FCA: Brokers have a ‘hugely important’ role in mortgage advice

0:00Welcome to the latest Margin Notes videocast with me, Simini Kiriakou, editor of FT Advisor. Over the past few months, advisors, brokers and lenders will have had plenty of time to digest various proposals from the Financial Conduct Authority. The regulator has been undertaking a broad programme of work around mortgages, including a discussion paper on the future of the mortgage market in the UK. Now this is due to close on the 19th of September, so you still have time to respond. The paper seeks feedback on a range of themes, including challenges for first-time buyers and for those lending into later life, as well as potential ways to address these.

0:37Joining us today is David Geel. He's the Executive Director for Payments and Digital Finance at the FCA. He's here to discuss the themes of the paper and the regulators' broader mortgages work. Welcome, David. Thank you. Well, let's get straight into it. Thinking back to earlier this year when Nikhil Rathi said... that they really wanted to focus on improving the housing market and help support people to get the keys to their own home. What role do you think the FCA has to play in actually helping people in Britain achieve that ambition? Well, I think we have a very important and pivotal role to play.

1:11So we set the rules that lenders abide by in terms of deciding on their lending approach. And what we've seen is that those rules have been around since around 2014, but the market's developed a lot since then and we think there's quite a lot more that can be done to help people realise the dream of owning their own home. So that's what we've opened the discussion on. So you've got a discussion paper that's just coming out. Can you talk a little bit about that discussion paper? Yes absolutely. So what we're really doing is seeking to open the debate. We're very conscious that things have moved on.

1:45We see around 99 % of mortgages that were taken out since 2014 are actually being paid so actually lenders are lending responsibly. Against that we see quite a high proportion of people who are renting who want to own their own home so around 40 % I think just under 40 % of people are looking to buy but struggling to do so in some circumstances. We see particular groups as you mentioned so we see first-time buyers we see those with perhaps irregular incomes and the self-employed and people borrowing into later life so we're interested in driving innovation. Lending decisions will always be for lenders.

2:21We want it to be done responsibly but we think there's a lot more can be done to really help people. So that's the sort of thing we're looking at is can we do more around creating flexibility in affordability tests? Can we do more to encourage innovation in products and services? And can we think a bit more about the sort of information and support that people need to help them get on their way? Can you talk a little bit more specifically about those particular areas you've just mentioned where the FCA has highlighted the need for a little bit more flexibility in the regulation, especially for lenders and being able to meet the needs of all these people.

2:55Yes, of course. So we've already put out a statement that we've seen lenders respond to, reminding them that there is a bit more flexibility than some of them use in stress testing. So we want people to take mortgages that they can afford now, but also on a sustainable basis. So it's important that lenders consider not just today but the future but in a world where we see interest rates not moving that much or perhaps trending down or more options for people when they come to the end of their perhaps short-term fixed rate deal then actually there may be more options for lenders to use around that flexibility so we've seen them already react to that but then again we can think about different things so if you or i could afford a certain amount in rent well could we take that into account in affordability assessments and say if you can afford it there you can afford it here could we think about actually different types of products for people in different circumstances so we don't see too much by way of part and part products so part interest only part repayment for a period to help people get underway as I say I don't think we've got all the answers that's why we've opened a discussion paper to really get those ideas what we do need to recognise is that with additional flexibility comes additional risk.

4:10So the vast majority of mortgages are being paid. There is always a risk that with more flexibility, that increases more risk into that system. Some people may not be able to afford it. But we think the support is there for them in a way that it wasn't before. So again, what are the trade-offs that we need to consider in there and what's acceptable and what's not for society? And that also helps with one of your primary objectives, which is competition. You want to increase competition in the marketplace and give people more options, don't you? Yes, we want to encourage competition. We want to encourage innovation.

