Published: 12 April 2016 | Author: Sue Anderson
For decades, the UK mortgage market has had something of a love/hate relationship with industry "outliers", who operate on the outer edges of normal practice. The same is true of "innovators", who do something new or different. Indeed, both features have sometimes simply been a euphemism for going up the risk curve.
And it would be true to say that the thorny question of how to treat outliers, and innovators, is also one that exercises regulators – and is firmly back on the agenda, after a period in which neither industry nor regulators had any appetite for addressing it.
On the one hand, innovators may be the brave pioneers, the disrupters, the whatever-the-current-buzzword trailblazers for new and positive improvement. Think, for example, of the funding innovators of the 1990s whose use of financial instruments paved the way for the mainstream offering of fixed rate mortgages. Now, over 90% of new mortgages sold are fixed-rate, providing a risk mitigant and level of product choice for consumers that few can now imagine the market existing without.
Pioneers – or opportunists?
On the other hand, outliers may sometimes be the opportunists, the short-termists, the risk-reward junkies testing regulatory and business model boundaries, and can cause trouble for customers, markets, and industry reputations. Think, for example, of the most enthusiastic embracers of automated underwriting (in itself a legitimate innovation), and the potentially toxic combination of this with self-certification of income, with the potential for manipulation and fraud that this created – most of which the UK thankfully avoided and escaped, but the US rather less so.
As an industry, we are cheerleaders for the genuine innovators – those who create something new and valuable for consumers and the market. And so is the regulator – the Financial Conduct Authority (FCA) has even gone as far as creating an "innovation hub" to champion and support those firms experimenting with new ideas that are demonstrably worth testing. And the FCA has also just this week shown itself capable of "sweating the small stuff" on innovation too. As we noted last week, it has helpfully taken steps that will make it easier for the hybrid lifetime mortgage market to develop.
But – and here's the rub – not everything that pushes out the boundaries is necessarily going to work out well. Some outliers are pretty obviously operating to an opportunist agenda - one recently established mortgage firm, domiciled in the Czech Republic specifically to offer self-cert mortgages in the UK using a regulatory workaround to avoid mortgage market rules, springs to mind. Other outlier practices can be more subtle, appearing positive but turning negative – and, left unchecked, can make their way firmly into the mainstream, as financial firms emulate the practices of others. Think payment protection insurance (PPI) – again, thankfully, the mortgage market largely avoided these problems, not least because of its clear focus on baseline standards for mortgage PPI.
Putting the customer first
An example where this "on the one hand, on the other" balance seems to be driving regulatory thinking is in the new draft guidance from the Prudential Regulation Authority (PRA) on underwriting standards in the buy-to-let sector. On the one hand, it's perfectly clear that current mainstream lender practice toes the line in terms of the stress-testing and credit underwriting assessment standards that the PRA thinks make sense. The regulatory nudge here is not a swipe at mainstream lenders, but a warning shot to outliers - and a reminder to all that pushing the envelope is not necessarily something to emulate.
Innovation with a clear purpose to create market improvement is great, and we should embrace it enthusiastically - but not uncritically. Innovators who do business differently and fall outside the pack are not necessarily baddies - after all, isn't that exactly what the new breed of consumer-friendly challengers aim to do?
But where mortgages are concerned, with their long-term impacts and all the implications that they have for people's lives, for our social fabric, and for the reputation of our industry, we can only conclude that it's also right for both regulators and firms to take a pretty forensic approach to analysing the pros and cons of doing new things – and, especially, for subjecting outlier practices to close and careful assessment.
Each year, it's inspiring to see what our Rising Stars competitors come up with in terms of the innovations that they think would change the market for the better. What's really striking is that they are always deeply consumer-centric. As starting points go, that seems a pretty good one for assessing the merits of innovation in the mortgage market.