The role of consumer decision-making in ensuring good market dynamics in the mortgage sector

Speech by Christopher Woolard, Director of Strategy and Competition at the FCA, at the Mortgages Conference.

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Speaker: Christopher Woolard, Director of Strategy and Competition
Event: The Mortgages Conference, London
Delivered: 5 October 2016
Note: this is the speech as drafted and may differ from delivered version


For many people, a mortgage still represents the biggest financial commitment they will make in their lifetime.

Socially and economically: the mortgage market remains hugely significant.

So I am very grateful to Imperial College Business School partnering with us and co-ordinating this conference. 

Let me talk a little about the recent history of mortgage regulation, the evolution of our thinking since we first introduced the MMR, and why we intend to launch a market study in the sector later this year.

Mortgage Market Review (MMR)

The simple principles that consumers should be able to genuinely afford their loans, and that in many circumstances some degree of advice is beneficial, have made significant improvements to consumer outcomes.

Mortgages may have existed for hundreds of years, and building societies and banks have been regulated for some time, but it was not until 2004 that mortgages as a product came into the ambit of the Financial Services Authority (the FCA’s predecessor).

In the same year, Sir David Miles published his report which has set the tone for much regulation even today.

Following the financial crisis, the FSA’s Mortgage Market Review made significant changes to the market. The simple principles that consumers should be able to genuinely afford their loans, and that in many circumstances some degree of advice is beneficial, have made significant improvements to consumer outcomes.

Earlier this year we published a review of how firms were applying our responsible lending rules, and found that no evidence of previous poor practices such as self-certification or interest-only lending without any credible repayment strategy. We found that lending looked to be affordable, and little evidence that creditworthy consumers were being prevented from obtaining loans.

This is real progress, and the industry deserves to be congratulated for working to implement the rules in a constructive way.

But since the FSA first launched MMR with a discussion paper in 2009, much has changed in the world of regulation. There are three important ways in which this is true. First, the macroeconomic environment, which could fill a speech in itself and I will only note briefly. Second the FCA has taken a more sophisticated approach to understanding consumers, and third, (unlike the FSA) the FCA has a competition mandate.

The macro environment

Since 2009, we’ve seen a number of trends begin to crystallise. That interest rates are likely to be low for longer than previously predicted.

Through work with colleagues in the Financial Policy Committee both the FCA and the Bank of England have taken action on lending risk including buy to let.

Through our own work on the ageing population we are developing a much deeper understanding of the issues posed by longevity and the needs of a population living longer in retirement including what part their property wealth plays in that.

And we are beginning to understand effects at the other end of the age range among younger consumers and the significant decline in home ownership.

Understanding consumers

That leads me to our consumer capability more generally, which we have been steadily building in recent years.

At the most basic level, this has consisted of putting greater resource on interacting with consumers, either by making it easier for consumer groups to work with us, seconding staff to them, or adopting much more advanced research methods similar to those used by many firms. Whereas commercial organisations use their research to understand where they can make greater profit, acquire or keep their customers, as a regulator we use it as a filter for better analysing risks, planning and policy development.

We have also put an emphasis on behavioural economics. For a regulator seeking to make markets work well, understanding what drives consumers’ choices is worth its weight in gold, and – as I shall come to talk about in relation to our mortgage work – we regularly commission research to understand consumer drivers before undertaking major pieces of work. We also now frequently test interventions before deciding to introduce to market, so that we can reflect, modify, or even try something new if necessary.

And the final way in which we are building our capacity on the consumer front is to build understanding of the needs of different sets of consumers. For example, working with the Open University, in May we published an Occasional Paper on access to financial services. The paper aimed to kick-off a debate, but it also provides us with a crucial lens, through which to look at the markets we regulate: how are different groups of consumers served, and what role is our regulation playing in that?

Competition duties

When competition works well, consumers are empowered as well as informed.

The other major change in regulation since MMR was first considered in 2009, is that we now have an explicit operational objective to promote effective competition in the interests of consumers. We also have a competition duty that applies to how we consider doing our work as a whole.

When competition works well, consumers are empowered as well as informed. They can make sense of the information they are given and can take their business elsewhere if they are not happy.

In turn, firms strive to win custom on the basis of service, quality, price and innovation. This helps generate better outcomes for consumers. Markets are open to entry and innovation, and successful, innovative firms thrive, while unsuccessful firms change or exit.

