Switching principles: call for evidence

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1 Switching principles: call for evidence Response by the Council of Mortgage Lenders to the Department for Business, Innovation and Skills consultation paper Introduction 1. The CML is the representative trade body for the residential mortgage lender industry that includes banks, building societies and specialist lenders. Our 134 members currently hold around 95% of the assets of the UK mortgage market. In addition to lending for home-ownership, the CML members also lend to support the social housing and private rental markets. 2. We welcome the opportunity to respond to the Department for Business, Innovation and Skills (BIS) consultation on switching principles. Our response considers the questions posed with regard to the mortgage market. 3. Our response addresses the call for evidence s specific questions after some general comments. General comments 4. We are pleased to see BIS recognise that customer engagement in switching to another provider in the mortgage market is already high. Customers know that they can get mortgage deals that suit their needs by switching and there are a wide variety of providers and products in the market. 5. Our statistics reflect this. For example in the first nine months of 2015, around 250,000 mortgage customers moved from one mortgage provider to another. This was around 10% higher than the comparable number in 2014 and in Looking ahead, we expect remortgaging to another lender to increase in the coming months if and when the Bank of England raises its base interest rate. Indeed this summer saw the highest level of remortgaging activity in years, which was likely due in part to the Bank of England s predictions regarding base rates around that time. 7. We are concerned the government is applying these markets to markets that are very different to each other. Some of these markets are also subject to detailed regulatory regimes and competition remits that mean there is limited need for the extension of switching principles to those markets. 8. Around two-thirds of mortgage sales are through intermediaries. In addition to giving consumers access to a greater range of providers and potentially a greater range of products than if they went to a single lender, intermediaries also have a strong incentive to contact customers on or around the end of their mortgage deal to encourage them to find a new mortgage deal. We point out that this makes mortgages very different to the other markets referred to in this call for evidence and we would welcome the government s reviewing the role of intermediation for switching in such markets rather than combining principles for intermediated markets and those that are not intermediated. 9. Mortgage lenders are already subject to the FCA s regulatory requirements. This includes the regulator s competition remit, which we consider is already a powerful incentive for firms to help consumers switch providers. We note also that the FCA is calling for inputs to a review of competition in the mortgage sector. Given the highly specialised nature of this call for inputs, we consider the government should wait first for this to report before looking to apply general principles to a market that is already well regulated. Q1. Do you think switching costs or contract terms act as a deterrent to switching? 10. We do not believe switching costs are a deterrent to changing mortgage provider. Our statistics above show there is strong growth in this market and that there is not even more is partly due to the stability of base interest rates. address North West Wing Bush House Aldwych London WC2B 4PJ telephone fax website

