation in some areas – or at least clarification of the rules by the FCA – to encourage more competition in the market. We believe that the regulator could provide greater clarity where firms may feel that they are taking a risk if they opt for a liberal interpretation of the rules.

In particular, it might be helpful for the FCA to make clear that it will not take an unnecessarily severe approach – either now or retrospectively – with firms over the interpretation of rules for assessing affordability for borrowers whose mortgages extend into retirement. 

The same could apply to rules covering mortgage sales and advice, which currently appear to discourage some firms from dealing with online and digital applications from customers. If that is indeed what is happening, it is at odds with what the FCA has said about encouraging mortgage market innovation and the use of modern channels of communication. 

Despite these stated objectives by the regulator, many of the rules applying to mortgage sales appear to have been drafted primarily with a face-to-face transaction process in mind. We believe the effect of the rules should not be to discourage firms from dealing online with customers; instead, firms and consumers should feel free to communicate about aspects of a sale through any channel that is convenient – face-to-face, by telephone, online or through some other digital application. 

Any competition review should look carefully at the impact of regulation to see if it is discouraging this kind of flexibility. We believe that it would serve to promote competition, flexibility and choice in the market if the FCA were to ensure that the rules are applied evenly, however customers prefer to transact and service their mortgages – with or without advice, and through any communication channel that the customer and lender want to use.

The FCA’s call for inputs

In its recently published Call for inputs on competition in the mortgage sector, the FCA sought to model the scope of its review (see Chart 1).

Chart 1: Proposed scope of the FCA’s review

Image showing the proposed scope of the FCA's reviewSource: FCA

In the document, the FCA set out its concerns about the potential for failings in market competition to cause detriment to consumers, resulting in them:

  • Buying mortgage products or services that are inappropriate to their needs. In particular, the FCA identified taking out loans with significant early repayment charges even if customers were likely to terminate their contract during the initial, fixed rate period.
  • Paying too much for their mortgage, or receiving poor value in terms of service standards.
  • Suffering as a result of “missing markets,” perhaps with some creditworthy customers being denied access to finance or opportunities to switch to products better suited to their needs and circumstances.

The FCA also said it would consider potential causes of consumer detriment on both the demand and supply sides of the market. 

On the demand side, the regulator said it could consider whether consumers can effectively access the information they need about mortgage products and services, and then understand and act upon it. 

On the supply side, the regulator said there may be a case for looking at how firms reflect consumer behaviour in the decisions they make about pricing and product design. It could also look at whether businesses have market power, whether there is any evidence of – or scope for – co-ordinated behaviour, how relationships between different firms in the mortgage supply chain are working, and whether there are potential conflicts of interest.


The FCA is now analysing the responses to its call for inputs – including our own. It plans to publish a feedback statement in March, giving more details of any competition review, including its timing and scope. Should it decide to go ahead with a review, we expect its interim findings in the second half of this year, and a final report in the first half of 2017.

While we accept that there may be a case for a review, mortgage provision in the UK already displays many features associated with a highly efficient and competitive market. There are more than 100 active firms in the market; consumers have a wide choice of products; and borrowing costs have been falling and are at an historic low point.

Should the FCA go ahead with a competition review, there will be a significant role for the CML is co-ordinating the industry’s response, and making sure it is based on all the available evidence. We will seek to ensure that any review focuses on the right areas, takes account of the continuing regulatory burden on firms – and the impact of regulation on market competition – and delivers the right outcomes.