WIREDGOV

The Financial Services Authority (FSA) today published the findings of the second stage of its Mortgage Effectiveness Review, which focused on consumer experiences in the sub-prime and lifetime mortgage sectors of the market.

Dan Waters, Director of Retail Policy and Themes at the FSA, said:

“The Mortgage Effectiveness Review is an integral part of the FSA’s programme of work on mortgages, and will help shape the future of our mortgage conduct of business regime. It sits alongside our thematic work and close supervision of individual firms, and forms part of the balanced and proportionate approach we are taking to ensure the fair treatment of consumers.”

The Effectiveness Review was designed to measure whether the FSA’s mortgage conduct of business rules are delivering the intended benefits for consumers. The first stage of the review, published in 2006, looked at disclosure and advice and selling practices in the mainstream mortgage market and found that things were generally working well for consumers. This second stage focused on the more specialised sectors of sub-prime and lifetime mortgages. While these sectors are modest in size, together accounting for less than 10% of the regulated mortgage market, they were looked at in detail because the risk of consumer detriment may be greater.

While the two markets are different in nature, there were many similarities in the findings. The research found that:

• both sub-prime and lifetime consumers see the Key Facts Illustration (KFI) as an important and useful document for helping them to check points of detail and clarify uncertainties, but not for product comparison and shopping around;
• in neither market do consumers make a distinction between receiving advice or information-only, and the Initial Disclosure Document (IDD) is not prompting them to think about the level of service they might get; and
• sub-prime consumers rely to a considerable extent on their broker and accept their broker’s recommendation. Most lifetime consumers also rely on their broker. Both sets of consumers focus heavily on price, with sub-prime consumers concentrating particularly on initial payments.

Research was also carried out into consumer experiences of arrears handling and this indicated areas of non-compliance by firms with the arrears rules. The FSA is undertaking focused thematic work on the arrears management practices of firms to establish whether such problems are indeed occurring. The results are expected in June and the findings will be published then.

The findings of the review will help to inform the wider review of the mortgage regime, announced in the FSA's Business Plan 2008/09. This wider review will consider the scope for moving towards greater reliance on principles and other high-level rules, and will reflect issues identified through past and ongoing thematic work that might point to changes in policy.

Notes to editors

1. The full Report of Stage 2 of the Review is available on the FSA Website, alongside the qualitative consumer research. Details of Stage One of the Review can be found in FSA Press Notice 96/2006.

2. The scope of the Mortgage effectiveness review was set out in FSA Press Notice 116/2005 . This highlighted that the review would focus on how the new mortgages regulation was delivering the following outcomes:

Outcome 1: Consumers shop around for mortgages

Outcome 2: Consumers understand whether they are being given advice or information by firms

Outcome 3: Consumers better understand the risks and features of the mortgages they take out, including affordability risks

Outcome 4: Consumers take out suitable and good value mortgages

Outcome 5: Consumers are treated fairly over the life of the mortgage, including when they go into arrears.

3. Methodology: In Stage 2 different pieces of research were used to ensure that the results were as robust and valid as possible:

• Consumer research was commissioned from Illuminas on consumers' experiences in the relevant sectors.
• The review analysed quantitative consumer research from the Consumer Purchasing Outcomes Survey on the mortgage purchasing process. This will be available on the FSA website when published.
• An analysis of sub-prime mortgages was also undertaken to find out whether MCOB had increased the degree to which consumers are being sold suitable mortgages, using arrears rates as a measure of suitability.
• Product sales data from firms was used to provide evidence on sales patterns.

4. The FSA regulates the financial services industry and has four objectives under the Financial Services and Markets Act 2000: maintaining market confidence; promoting public understanding of the financial system; securing the appropriate degree of protection for consumers; and fighting financial crime.

5. The FSA aims to promote efficient, orderly and fair markets, help retail consumers achieve a fair deal, and improve its business capability and effectiveness.