2 Q2. In your sector, what are the key factors that contribute to switching costs and prevent free switching? Please provide information (please specify sector) 11. Lenders use a variety of markets including both retail and wholesale, to secure funding for UK mortgage books. These funding markets offer a diversified pool of funding for lenders but each has specific characteristics e.g. currency, term/maturity and calculation of interest (fixed or floating). Lenders will therefore need to apply a variety of hedging strategies to enable these diversified sources of funding to match the mortgage products offered. Implementing hedging strategies (and unwinding hedging strategies when borrowers switch lenders/products) entails costs to lenders. 12. In addition, some lenders may be excluded from used certain funding markets. For example, non-bank lenders cannot raise funding via the retail deposit market. As a result, their cost of funding may be more expensive than other lenders and the relative lack of flexibility these lenders have in their funding mix may mean that frictional costs to raise funding and implement (or unwind) hedging strategies is higher than other lenders. Q3. What would need to happen to remove these factors and implement free switching? Please provide information (please specify sector) 13. The structural mechanics of the funding markets reflect the operation of large and in some cases international markets, which are impossible for governments to influence. The procedures to become a deposit taker reflects the current regulatory architecture designed to ensure the financial stability of the UK financial sector. 14. There is already strong competition among firms for remortgage business. We highlight that mortgage deals are currently very low: Moneyfacts reported in October 2015 that the average twoyear fixed price mortgage deal was around 2.7%, a considerable fall on the same period in This suggests strong competition. 15. We also note robust competition among firms for customers using other means bases. For example a number of firms offer customers remortgaging to them free legal fees and other incentives, including cashback. Q4. Do you think the length of time it takes to switch acts as a deterrent to switching? 16. No. Q5. In your view, what factors might slow the speed of the process and/or prevent the switch taking place on an agreed date? Please provide information (please specify sector) 17. We do not believe there are any factors slowing the process of switching mortgage provider. The fact that money needs to be repaid to one firm and drawn down from another means remortgaging has to happen on the same day. Q6. What would need to happen to remove these factors and implement quicker switching on an agreed date? Please provide information (please specify sector) 18. Given our answer to the previous question, we do not believe any further measures are needed here. Q7. Do you think consumers would be more likely to switch if they only had to deal with the gaining provider (i.e. where the new provider takes responsibility for organising all steps in the switch)? 19. We consider that the motivations for switching mortgage provider, such as borrowing more money or getting a cheaper rate, are such that these will outweigh any perceived inertia on the customer s part. Mortgage payments can represent a considerable proportion of a customer s expenditure so there are strong incentives to minimise those payments where possible. 20. It is also worth noting that in the mortgage market customers are able to choose to deal with a single party the mortgage intermediary. There may be costs to the customer for their doing so but intermediaries may not charge fees where it has an existing relationship the customer.

3 Q8. In your view what factors might prevent the gaining provider taking responsibility for organising all steps in the switch, or force the consumer to engage with their existing provider to arrange the switch? Please provide information (please specify sector) 21. We do not believe there are any issues in the mortgage sector preventing this. Q9. What would need to happen to remove these factors and implement gaining-provider led switching? Please provide information (please specify sector) 22. Given our answer to the previous question, we do not believe any further measures are needed here. Q10. Do you think consumers are easily able to work out how much they are using each month (e.g. gas units, data, minutes) and use this information to manage their accounts or make valid comparisons of deals? 23. Because mortgage payments are usually regular payments towards the repayment of a credit plus interest, we consider customers can work out how much they are paying towards their mortgage. Instalments are usually monthly so a customer can use their bank or mortgage statement to compare what their repayments would look like if they changed provider. 24. Many firms also provide online mortgage accounts that, among other things, allow the customer to see his or her outstanding balance. This is a major piece of information that is required to support the switching process. The customer may also be able to see the remaining mortgage term, which will also provide a helpful comparison: a shorter remaining term with a new provider may suggest the mortgage will be repaid more quickly. 25. Additionally regulatory requirements the monthly instalments and total amount payable, which are regulatory requirements, reinforce comparability. The customer will be able to measure their existing payments against those of another firm using the Key Facts Illustration or, from March 2019, the European Standardised Information Sheet. Q11. What would need to happen to make it easier for consumers to better understand their usage/patterns and use this information to manage their accounts or to make valid comparisons of deals? Please provide information (please specify sector) 26. We reiterate that the closest thing a mortgage customer has to a usage pattern is his or her repayment schedule, the outstanding balance and the remaining term. This information allows customers to take their information to a prospective new lender and determine whether their repayments would be higher, lower, faster or slower according to the new lender s mortgage terms. 27. There are regulatory requirements regarding how mortgage products are shown to customers. The annual percentage rate or, from 2016 following introduction of the Mortgage Credit Directive, the annual percentage rate of charge, are intended to allow customers to compare mortgages between providers using a simple metric. We do not believe this is the most meaningful way to show the details of the mortgage to consumers; consumers will have various requirements, not all of which are served by these measures. 28. However, they are regulatory requirements for firms and firms comply with such requirements. We believe consumer organisations like the Money Advice Service can do more to help people understand what they are for and how to use them. Otherwise consumers attention when shopping for mortgages will continue to be drawn to the lowest figures rather than understanding the interest rate is just one of the various factors they should consider. The mortgage industry would be prepared to work with these organisations on such a project. Q12. In your view, can consumers be confident that comparisons sites will give them a good chance of identifying the best deal for them? Please provide more information (please specify sector) 29. Our view is that comparison sites provide a helpful introduction to the mortgage market but that the information they provide to consumers does not necessarily help them understand or weigh the various factors involved in a mortgage decision. We believe price comparison websites present mortgages with an emphasis on the initial rate rather than being encouraged to consider the rate, any fees, the trade-offs between fixed and variable rates and so on.

