Fairness, flexibility and the long-term view: the FCA’s vision for the mortgage market

Speech by Christopher Woolard, Executive Director of Strategy and Competition at the FCA, delivered at the UK Finance Annual Mortgage Conference, London.

christopher woolard.jpg

Speaker: Christopher Woolard, Executive Director of Strategy and Competition
Location: UK Finance Annual Mortgage Conference, London
Delivered on: 6 November 2018


  • The interim findings from the FCA’s Mortgage Market Study have shown a market largely working well. But there are challenges.
  • Mortgage prisoners is a clear example; one that will require creativity from us and a coordinated effort from industry.
  • Long-term and lifetime lending is another concern and we are looking to firms to use their common sense to make sure they’re matching the right products to the right consumers.
  • For markets to move forward and adapt requires the highest level of trust. This will only be gained through the long-term, consistent, fair treatment of customers.

Note: this is the speech as drafted and may differ from the delivered version.

Thank you for giving me the opportunity to talk about the FCA’s mortgage market study and our regulatory view of the mortgage sector more broadly.

I bought my first house in 1997. It was a Victorian terrace that had been 'made over' in the mid-1970s, complete with Artex, tangerine floral wallpaper and an avocado-coloured bathroom. My first few years of homeownership were spent, painstakingly, room by room, restoring it to its original features. Like many new homeowners, the mortgage felt implausibly large.

In the years since, the market has moved on dramatically. The stats are well known. ​​​​​​

According to the Institute for Fiscal Studies, in 1997 homeownership for 25- to 34-year-olds like me at the time was 55%; 20 years later it was 35%.

Over the same period house prices in England have increased by 173%, while 25- to 34-year-olds have seen real incomes increase by only 19%.

And, according to our data, whereas in 2005 nearly half of all sales were for 20-25 year mortgages, the figure today is just under a quarter. Instead we’re seeing an upward tick in longer term mortgages – in 2005 just over 2% of mortgage sales were over a 30-35 year term; at the start of this year it was nearly 18%.

But while the big picture has shifted and evolved in the intervening years, one thing has remained the same – buying a house is no ordinary purchase and getting a mortgage is no ordinary transaction.

It’s not only the large sums involved that make it so – for many people it’s what a house represents; a stable foundation, an ongoing financial commitment and often the perception of a way to build wealth.

The mortgage market, first and foremost, has to be agile enough to adapt to the changing needs of the consumers it serves.

This is a hugely important market with myriad products and players – and one that occupies a central space in the lives of millions of consumers up and down the country.

Given its vital role in people’s everyday lives, the mortgage market, first and foremost, has to be agile enough to adapt to the changing needs of the consumers it serves.

From a regulatory perspective, that means there’s a lot to think about.

Today I’d like to talk about how we as regulators make sense of this market – our assessment of its risks and opportunities, and our long-term view of the sector.

Our vision for the mortgage market

The first thing to say is that this is a huge market, worth at least £1 trillion. And it dominates lending activities in the retail space – making up 88% of major banks’ lending balances.

Given its central position – both in consumers’ financial lives and the wider industry – it’s crucial that we understand the mortgage market in the round; from market forces and structure, to consumer behaviour and the impact of new entrants.

So in December 2016 we embarked on our Mortgage Market Study, a detailed, in-depth analysis of the market on a scale that had not been done before. In May 2018 we published our interim findings.

The purpose of our market studies is to consider how markets are working in the round. That means not just punishing rule breaches where they occur or driving up standards in specific areas, but rather looking across the whole landscape and seeing where things can be better.

The initial findings for the Mortgage Market Study showed a market largely working well, but one that could be improved.

On the positive side of the ledger we found a market where consumers are, on the whole, engaged; where there is an abundance of products; and where competition seems to be working well.

But there are areas that require work. While many customers are active and will switch to a new mortgage after the introductory offer has expired, about a quarter don’t switch within 6 months of moving on to a reversion rate, even though many could get a better deal if they did.

There’s more to do to ensure consumers can easily see which mortgages they qualify for. We found that around 30% of consumers could have found a cheaper mortgage with the same key features, and saved around £550 a year in the process.

So we put forward a package of remedies designed to tackle these challenges. We will publish the final market study report in the first quarter of the New Year.

