The FCA – Striking the right balance

Posted: November 14th, 2012

Martin Wheatley, Managing Director of the Conduct Business Unit at the FSA, addressing delegates at the CML conference yesterday that larger lenders who had previously built a “one-size-fits-all” approach would have to change their ways. He said: “I think this is a good thing… lending should be about building a relationship with your customers, not just performing a transaction.”

Wheatley, Chief Executive-designate of the new Financial Conduct Authority (FCA), said that the drive to promote more effective competition did not necessarily mean having more firms in the market. He added: “In the mortgage market at its peak there was lots of competition, but can we actually say that it was effective and good for the consumer? In fact, it is probably right to say there were too many lenders, too many products and that standards were dragged down.”

Wheatley emphasised that financial services is still in a difficult phase. He said that it is ‘time to be different” at a stage when many believe that mortgage lenders have lost the connection with and focus upon borrowers.

Interest-only products are a hot topic today as some lenders have appropriately sold this product but others have not, the FSA will still allow the sale of this product if the borrower can demonstrate a stringent repayment ability, but a borrower waiting for house prices to rise is NOT a good enough reason to be sold this product.

Wheatley added that they believe that there is a place for interest-only mortgages in the market, “although we see them as more of a niche product in the future”.

The recent publication of the Mortgage Market Review was intended to ‘hard-wire’ common-sense into the mortgage market and affordability is a basic principal of this. Lenders will now have more flexibility on the kinds of evidence they accept to demonstrate a borrowers affordability.

MMR for some will mean significant change – a one-size-fits-all lending approach won’t work anymore. There will be a bigger focus upon lenders fostering working relationships with borrowers as opposed to just a monetary transaction.

There is a balance to strike between customer fairness, customer choice, a customers’ ability to take risks and also the protection of these borrowers. A financial service that works well will carefully accommodate these factors.

The FCA needs to be better at spotting risks for consumers and the biggest difference from the current regulator will be its proactive approach to regulation. Instead of just collecting data from lenders, it will actively be making speculative enquiries so that it can outline regulatory framework before consumers suffer.

The FCA doesn’t intend to remove all risk from financial services as this is an impossible task. It will instead aim to provide a wider scope of regulation by engaging fully with lenders – regulation will be collaborative with continual dialogue. Firms will be assessed regularly to identify themes/potential issues across the market.

Consumers act differently when obtaining a mortgage – it is a one off purchase and not something they repeatedly do. Lenders must therefore ensure consumers are sufficiently educated about the products out there; product information needs to be more transparent.

Recent FSA enforcement cases have demonstrated that product intervention rules are already being implemented to protect consumers before they are sold an unsuitable product. The regulator will restrict the use of certain product (abuse of self-certification products sparked this) and will ban others (for the selling of a UCIS to consumers who don’t have a large, well-diversified portfolio).

Stimulating competition in the market will also be key. However, this doesn’t necessarily mean more lenders but competition with better quality products. Wheatley said: “we need to remove barriers of entry for new lenders with sound and thorough competition analysis”.

The future FCA in April 2013 will constantly develop policy initiatives to better protect consumers and it will also help lenders to prepare for MMR enforcement in 2014.

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