4 30. The prevalence of advice in the mortgage industry means it is highly likely that by the time a customer draws down their mortgage they have had any assumptions derived from sources like comparison websites challenged. This means that despite the potential effects of comparison sites it is likely that customers will end up with the product that meets their needs. 31. The role of comparison websites may be more impactful on those who buy mortgages using an execution-only sale. These customers will not have their assumptions challenged in the same way as those in advised sales. How information is presented on price comparison websites is therefore especially important here. 32. We will be working with Which? over the course of 2016 to consider what, if any, improvements the industry can make to its product tables. This work may look at ways to standardise the provision of information on financial costs in tables for example. It may also use the lessons from the FCA s smarter consumer communications discussion paper to help consumers understand the range of factors they need to consider when looking at a mortgage. This work on the industry s product tables may be relevant to comparison website providers and we will discuss with them how they may adopt the changes. 33. We will keep government apprised of how this work progresses. It may be that government would like to consider how to improve the presentation of mortgage information to comparison site users. Q13. Do you consider that comparison sites make sufficiently clear where they have received funding from featured suppliers? 34. We have no information on which to base a response to this question. Q14. What would need to happen for consumers to be confident comparison sites will help them identify the best deal for them, and / or make clear when they receive funding from featured suppliers? Please provide information (please specify sector) 35. As above, we have no information on which to base a response to this question. However, we expect to arrive at a view following our abovementioned work for We will share this with government when it is available. Q15. Do you consider that there is an effective redress avenue available when a problem arises with the switching process? 36. We believe there is already sufficient redress in the mortgage industry. Q16. In your view what would an effective redress system look like and how could it be implemented? Please provide information (please specify sector) 37. We have no comments on this given our above response. Q17. Do you have any other comments you would like to make on the switching process or the proposed switching principles? 38. We reiterate that we remain to be convinced that switching principles across regulated markets are necessary. Speaking only for the mortgage market, we believe there is already sufficient switching in this market; we also expect it to rise with eventual base rate rises. 39. Recent regulatory changes in the mortgage market that take effect from March 2016 will make switching providers harder than it already is. These changes emanate from the Mortgage Credit Directive and specifically concern foreign currency loans and transfers to another lender. Both of these have the potential to make switching harder for consumers and we would welcome the government s monitoring their effects and relaying the impacts to the European Commission for its review of the Mortgage Credit Directive. 40. Looking at the principles themselves, we would welcome its revision to refer to consumers being aware of any restrictions at the start of the contract. There are already adequate provisions regarding restrictions and charges. For example these would fall under general consumer contract regulations in the Unfair Consumer Contract Terms Regulations and the Consumer Rights Act. In the mortgage market the FCA also specifies the bases regarding certain fees and charges. We do not consider an additional principle can add much beyond these laws.

5 41. Regarding principle four, we do not believe there is a need for customers to be able to access their transaction data. We reiterate that the data required for customers to compare mortgages is already readily available in the form of their monthly payments and their outstanding balance. We note the industry has begun discussions about improved data sharing in the longer term and we will meet government to update it on this work soon. 42. Regarding principle five, we welcome this principle. However, we recommend its amendment to, Sites and tools providing comparisons to consumers that receive payments from suppliers should make clear where such payments affect the presentation of results. This will put beyond doubt what the principle is referring to. 43. Should these principles be adopted, we believe the government should ensure the principles are properly communicated to both providers and to consumers. We would welcome the government s making clear both a process and a timetable for this. Contact 44. We have prepared this response with our members. Please send comments or questions to June Deasy (june.deasy@cml.org.uk).