Journey to the FCA: To make financial markets work well so consumers get a fair deal
Response by the Council of Mortgage Lenders
Introduction
1.
The Council of Mortgage Lenders (CML) welcomes the opportunity to respond to FSA
consultation paper ‘The Journey to the FCA’.
2.
The CML is the independent, representative voice for the first charge, residential mortgage
lending industry in the UK. Our members hold around 95% of outstanding mortgage assets, and
include banks, building societies and specialist lenders operating in various housing finance markets.
Our members have funded housing activities across all tenures – home ownership, intermediate
tenures, private rental through buy-to-let mortgages, and social housing.
3.
We appreciate the scale of the FCA’s task in producing a new consumer protection regime for
financial services, a market of which mortgages is a small but very important part. This broad
overview of its regulatory philosophy is welcomed; but we expect that there will be more iterations of
detail to come and it is only then that we will be able to assess how the mortgage market will be
affected. In particular, we will be anxious to avoid unintended consequences.
4.
We were pleased to note a new emphasis on competition, as we believe that good regulatory
outcomes often flow from the operation of the competitive market.
Competition and innovation vs earlier intervention and bolder supervision
5.
Our concerns are as much with how the document will come to be interpreted as with its
contents.
6.
There is little discussion of the predictability and certainty of the FCA’s regulatory approach in
the document. In particular, it is not clear how the FCA intends to balance maintaining and promoting
innovation and competition in the market, with its policy of earlier intervention and bolder supervision.
We believe that this balancing act is achievable and desirable but its parameters should be spelled
out up front so that businesses can plan and act upon it.
7.
So we continue to be concerned about the level of regulatory certainty that will exist in the
future, particularly given indications that less regulatory guidance is likely to be published going
forward.
8.
For mortgage lenders in particular, the structural regulatory changes come at a time of
significant change as firms move forward in implementing the new MMR rules. While we understand
the regulator’s concerns regarding the publication of guidance and the potential provision of ‘safe
harbour’ for firms, we are extremely concerned that, without clear guidance and reasonable
supervisory certainty, lenders will be hesitant to develop new mortgage products, and may also be too
conservative in their current lending.
9.
There are some areas within the new MMR rules which are less prescriptive than earlier
drafts (for example, lending into retirement and interest-only mortgages). We have welcomed the
added flexibility which these changes in the Final Rules have brought; but lenders remain concerned
that there is a lack of certainty about rule interpretation by supervisors. If this is coupled with less
formal regulatory guidance, lenders are likely to adopt a ‘wait and see’ approach. This could lead to
certain segments of the consumer population being under-served even if they can afford a mortgage.
We have already said that we will be studying the effects of new regulation on particular segments of
the market and would expect the regulator to modify its requirements if presented with compelling
evidence that some groups were effectively yet unintentionally being denied access to mortgages.
10.
Lenders also continue to be concerned about the use of supervisory hindsight both in the run
up to the implementation of MMR and post implementation. We welcome the FSA’s commitment to
supervise firms against the current MCOB rules until the formal move to the new MMR rules takes
place. We do, however, want some reassurance over the transition process from current MCOB rules
to the new rules as we approach the date of changeover, and how firms implementing new processes
and systems will be supervised during this time.
11.
We will continue to work with lenders to assess the impact of the FCA’s new supervisory
approach on lending, competitiveness and innovation.
Consumer protection – super complaints
12.
The document is very clear that the protection of consumers is at the heart of the FCA’s
objectives and that ‘The creation of the FCA is our opportunity to reset conduct standards for the
financial services industry’ [p7]. The introductory pages set the tone of the document and emphasise
the FCA’s intention to focus on the consumer at all times, even when promoting effective competition
in the market.
13.
We note the proposals to allow certain consumer organisations to make ‘super-complaints’
as introduced by the Financial Services Bill, and we welcome the additional clarity provided by the
Treasury regarding the designation of super complainants in the secondary legislation.
