The Financial Conduct Authority (FCA) will not recommend that lenders change how they price mortgages to encourage borrowers to switch or to mitigate harm to those who cannot.
It has also begun further research into those borrowers who do not switch, including trying to find out whether they have been neglected by certain lenders or have particular characteristics.
In its final Mortgages Market Study (MMS) report, the regulator rejected concerns from some stakeholders that the model of using introductory and reversion rates was harmful.
And it was not persuaded by proposals to limit the gap between these two rates as a way of mitigating harm to people who did not or could not switch.
Not a strong case for change
The FCA’s interim report last year identified around 800,000 customers who were eligible to switch products and could save an average of £1,000 a year by switching to a two-year fixed rate deal.
This prompted some stakeholders to question whether real concerns related to the standard pricing model for mortgages of a short-term introductory deal followed by a typically higher reversion rate, often a Standard Variable Rate (SVR).
Respondents questioned the focus on switching, suggesting that instead the FCA should focus on lenders’ use of introductory and reversion rates.
“For example, some suggested that addressing the differential between the two would better address the root cause of the issue and mitigate the harm to those customers that do not (or cannot) switch,” it said.
However, the FCA rejected these proposals.
“We do not believe that there is currently a strong case for changing the pricing model for mortgages,” it responded.
“The rates of switching in mortgages are high compared to other financial markets, suggesting that this model works well for most consumers.
“We believe it is better to focus on helping the minority of consumers who do not switch when it would be beneficial for them to do so.”
Concentrated in specific lenders
The sector has been the subject of a super complaint by Citizens Advice which queried whether lenders were exploiting borrowers with a loyalty penalty.
In response to this, the FCA said it is conducting further analysis of the market to identify why people do not switch product when they are able to and could save money.
Many lenders and intermediaries told the regulator they were proactively and effectively engaging customers in switching and that this was an area which was continuing to evolve as strategies developed.
The further research will allow it to better understand the characteristics of those customers that do not switch when they would benefit from doing so.
This will include looking at whether these consumers have particular needs or common characteristics, or whether the numbers are concentrated in specific lenders such as those who do not proactively offer internal switches.
The FCA explained this by citing past supervisory work into the retention strategies of some of the large banks which found that not all firms engaged with all customers.
“For example, one large lender appears to segment their customers and focus retention efforts based on an assessment of a customer’s likelihood of switching to a different lender,” it said.
“Another large lender has historically not sought to proactively engage with customers remaining on a reversion rate for longer periods, but offers comparably generous retention procuration fees to intermediaries.”
Consumers ‘active and engaged’
Overall, the FCA said it was content that there was sufficient engagement from consumers in switching mortgages when coming to the end of an introductory rate period.
“Over three quarters of consumers switch within six months of moving on to a reversion rate,” it said.
“This indicates that the market works well for many, and that consumers are generally active and engaged.”
It has also set up a working group with lenders to explore how to make switching easier for those consumers who would benefit from doing so.