UK: Call For Inputs On Competition In The Mortgage Sector Casts The Net Wide

Last Updated: 30 December 2015
Article by Adrian Magnus and Richard Jenkinson

The FCA has issued a call for inputs (CfI) on competition in the mortgage sector. The scope of the CfI is very wide and goes beyond the selling of mortgages to consumers, encompassing all lending secured by property, as well as the effect that access to wholesale funding has on lenders' abilities to operate. The information which the FCA receives from the CfI will be used to shape its market study into the mortgage market, which it intends to launch during the first quarter of 2016.

The questions being asked by the CfI are extremely broad and are grouped into three categories:

  • Demand side topics: which focus on how customers go through the process of deciding to get a mortgage, choose a provider and a product;
  • Supply side topics: which focus on lenders' strategies and their relationship with competitors; and
  • Topics regarding market features: which mainly focus on regulation, barriers to entry and price comparison websites.

The FCA gives little away about its own initial views of the mortgage market. It should have a wealth of information to draw on by virtue of being the financial conduct sector regulator as well as a concurrent competition authority. Its last substantive piece of research in the market, on the quality and suitability of advice provided to customers following the implementation in 2014 of new rules resulting from 2012's Mortgage Market Review, was only published in July 2015.

As a concurrent competition regulator as well as a financial sector regulator, the FCA has the power to launch market studies either using its powers under FSMA 2000 or the Enterprise Act 2002. The Enterprise Act powers are part of the package of concurrent competition authority powers given to the FCA in April 2015. In accordance with its powers and procedures guidance on market studies and market investigation references, the FCA has kept open the question which kind of market study it is going to launch. One key advantage of an Enterprise Act investigation is that the FCA's information gathering powers are not limited to regulated entities, but they have a 12 month statutory deadline, unlike FSMA market studies. The FCA has also previously noted that it can switch from one type of market study to the other during the process, should the need present itself.

Even though the topic under scrutiny is competition in the mortgage sector, this is no guarantee that the study will be undertaken using the FCA's Enterprise Act powers. In November 2015, the FCA announced that its market study into whether competition is working effectively in the asset management sector would be undertaking using its FSMA powers. There has been little explanation as to why FSMA powers were chosen over the Enterprise Act powers, with the FCA merely noting that responses from non-regulated entities will be voluntary and not mandatory. Aside from information gathering powers and statutory deadlines, there is little difference between the two processes: the same personnel will carry out the market study (from the competition division) and the FCA's own guidance notes that the technical details of the study will not be affected.

Whatever set of powers the FCA uses for its market study, if its conclusion is that competition is not working well in any part of the mortgage sector, it is able to make a Market Investigation Reference (MIR) to the Competition and Markets Authority (CMA), the UK's central all-sectors competition authority (which replaced the OFT and Competition Commission in 2014), requesting that it launch a market investigation. This is, however, somewhat unlikely. The FCA already has extensive powers in relation to the financial services sector and can make substantial changes in the market without resorting to the CMA's own market investigation remedies powers. Among other things, the FCA has wide supervisory and rule-making powers, including the power to prohibit an existing product or service where it identifies a risk of consumer detriment related to that product or practices associated with it.

Another lesson to be drawn from the asset management market study is the way in which a CfI is used as a filter, the responses to which may influence the areas which the FCA will focus on in its subsequent market study. The CfI which gave rise to the asset management market study asked questions about the wholesale banking sector, focusing primarily on competition in wholesale securities and investment markets, and related activities such as corporate banking. The feedback given during the CfI suggested that there were a number of areas within the asset management value chain where competition might not be working effectively.

Since 2014, the CMA has been carrying out a market investigation into the markets for personal current accounts and SME banking. The CMA's provisional findings in this study, published in October 2015, concentrated on the low level of customer switching in both markets. The remedies proposed primarily relate to making the customer switching process easier. Among the proposals is a requirement for banks to improve the Midata account information system in order to provide customers with more information on their account usage and what they could save with a different current account and a new statutory price comparison website for SMEs to use in order to compare providers. The CMA has stated its intention to publish its final report on this market study in April 2016, shortly before the statutory deadline.

The CMA's retail and SME banking investigation did not provisionally conclude that the market was too concentrated, which had been predicted in some quarters. A nightmare scenario for the big retail banks was that the market study would order the breakup of one or more of the big high street banks in order to promote competition. This did not happen, and while a conclusion that the market is too concentrated and may need to be broken up cannot be completely ruled out in the upcoming mortgage market study, it does suggest that such a conclusion is unlikely in the FCA's mortgage market study.

The deadline for responding to the FCA's CfI is 18 December 2015.

This article was originally published by Complinet.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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