14.
We also note the draft guidance on super-complaints published by the FSA and welcome the
FSA’s confirmation that complaints that are, or appear to be, frivolous or vexatious will be rejected.
15.
In particular, we are concerned that it is not necessary for a complaint to demonstrate that
the interests of the consumers have actually been damaged. Despite the list provided in the guidance,
we would appreciate further clarity on how rigorously a super-complainant will be required to
demonstrate how or why they think consumers may suffer damage if the damage is not already
occurring, before their complaint will be taken up by the authorities.
Regulatory certainty
16.
We note the change from the current Arrow supervisory approach to the Firm Systematic
Framework (FSF). This represents a significant change in the way firms will be supervised. The
impact of the new approach will depend, in part, on the category that an individual firm is placed into.
Early confirmation of categorisation would useful for firms, particularly those firms who are part of a
wider group. It would also be helpful if the FSA were willing to provide some case-study examples of
how the FSF approach will work in practice.
17.
We also note that the FSF will allow for ‘greater use of s166 powers’ [p28]. Firms have
already seen an increase in the use of s166 powers and are concerned to know more about the
FCA’s intended use of s166 powers, both when they will be invoked and how they will be used in the
future regulatory environment. It would be helpful for these ground rules to be published.
Product intervention
18.
It is clear that product intervention and an increased focus on product governance will be key
tools of the FCA’s regulatory regime going forward.
19.
The FCA’s approach to product governance puts an increased onus on firms to ensure that
their products only reach the consumers that they were designed for. From the perspective of product
intervention, the FCA is clear that it will ‘intervene earlier’ [p13] and make temporary product
intervention rules were it deems necessary. We note that the FSA has published its consultation on
the temporary product intervention powers (CP 12-35) and we will be responding to this in due
course. It is clear from the draft policy statement that temporary product intervention rules will be
made without prior consultation: we are concerned about the potential unintended consequences that
may arise from these rules. We note that the FCA may review or amend the temporary rules to take
account of unintended consequences, but it is not clear how these consequences will be assessed
and we are concerned about the potential time-lag while due process relating to revisions is carried
out.
20.
We believe that regulatory interventions such as this need to be exercised in a predictable
manner and that the requirements should be clearly communicated to give firms as much certainty as
possible about their responsibilities. It is also crucial that FCA intervention, or indeed the threat of
intervention, does not stifle product innovation or create barriers to entry.
21.
It is also crucial that the FCA review the impact of its product intervention powers on the wider
market for lending.
FCA performance framework/measures
22.
The document sets out a potential performance framework [p58] for the FCA with a series of
possible measures of success/performance indicators across the FCAs three core objectives.
Accepting that isolating the impact of new regulatory structures, and measuring regulatory success, is
difficult, we are concerned that a number of the possible measures are subjective and/or based on
anecdotal evidence and (a) may not give a true picture of the impact of the FCA on the market or (b)
could lead to perverse regulatory incentives/impacts.
23.
We note in particular that some of the measures – for example ‘consumer confidence in
financial services, firms, products and services’ [p58] – will not be wholly determined by the activities
of the FCA and will be impacted/influenced by other market factors and policies. Poor ‘scores’ against
measures such as these could lead to an unnecessary escalation of regulatory action by the FCA.
24.
We are disappointed that the performance framework does not include reference to outcomes
for firms in the new regulatory environment. Firms, as well as consumers, will be “customers” of the
FCA. We believe that the experience of firms, particularly regarding the impact of the regulator on firm
confidence, the competitive environment and barriers to entry, will be crucial indicators of the FCA’s
success. This is particularly pertinent given the regulator’s objectives regarding competition in the
market.
Contact
25.
This response has been prepared by the CML in consultation with its members. If you have
any comments or queries on this response, please contact Lorena Esposito-Storey, Senior Policy
Adviser: [email protected].
December 2012