How the FCA’s mortgage proposals could undermine consumer protection

By now, you will hopefully have read the letter from the chief executive of the Financial Conduct Authority (FCA), Nikhil Rathi, to Emma Reynolds, economic treasury to the Treasury, and if you have not then I would suggest you take a look at the press release here, which includes a link to the letter in question.

Released on a Friday afternoon – which seems somewhat odd in itself but perhaps we can let that slide – the letter is FCA’s next response to the Government’s own call for regulators to look at ways their rules might be inhibiting economic activity, and therefore, growth in the UK.

Much has been made, following this call, for the FCA to potentially reconsider the stress-testing rules it holds mortgage lenders accountable to, with a particular focus on affordability, especially when it comes to the maximum amount of business it allows lenders to write at over 4.5 times income, currently 15%.

This letter outlines how the FCA will soon be announcing a Call for Evidence on ‘current and alternative approaches to stress testing’ but the fact this letter ‘is reminding lenders of flexibility in its existing rules, which it says can help more people access a mortgage, to me suggests the regulator is not overly keen to offer lenders more flexibility.

Kicking its heels in on this aspect may however be slightly out of its hands if the Government is keen for this to happen, but we await to see what will come out of that ‘Call to Evidence’.

My own view is it is likely there will be an easing of the current stress-testing rules, although you might well argue that lenders should be able to make up their own minds in terms of what they lend, and how they lend.

What however is somewhat buried in the letter is a proposed May consultation that the FCA says it will be launching in three specific areas in order to make it easier for consumers to:

Now clearly all three areas will impact on the adviser-borrower process, but that last one appears to be the most nuts in terms of a regulator proposing that it makes it ‘easier’ for consumers not to have advice.

In other words, it wants to make it easier for all types of borrowers to opt out of a regulated advice process, to eschew the protections that come with that, and to then – and I ask this as a question – to go and discuss this with a non-regulated entity? Who will do what?

Of course, I’m getting slightly ahead of myself here in that the consultation hasn’t happened yet, but we have obviously seen the FCA try to push a non-advised agenda before, seemingly believing this is somehow good for consumer choice.

The reality is, as we know, somewhat different. Unregulated ‘advice’ means no protections at all for the consumer, no recourse to FOS or the FSCS, and you have to wonder who gains from this, and indeed, who would be happy for this to be case.

Take lenders, for example, are they going to be comfortable with unregulated/unprofessional sales of their products, when they have been under increased Consumer Duty-pressure to understand way more about who is selling their mortgages? Indeed, this consultation seems totally at odds with this.

Also, look at the other two areas to be consulted on – remortgaging with a new lender and reducing overall cost through term reductions.

Two key areas that almost every consumer would want to discuss with an adviser anyway.

If it is made easier for them to do this outside a regulated advice process, or any aspect of their mortgage wants and needs, is the FCA not raising the risk of there being consumer detriment?

This, of course, all flies in the face of the direction of travel with consumers engagement with the mortgage market.

While the FCA appear to want to make it easier for consumers not to take regulated advice, consumers themselves are much less inclined to want to do this.

We know that 90% of all mortgages are sold through the intermediated channel. That’s not because consumers are being forced into the hands of advisers; it’s because they want professional advice for all the obvious reasons.

The way this letter reads, it appears the FCA may think this is somehow a bad thing, or that consumers don’t have a strong enough choice of unregulated advice options.

The truth is they absolutely do, and the vast majority reject them, because they want the quality, the professionalism, the certainty, the protections that come with regulated advice, particularly when it’s such a huge financial decision as their next mortgage.

I’m afraid if the FCA think there are benefits to unregulated ‘advice’ for consumers, they are sorely mistaken.

Indeed, the whole notion of ‘unregulated advice’ is a huge misnomer that I am perplexed the regulator continues to pursue in this manner.

Consumer Duty talks a lot about ‘positive consumer outcomes’ – it would take a lot of argument on the FCA’s part to ever convince me that making it easier for consumers not to have advice on their mortgage is a sound way to deliver this.

If anything, it feels completely at odds and I suspect many people’s reaction to May’s consultation on this will agree.