4:44In our strategy that we put out earlier this year, we talked about supporting growth, but also helping people to navigate their financial lives. And if there's more we can do to help people in that, then we want to play our part. Can we continue to talk a little bit about competition in the light of some of the things that the FCA has been saying around AI and perhaps sort of rooting the bulk of lending through particular AI platforms. Could you talk about how this sort of fits in in terms of choice and maybe competition, but also how it fits in with consumer duty? So I think the first thing I would say is that lending is not one size fits all.

5:20Sure. So AI is an important tool, but it's not everything and it won't be right for everyone. So we still think there is a hugely important role for advice, whether that's face-to-face, whether it's over the phone or whatever it is we think there's a hugely important role for mortgage brokers and advisors but actually for a lot of people we see ai developing as a tool and i think that can be used in different ways so it can be used firstly to actually help some people with their selection it can be it can help people in terms of learning it can help to identify customers who need more support so we've done some work around vulnerability for example in ai and it can also help with back office so actually reducing some of the cost by streamlining processes and enabling advisors and firms to spend more time with customers so if we can do that and we can harness AI to help people look across the market look at the options available to them and reduce cost I think that all helps competition.

6:15Yeah and that certainly will be very refreshing for advisors to hear because they're really keen on maintaining that level of independent advice and being able to give people really personalised, tailored recommendations when it comes to mortgages. I agree. So we've always said we think there is a role for advisors. So not everyone is the same. Some people are going to want more help than others. People, for example, first are setting out on their first mortgage, may need more support. People who have atypical circumstances or are looking to do something a little bit different, something for the first time.

6:49I think all these sort of people will want and need advice. And indeed, again, we expect firms to identify where customers may have characteristics of vulnerability and provide the support they need. And for some, that will be advice. And the FCA has also highlighted that there is a trend for people taking out mortgages, first time mortgages, much later on in life, in their late 40s, 50s and 60s. how do you sort of what sort of plans have you got in place to help people who are then taking out mortgages for the first time at a much later stage of their life well I think I think there are two aspects actually so firstly there's people taking out mortgages for the first time later in life secondly there may be people who are continuing three areas actually secondly people who continue lending into retirement and thirdly people who may have paid off their mortgage but then seeking to release equity.

7:42To your point, what we've seen over the last few years is the average age of the first time buyer go up to about the age of 34. I think the changes that we're looking at making, or certainly looking for ideas around in terms of things like affordability, if we can free that up, we can free lenders to help people a little bit more, then maybe people can get on the ladder earlier. And if we can increase their options to overpay, to shorten terms when they're able to do so, then again, maybe we can bring those terms down. Let's continue talking about affordability a bit, because some of the financial advisors who read FT Advisor have commented they're concerned that affordability criteria might be loosened or made more flexible at a time when wages are stagnant, inflation is still persistently high, and people's pockets are not quite as deep as perhaps they might have been back in 2014 or 2015 So I think this is a really important point.

8:39I go back to the fact that what we see is 99 % of mortgages currently being paid. So I think we've got a question then with the support that's available to people. Actually, are we stopping some people from getting on the housing ladder when they could do? And when I say we, I mean lenders, regulators and others in terms of the framework that we set. So I think it's important to take that step back and look at that. but anything that we do must be grounded in responsible lending. Yes, of course. And therefore, this isn't a free pass to say you can lend to just about anybody. We still expect lending to be responsible, and we have the consumer duty that we introduced that is focused very much on customer outcomes and looking for good outcomes.

9:21So I recognise the concern. It's something that we should be very alive to, and we have to accept that if you loosen requirements in some areas, then actually the level of risk may go up. But we have to also question, is the balance right? When we're seeing repossessions at an all-time low, we're seeing mortgages in payment at a very, very high rate, have we overcompensated, I think, as a society as a whole? We can set the conditions. Lending will always be the responsibility of the lender, and it will always be a risk appetite decision for them, a commercial decision for them. But what we want to do is make sure that they know what flexibility exists.

