Competition and choice in retail banking - Treasury Contents


Written evidence submitted by Kensington Mortgage Company

EXECUTIVE SUMMARY

—  The landscape of the UK mortgage market has changed dramatically over the past three years. The majority of UK mortgage lenders, as a response to the financial crisis and market downturn, have restricted their lending to consumers, while other providers have pulled out of the market altogether.

—  In addition, much of the consolidation within the market has resulted in a lack of diversity of mortgage products and providers, which has, in turn, restricted mortgage provision to a select number of customers (eg those with an exceptional credit rating or with a significant level of deposit).

—  With a lower number of first-time buyers in the market in England and Wales than at any time in the last 35 years[24], we believe it is more important than ever that mortgage lenders do their utmost to help people fulfil their aspirations of homeownership consistent, of course, with their ability to fund those loans sustainably.

—  We believe that the best way to do this is to ensure a competitive, diverse market, which is able to meet a range of customers needs in different circumstances and which is not just reliant on a small number of super-dominant lenders.

—  We believe it is important for the Government and regulators to support a level playing-field between lenders of every kind—whether large and small, monoline and full service, private sector and part-nationalised—to maximise the level of competition in the mortgage market and make sure that every lender is, like us, playing their full part.

1.  INTRODUCTION

1.1  Kensington Mortgage Company ("Kensington") welcomes the opportunity to contribute to the Treasury Select Committee's important and timely inquiry into competition and choice in the banking sector.

1.2  Kensington is a leading intermediary only mortgage lender with approximately 47,000 customers and a mortgage book of £4.54 billion. It offers mortgage products—through a controlled distribution of intermediaries—aimed at customers who are overlooked by the high street and its products are tailored to meet a range of different circumstances[25]. With the support of its parent, Investec, a leading specialist bank and asset manager, Kensington became the first lender driven out of the market by the credit crunch to return to lending.

1.3  As an intermediary lender, Kensington plays a key role in ensuring greater diversity and competition for mortgage customers and potential homeowners, as part of ensuring a sustainable recovery in the UK mortgage market—particularly, at a time when there have been mixed signals about the direction in which the housing market is heading. In a sector which has been subject to significant levels of state support through the nationalisation and part-nationalisation of some of the big banks and mortgage lenders, we believe that the promotion of greater competition and diversity is of paramount importance for the benefit of consumers.

1.4  Kensington are committed to running a responsible, sustainable business. We make sensible considered lending decisions based on the information provided us from a variety of verifiable sources. We check robustly a customer's ability to afford a mortgage taking into consideration the specific characteristics of the customer's financial situation and we further stress test this to allow for the potential of further interest rates increases.

2.  THE IMPACT OF THE FINANCIAL CRISIS ON COMPETITION AND CHOICE

2.1  The landscape of the UK mortgage market has changed dramatically over the past three years. The majority of UK mortgage lenders, as a response to the financial crisis and market downturn, have restricted their lending to consumers, while other providers have pulled out of the market altogether.

2.2  The market in mortgages saw a reduction of products from 28,413 in June 2007 to just 2,177 in July 2009 according to Money Supermarket. That figure had risen slightly to 2,990 by August 2010.

2.3  With a lower number of first-time buyers in the market in England and Wales than at any time in the last 35 years[26], we believe it is more important than ever that mortgage lenders do their utmost to help people fulfil their aspirations of homeownership consistent, of course, with their ability to fund those loans sustainably. We believe that the best way to do this is to ensure a competitive, diverse market, which is able to meet a range of customers' needs in different circumstances and which is not just reliant on a small number of super-dominant lenders.

3.  THE IMPACT OF WIDESPREAD CONSOLIDATION AMONG BANKS AND MUTUALS

3.1  There has been significant consolidation in the UK mortgage market over the past three years. In addition, much of government support has focused almost exclusively on larger deposit-takers, reinforcing the lack of overall competitiveness in the mortgage market for first time buyers and those facing negative equity.

3.2  Much of the consolidation within the market has resulted in a lack of diversity of mortgage products and providers, which has, in turn, restricted mortgage provision to a select number of customers (eg those with an exceptional credit rating or with a significant level of deposit). Many credit-worthy consumers—including those, for example, who are self employed—are still being denied the opportunity to buy their own homes and are unable to enjoy the clear benefits associated with home ownership. A diverse and responsible mortgage market that supports the recovering in the housing market would, in turn, give a much needed fillip to the broader national recovery.

4.  THE KEY BARRIERS TO ENTRY INHIBITING INCREASED COMPETITION—INCLUDING REGULATION

4.1  It is crucial for the Government, regulators and the industry to ensure the necessary conditions for a return to a diverse and vibrant market in which there are more kinds of lenders—both small and large—with different funding models.

4.2  Following the financial crisis, there have been a number of new or proposed regulatory requirements affecting the mortgage market including the FSA's Mortgage Market Review and the Bank of England's proposed market measures on monetary policy[27]. While the intention to further stabilise the system is entirely welcome, there needs to be greater recognition and understanding of the cumulative effects of all these regulatory changes on market competition and scope for product innovation. There is a danger that these new and proposed regulations will tend to favour large incumbent organisations, protect them from competition (in some cases with taxpayers' money), with additional prudential regulation typically representing a greater proportionate cost to small firms.

5.  WHETHER COMPETITION IS INHIBITED BY DIFFICULTIES FACED BY CUSTOMERS IN ACCESSING INFORMATION ABOUT PRODUCTS

5.1  Kensington believes that there is currently a lack of transparency in the market, with many of the products promoted by the mainstream providers being restricted to only a very small number of borrowers. Credit scoring systems are used to cherry pick customers for the best rates. The criteria behind these scores are undisclosed and many customers can be denied access to products promoted as best buys without knowing why.

5.2  In addition, Kensington believes that it is important to promote greater understanding in financial services, with more emphasis put on the value of product transparency and professional independent financial advice. We support the work of Independent Financial Advisers (IFAs) and Mortgage Intermediaries as the fairest financial services institutions inspiring trust and consumer confidence as well as continuing the roll out of free impartial generic financial advice.

6.  EXPLORE THE GOVERNMENT AND COMPETITION AUTHORITIES' STRATEGY TO INCREASE COMPETITION IN BANKING, INCLUDING THE LIKELIHOOD THAT NEW ENTRANTS WILL SUCCESSFULLY ENTER THE MARKET

6.1  We believe it is important for the Government and regulators to support a level playing-field between lenders of every kind—whether large and small, monoline and full service, private sector and part-nationalised—to maximise the level of competition in the mortgage market and make sure that every lender is, like us, playing their full part.

6.2  Kensington is determined to play its role to support the continuance of a sustainable, responsible recovery in the UK mortgage market though helping homeowners and potential homeowners.

7.  CONCLUSION

7.1  Kensington has been delighted to offer these thoughts to the Committee which it trusts the Committee will find helpful. We would be delighted to discuss these important issues with you in further detail.

September 2010


24   Statistics supplied by Home Builders Federation, 5 August, 2010 Back

25   These include self-employed workers, people whose income includes salary plus bonus or commission, people with more than one income source (eg from two part-time jobs), customers who have missed one or two of unsecured payments in the past but are now back on their feet financially and people without personal information on record to fit a standard credit score. Back

26   Statistics supplied by Home Builders Federation, 5 August, 2010 Back

27   Monetary Policy After the Fall-Paper by Charles Bean, 28 August 2010 Back


 
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