Ultimately, our vision for this market is very simple. It is one in which:

  • borrowers can access suitable, good value products that meet their needs
  • competition empowers consumers to make effective choices at every stage of the mortgage lifecycle, and
  • firms operate with a culture of treating customers fairly

I’d like to take a few minutes to focus on this last point in particular.

Fairness and mortgage prisoners

As has often been observed, few of us are the super-consumers economists would like us to be. We can be illogical, impetuous and prone to decision-making on the basis of emotion, rather than a rational calculation of the optimal outcome.

We also sometimes fail to act when we might be better off if we did. There are lots of reasons why this could happen – we might forget, we might be going through a difficult period and have our attention diverted or we might experience other constraints that make action impossible. We may be simply time poor.

Whatever the reason, the result is the same: some consumers end up paying more when their introductory rates end and they fail to switch on to a better rate.

We are dealing with this sort of issue across a range of markets. That’s why last week we published a Discussion Paper which sets out our approach to considering the fairness of pricing in general. We are keen to discuss this work with a broad range of stakeholders and we will be holding roundtable events in January.

We are also working closely with the CMA on its response to the Citizens’ Advice super-complaint about this type of pricing across mobile, broadband, home insurance, mortgages and savings.

One important aspect of fairness relates to those customers who are simply unable to switch, even though they would benefit from doing so. This is the case for those often-called mortgage prisoners – homeowners who took out mortgages before lending practices and regulation changed after the financial crisis.

This is an area where UK Finance, along with the Building Societies Association and the Intermediary Mortgage Lenders Association, and many of you in the room today, have already shown a commitment to helping consumers.

The voluntary arrangement agreed earlier this year allows customers of active lenders to switch if they meet standard criteria. We believe this is an important step forward. But the devil is in the detail. We are keen to see what impact this agreement has, and to see all lenders able to participate doing so. There is a potential group of at least 10,000 customers this may help.

The question of customers of inactive or unregulated lenders is a harder nut to crack. We have identified about 20,000 customers in the closed books of authorised lenders, and a further 120,000 customers whose mortgages are held by firms that are not authorised, who may be able to benefit from switching.

We have put the challenge to industry to help these consumers and are leading an industry working group to deliver on that as a matter of urgency. This is a complex issue; one that will require creativity from us and a coordinated effort from you. But the objective is clear – to see if, between us, we can help these customers to benefit from being able to switch to another lender.

From our side, we are challenging ourselves to look at improving our regulation so it isn’t a barrier to customers switching. Affordability is integral to our responsible lending rules. And it would not help anyone to switch to a mortgage they cannot afford. But we are open to considering whether we can provide additional flexibility in a way that is in line with our obligations. It cannot make sense to deny a cheaper deal to someone who has maintained a good record with higher payments.

It cannot make sense to deny a cheaper deal to someone who has maintained a good record with higher payments.

That will only be part of the picture, however. We need to see a willingness from industry to offer re-mortgaging opportunities to those who currently don’t seem to have them.

That’s not to say that every trapped borrower will be eligible. For some their specific circumstances will mean that no lender is likely to consider that a new mortgage is an appropriate risk. But it’s clear this isn’t the case for all those who find themselves trapped. So we expect firms to engage with this work as we move forward, and to consider the opportunities to take on these customers.

We have the answer for authorised firms. I want to see an answer in the unauthorised space. If need be we will also discuss with government whether a change in our regulatory perimeter or any other government support is needed to protect those customers where mortgages are transferred to the unregulated sector. It simply isn’t an acceptable argument to hide behind the intricacies of our regulatory perimeter when real families are involved.

Later life lending and the long-term health of the market

When I bought my first house 20 plus years ago, I didn’t expect I’d be talking about it in a room like this all these years later.

But the reality is that these purchases can define the course of your life. Mortgages last a long time – and judgements consumers made 10, 20, 30 years ago will have a lasting impact well beyond their initial decision to apply for that particular product.

When we consider the context of an ageing population – and the particular challenges lending to older borrowers poses – this becomes especially pertinent.

Recent trends tell this story eloquently.

Consider lifetime mortgages.

Following a relatively flat period, we started to see sales of these products really take off in 2016. FCA data shows sales growing both in number and value, and as a proportion of total mortgage sales. In fact, over the last 5 years sales have nearly doubled; in the first half of this year alone we’ve registered nearly 20,000 sales – more or less the same as the total figure for 2013.

