All is not rosy in the mortgage market, despite what the FCA says

Well, that’s a relief. We’re told that the mortgage market is more or less in good hands, with the majority of customers getting the advice they need. There’s a bit of room for improvement, of course, but those diligent folks at the Financial Conduct Authority (FCA) are working with the industry to make sure all’s well. So the watchdog says in its latest press release anyway (with some minor embellishments from me).

It’s when you drill down into the details of said press release, and the “thematic review” that accompanies it, that the problems with its assertions start to emerge. According to the watchdog, borrowers received suitable advice in 59 per cent of the cases that it looked into. That is indeed a majority. However, it also said that in 38 per cent of cases the “basis for the recommendations given was unclear”.

In other words, it’s not sure whether the advice given was good or bad in nearly four out of ten mortgages sold in the UK, assuming these figures are reflected across the industry. That represents a problem. A mortgage is the biggest financial commitment that most people will make in their lives. The consequences of choosing the wrong one can be disastrous.

In a properly functioning market you would, therefore, expect that an adviser’s reasons for making a recommendation should be absolutely clear and understandable in every case that the regulator looks at. That this is not the case in so many instances is disturbing to say the least. It is true (as the regulator says) that it found only a relatively small number of cases – 3 per cent – where the advice given was demonstrably unsuitable. However, the key word there is “relatively”.

The most recent figures from the Bank of England show that there were 64,434 mortgages approved in May. If 3 per cent of those were sold on the basis of demonstrably unsuitable advice that translates into more than 1,800 people facing a potentially nasty mess.

The actual figure will be smaller because not all mortgages are sold on the basis of advice. But even so, if you extrapolate those figures over 12 months you still get to a rather large number of bad sales.

Throw in some of the sales in the 38 per cent of cases where the “basis for the recommendations given was unclear” and that number could increase by an order of magnitude. My analysis would indicate that the FCA needs to work with rather more urgency than the tone of its publications would suggest that it is.