10:01Yeah, flexibility but not flippancy. I mean, I remember, I don't know if flippancy is a word, but I'm going to use it. I remember back in 2006, 2007, when I was sort of taking out my first mortgage, people could be offering sort of eight times, nine times your salary. And it just seems, you know, obviously with the benefit of hindsight, just before, ahead of the credit crisis, it seems ludicrous that anyone would be offering that much. But again, it's like coming back to what you're saying, you know, you want to be flexible, but without sort of removing those safeguards because they're really important.

10:35Right. That's one of your pillars is consumer protection. Right. Absolutely. And I think so we have tools that didn't exist back in 2008 when the real problems were there or indeed in 2014 when our latest rules came in. So we have the consumer duty. I would also stress that we have seen changes in firm behaviour. So firms have got a lot better at spotting the potential for people to get into difficulty and stepping in to do something about it while they can still help before it becomes a real problem. And where we see those options being used, then I think there is more opportunity to open the market, but do so in a way that is safe and responsible.

11:16So I think it feels the right time to look at it. Can we talk about that safety aspect as well? People have questioned, some of our readers have questioned, how safe are the safeguards when it comes to transparency around proprietary algorithms when making lending decisions? Can AI and algorithms really identify and protect vulnerable customers? Do we know enough about it yet? So we've seen some really good examples. So through some of the work we've done on vulnerability, for example, we've seen firms analysing in real time conversations with customers and using AI to say, actually, some of the things they're saying lead us to believe there's some elements of vulnerability here.

11:59maybe we should take a different approach to the information we're giving. Maybe they need advice. Maybe they need some trapdoors in the process. And similarly, we've seen that used after the event, so the firm can actually check and go back. And I think these are good, positive examples of using AI to help and to help people who may experience some vulnerability. With any lending decision, the lender is going to be responsible. It's not the machine that's responsible. So they do need to go into it with their eyes open. They need to test it properly. So we have our AI labs, our AI sandbox, and we're really willing to work with people to find tools that are effective and to make sure that they're robustly tested on the way in.

12:40And the onus on brokers as well when it comes to them using AI or robo tools? So brokers have used tools for a very long time in terms of search engines and various things that are available to them. The same would apply. actually if there's an advisor actually giving the advice and using a tool in the background, it's still the advisor who is responsible. So the lender is responsible, the lending advisor is responsible for the advice. That doesn't change through the use of AI. So it depends how it's used, where the responsibility lies. But we think it can be done responsibly. Going back to an earlier point, you talked about, we mentioned the sort of credit crisis in 2008 and a lot of the lessons we learned then.

13:22I'm thinking in terms of the mortgage prisoners, because many of them had taken on these what we would now call exorbitant loans and then saw the value of their properties fall and ended up in negative equity, many of them. There are still thousands of people stuck as mortgage prisoners. Do your proposals go any way to help them? Are there any things that can be done from lenders or even just advocates who can help? Well, firstly, I'd say it's a very difficult position to be in, and I absolutely sympathise with that. Our proposals don't directly address mortgage prisoners. We've done what we feel we can do in that space.

14:00So we have made it easy for lenders to actually look and say, if you can afford your payments here, you can afford your payments there in terms of potential for switching. But we don't feel there's actually more that we can do. So these proposals will not harm mortgage prisoners. They will not get in the way of anything. In some ways, they may help a bit by making it easier to transfer between lenders. but we've gone as far as we think we can go. It's still a commercial decision for lenders whether they want to lend to somebody, but we stand ready to work with government and others, including the industry, if there are other bright ideas to help people.

14:39Well, I hope there are lots of bright ideas, especially ones that come through in the discussion paper. So do I. Excellent. Well, David, we could sit here and talk so much about everything to do with the mortgage market, but I am aware that advisors need their time to fill in their responses. So please do engage with the regulator, respond to the consultation. Again, it closes on the 19th of September. So for now, though, thank you very much, David, for coming in and talking to FT Advisor readers. Thank you, it's a pleasure. And thank you for watching. More news and views, stay tuned at ftadvisor.com.

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