By Paul Smee, Director General at CML
In my youth, I studied philosophy; one of my (not very impressive) attempts at philosophical thought was returned to me with the comment: “This is a conclusion in search of a premise.” For some reason, I recalled this when I discovered in the depths of a BIS consultation paper a suggestion, coming off the wall, that the world was waiting for a seven-day mortgage switching service, and that the mortgage sector should start setting one up pronto.
As if to demonstrate the virtues of speed, the BIS consultation paper has a one-month turn-around, which suggests that the full, horrendous complexity of this throw-away suggestion has not been fully appreciated.
I am not feeling over-defensive on this issue. Remortgaging may be less prevalent than it was a decade ago (for all sorts of reasons) but it still accounted for a quarter of all lending last year. In that period, around one in 10 mortgage customers – some 1.1 million – switched, with nearly half a million moving to a new supplier. Those numbers show that there is already strong competition among lenders for remortgaging business, and this has been a significant feature of the mortgage market for the last two decades. We are not dealing with a market activity that’s as rare as hen’s teeth.
But, as we prepare to fire in our views, we have to consider not only the central question of seven-day switching, but some broader ones about why customers do or do not switch in the mortgage market – whether that means taking out a new product with an existing lender, or moving to a new supplier. Even if my philosophical training did not push me to those deeper questions, I could not duck this challenge because the FCA (who, just a hunch, were not pre-consulted on the seven-day service), raised them in a separate call for inputs on competition in the mortgage sector.
This leads to some broader questions to consider. Despite the large volume of remortgaging, do we really know what a healthy amount of it looks like? What prompts customers to remortgage? And are they responding to the right triggers in doing so?
The scope of the studies
While there are some similarities in the studies by BIS and the FCA, there are also profound differences. The FCA’s paper is, of course, not restricted to switching. So, it casts a wider net, but over a single sector – the market in which we operate. By contrast, BIS comes from the other end of the telescope and asks where seven-day switching is appropriate across a range of sectors, which encompasses mortgages, but also extends to retail banking more generally, as well as utilities and telecoms.
So, we have to address why the mortgage market obviously differs from the others fingered in the document. Several occur to me.
First, almost all mortgage customers are advised as they work their way through the switching process. That provides some obvious safeguards. But, as the FCA points out, the lengthy advised process is a “perceived cost” for some consumers.
Second, the checks over affordability, creditworthiness and all the apparatus of MMR will inevitably be more intrusive and time-consuming to piece together than in the other markets, where the sums are smaller and the contracts shorter.
Third, as the regulator also notes, brokers have developed sophisticated strategies to engage with previous clients, and both lenders and brokers are a source of “switching prompts” that might affect consumer behaviour.
The prompt from a lender might be to inform existing customers that they can move to another deal rather than reverting to the standard variable rate – in other words, a switch of product but not supplier. Many lenders have, of course, built successful commercial strategies on long-term relationships with customers based on delivering good value and service, and rewarding loyalty.
The logic of switching
The FCA is also keen to understand why some borrowers do not switch. Is this a sign of consumer inertia, or of disengagement with the process or the product? Or is it a conscious decision, based on a logical assessment by customers that their current loan suits their needs, and that any savings from remortgaging are outweighed by the associated costs, including the “cost” they ascribe to going through a lengthy advised process?
The CML and its members have played their part in trying to ensure that any decision not to switch is not rooted in inertia because consumers do not understand their options. Our work on the tariff of standardised mortgage terms, developed in conjunction with Which?, is intended to help make comparing products easier for borrowers.
So, what are we likely to say in the final draft of our response on seven-day switching? We will set the regulatory scene and the inhibitions that it correctly imposes on speed. And we will stress the fundamental point that any desire for an industry standard of seven-day switching will depend on when the clock starts ticking. If that occurs when lenders have completed all the necessary checks and confirmed to the customer that the deal can go ahead, then many lenders may already be delivering a seven-day switching service.
But we will also point out that, while there may be concern about the time taken to switch products, the causes of consumer frustration are not the same in all markets. Lenders must complete thorough risk assessments, and work through robust – and heavily regulated – affordability checks, and these cannot be short-circuited by insisting on seven-day switching from an early point in the process.
Is there room for some improvement to the switching process? It would be odd if there wasn’t and, as ever, we are willing to consider the evidence carefully and work closely with lenders, consumers and regulators in speeding up the process where it may be possible to do so. But we will need to work with the grain of the market and the direction of regulatory travel and everyone will have to – philosophically – manage their expectations of the end result accordingly.