While these sales have, and continue to be, concentrated around older borrowers (aged about 70), we’re also seeing a gradual upwards trend in the younger 56 to 60 group, who now represent 7% of all lifetime mortgage sales.

While numbers are still small (around 2 or 3 thousand a year), this pattern warrants our early attention.

After all, there’s an obvious reason why lifetime mortgages are better suited to older borrowers.

As everyone in this room will be aware, the compound interest charged on equity release mortgages means debt will get bigger and bigger each year, eating away at equity. The rule of thumb is that debt will roughly double every 14 years based on current interest rates – so if a consumer has borrowed £50,000, they will end up paying £100,000. The risks, therefore, increase when a consumer takes out such a mortgage at a younger age.

The result may be very little money left to pay for care or to pass on to children – or even the loss of equity completely.

We must be especially alive to this as the range of equity release products on the market is on the rise.

As of August this year, there are 139 product options available – compared to 58 in 2016 and only 24 in 2007. This is mirrored in the proliferation of advertising we’re seeing. A note put through my door recently promised 'help if you are 55 and over' and attempted to woo with offers of a 'free initial consultation' and 'nothing to pay until completion'.

As a regulator, we are squarely behind the development of innovative products that meet the changing needs of consumers. We introduced new rules this year to allow for greater consumer access to retirement interest-only mortgages (RIO), for example. And as more people live longer lives, it will become ever more important that the market evolves to accommodate the particular requirements of an older population.

But to ensure that innovation lives up to its promise – and doesn’t fall into the trap of unintended consequences – we are looking to firms to use their common sense when lending, and make sure they’re matching the right products to the right consumers.

Past experience shows that when lenders compete on loosening their criteria, it does not end well – for consumers or firms.

We are looking to firms to use their common sense when lending, and make sure they’re matching the right products to the right consumers.

When it comes to later life lending, the assessment firms make about a borrower’s ability to afford repayments over the long term could have a dramatic impact years later on their life.

The peaks in the maturity of interest-only mortgages we’re seeing now are a reminder of that.

Nearly 1 in 5 existing mortgages are on an interest-only basis. That’s 1.67 million interest-only mortgages, many of them made before 2008.

There are several peaks in the maturity of these mortgages. The first, which we’re seeing now, is likely to have fewer and more modest shortfalls, as these borrowers approach retirement with higher incomes, assets and more equity in their properties.

The next 2 peaks however, in 2027/2028 and 2032, pose a greater risk of shortfalls. Which means they’re at greater risk of losing their homes. Among this cohort are less affluent individuals, who borrowed higher income multiples and have lower levels of equity.

It’s vital that these borrowers speak to their lenders early to give them more options about the steps they can take. And it’s crucial that lenders engage properly when they do. We’ve been pleased to see lenders making positive efforts in this regard.

But well before these conversations are necessary, we’re looking to you as lenders to make a rational judgement about which product is suitable for which consumer in the first place.

The ball is in your court.


Mortgages are the cornerstone of retail banking. Looking forward, our study of the market shows that many parts of the market are working well. We want this to be a profitable industry that serves consumers' changing needs. But we need your help to do that.

It is worth remembering that many people carry their mortgages with them over significant periods of their life. As my tangerine and avocado-coloured first home shows, these are transactions that are not quickly forgotten.

This gives huge potential for the actions of lenders to have a lasting impact. When an injustice is felt, its effects are likely to linger, and can inform a person’s view of a company – or a whole sector – for decades to come.

This is not only an issue of fairness, but of the efficiency of the market.

For markets to move forward and adapt requires the highest level of trust.

After all, even if the daily machinations of the financial sector don’t interest you, what you’re paying for your mortgage and how you’re treated by your lender probably does. And if you think you’re getting a raw deal, that feeling of injustice is likely to persist.

There’s no great mystery to how this trust is gained. The secret is a time-honoured principle of banking sometimes too quickly forgotten – the long-term, consistent, fair treatment of customers.

What we have found is that many parts of the market do this well. But there are challenges. Mortgage prisoners is one that casts a shadow. The sensible use of long-term and lifetime lending is another.

With thought and care these are issues that can be addressed together for the long-term good of both the sector and the consumers who rely on it.