There are many ways in which competition can be weakened. For example, firms may exploit the difficulties that consumers have making the right choices about often complex services.

Where there are barriers to switching or entry into the market, firms may engage in oligopolistic behaviour with little real choice being offered by incumbents.

Across financial services we can see situations in which there is a choice of brands and superficial competition, but sometimes limited competition on price, quality or service under the surface.

Competition flows through all the work that we do. However, from time to time we also take a hard look at each of the markets we regulate and how competition is working within it. Let me turn to talk specifically about mortgages.

The mortgage market study

Last year we published call for inputs on how competition is working in the mortgage market.

As part of our feedback statement last May, we confirmed that, alongside work on many of these fronts respondents told us about, we had chosen to focus a market study on one question in particular: consumers’ ability to make effective choices.

We are due to publish the terms of reference for that study in the next few months.

Ahead of that, I want to take you through some of the key feedback we received, and the questions we are currently considering.

Shopping around

The question we do want to consider in the market study is whether the tools available to consumers to help them make decisions effectively meet their needs.

Firstly, respondents to the call for input made clear that consumers face challenges in making effective choices, particularly when it comes to assessing and acting on information about mortgage products. You might choose to label this as the ‘shopping around question’.

And that’s key because we have some evidence that consumers’ behavioural biases may impinge on their ability to shop around.

We recently published qualitative research which suggested that first time buyers and home movers, the overarching priority is buying the property they have in mind.

That’s intuitive. Anyone in this room who has bought a house is likely to have gotten much more excited by the number of bedrooms, size of the garden, or proximity to a good school, than the finer details of their mortgage contract.

Well, perhaps not anyone in this room.

These behavioural biases have also been highlighted by responses to our call for input, with respondents reporting that consumers focus on short-term price elements and are excessively optimistic about their future prospects.

The question we do want to consider in the market study is whether the tools available to consumers to help them make decisions effectively meet their needs.

There are of course already many tools to help consumers shop around – brokers, price comparison websites, apps, etcetera. These should assist consumers in searching for the most suitable product for their needs, but we want to consider whether there may be any distortions caused by an undue focus on certain headline charges or features.

This is an issue of course that cuts across many markets, financial or otherwise, and we will be also be working with our colleagues at the Competition and Markets Authority who made public last week that they will initiate a market study looking specifically at price comparison websites and apps.

Another lens we will think about when considering shopping around is one I alluded to earlier: to what extent do the tools serve consumers with less common needs? For example, Lloyds Bank recently estimated that around 11 million people in the UK have low digital capability – so do they have the same access to the same choice as people who can readily use price comparison websites?

Increased intermediation

That lens is a crucial one, as since the Mortgage Market Review the role of intermediation has increased significantly.

Intermediated mortgages sales, which had decreased to around 50% in 2009/10, had increased to 67% of the number of sales in Q2 2016. To what extent is this increase caused by the MMR’s rules on advice? It’s not wholly clear to us, and that’s one of the questions we are considering.

But the key issue in this area is to what extent there are differences in the outcomes for consumers who obtain their mortgages through a broker versus those who go direct to a lender.

We intend to seek out what drives those differences, and consider if there is room for improvement.

Commercial arrangements

Third, a ‘commercial arrangements’ question. The relationships between brokers, lenders, panels, price comparison websites – even some estate agents and builders – exist for a reason.

For many, it is the management of commercial or regulatory risk. However, some of these relationships may be detrimental to the overall good-functioning of the mortgage market, or to the interests of consumers. We want to understand in more detail the competition dynamics in this space.

More broadly, we intend to use the study as a means of reviewing the impact of the MMR as a whole. I should say now we do not envisage wholesale change. 

The market has told us pretty clearly they have managed the changes and would not like more, and as I said earlier we are seeing improved outcomes. 

But we will look at whether there is room for improvement and adjustment, it would be surprising if any regulator had got every single detail of a policy as significant as the MMR right first time.


So I hope I have left you with a clear picture of what we intend to achieve through our competition work in the mortgage market.

We have seen some encouraging progress in the past few years. But issues remain that we need to understand in greater depth and adapt to. Put very simply can we make this incredibly important market work better? Thank you once again for your time and energy in helping us address this question.