Christopher Woolard, director of strategy and competition at the Financial Conduct Authority, kicked off the regulator’s Mortgage Conference in Westminster today (7 September) by raising concerns about the equity release market and the way lenders interpret rules.
He said it was clear much has been accomplished by the Mortgage Market Review.
Mr Woolard said there was no doubt there were key differences between 2015 and the unsustainable lending levels of 2007.
The first big difference, according to Mr Woolard, is what appears to be a shift in the risk appetite of industry.
The second comes in the form of regulation, which he said has involved stricter international and domestic capital and conduct requirements including the introduction in the UK last year of the FCA’s Mortgage Market Review, as well as work by the Bank of England and the Financial Policy Committee.
Mr Woolard said: “That some questioned whether the impact of those interventions might lead to a drying-up of the market is a matter of public record.
“The MMR alone was predicted to affect mortgage approvals by anything up to 20 per cent.
“Looking back now, it is difficult to square those forecasts with actual market activity.
“Particularly when you assess the number of mortgage approvals post-MMR versus pre (43 per cent against 41 per cent).
“But there is clearly a question here as to what the ideal level of activity is and how you achieve it.
“No-one, frankly, wants to return to the unaffordable lending practices of the past, where almost every application was approved.
“And this is likely to mean (among other things) that assessments of mortgage applicants’ circumstances will continue to require more care than they did pre-crisis.”
Mr Woolard said the regulator has to remain sensitive to the impact of these reforms over the long run and keep focussed on outcomes and whether the market is working well.
He said: “Even if we believe our rules are proportionate, we need to remain alert to how firms are interpreting them and the effect on consumers.”
According to Mr Woolard, the UK’s ageing population is also on the regulator’s agenda.
Globally, he said the forecast is for a 244 per cent increase in the number of over 85s in the next 35 years.
Couple it with wider issues in the mortgage market, including affordability, and Mr Woolard said we quickly run into a number of important issues.
For example, an older population that is increasingly asset-rich, but cash-poor.
To address that challenge Mr Woolard said you could unlock the value of your home but “in the not too distant past, equity release became a dirty word.”
He said: “While we have seen a combination of regulation and industry-led initiatives to help clean up the market, some will argue that the costs of equity release, both up front and compounded over time, are relatively high for the individual, and that the previous image has stuck.
“It is clear that the UK and EU equity release markets are relative minnows.
“Now, this does invite the question as to whether the reputation of the market has reduced the number of firms and consumers willing to engage in it.
“However it does make assessment of market functionality more difficult. From a regulator’s perspective – are there barriers to competition or even missing markets?
“We believe there is a debate to be had about what products and markets could exist and whether more entrants and innovation here might benefit consumers with greater choice and improved products.”
Mr Woolard also raised concerns that 80 per cent of the mortgage market sits in the hands of six main players.
He said: “That competition can play a key role in ensuring the mortgage market works well is in little doubt.
“If competition is functioning effectively, it should lead to lower prices, better consumer service and more innovation in the form of products that better address consumer needs.
“Inversely, if competition does not work well, we know you quickly run into a host of potential issues.
“Market features need to facilitate competition. Regulation is not the be all and end all, but can have an important impact on how well competition works – in fact, many aspects of the regulatory regime are designed to affect the ability of firms to enter or be present in a market and the type of products they offer.
“But, we need to ensure that , in doing so, they do not put an unnecessary constraint on competition. Although much of the market is based around the idea of the 25 year mortgage with some kind of fixed or capped element, we have to ask ourselves whether that will always be the case.”
emma.hughes@ft.com
