Entering a mortgage is a significant financial decision for any consumer. The offer and sale of mortgages that meet the consumers’ objectives and needs is important to ensure appropriate consumer outcomes over the life of the loan. At an economy wide level, appropriate consumer outcomes regarding mortgages help underpin the stability of the financial system. Market conduct supervisors are responsible for identifying poor market conduct and driving improvements to consumer outcomes.
This Briefing Note, informed by a survey of market conduct authorities, explores risks to consumer outcomes associated with mortgage distribution practices. These include sales incentives, bundling and/or tying practices, and distribution through digital channels. Supervisory approaches on each of these topics are discussed, including case studies and research.
Rules and principles govern the sale of mortgages through both direct and in-direct channels. Legal and regulatory requirements designed to protect the consumer vary across jurisdictions and include conduct rules, licensing requirements, cooling-off periods, and disclosures. Common principles required of lenders and distributors include honesty in dealing, transparency in disclosure and professional conduct.
Supervisor awareness of the impacts of lender incentive structures has improved in recent years. Without appropriate rules governing sales incentives, salespeople may be motivated to engage in the inappropriate sales of mortgages to consumers, resulting in the potential for poor consumer outcomes and increased market risks.
Bundling the sale of financial products with a mortgage can be convenient for the consumer, reduce transaction costs, and support the consumer’s interests when initiating the loan, for instance by offering insurance on the property. Products bundled with a mortgage are most commonly insurance such as life insurance, credit products such as credit card accounts and bank accounts such as offset accounts. Many jurisdictions rely on product governance provisions or specific rules relating to bundled products to ensure appropriate consumer outcomes. The sale of tied products, not otherwise available to the consumer, are prohibited in most jurisdictions.
It is essential that consumers are aware of the product attributes and costs associated with mortgages and bundled products.
Distribution through digital channels is essential to keep pace with consumer expectations, provide efficiencies, improve customer experience, and prevent biased credit decision making. Risks associated with digital distribution include possible impairment of financial inclusion, or opaque decision making. Technology neutral rules are common.
Looking ahead, supervisors can improve effectiveness in the identification of risks to consumer outcomes associated with mortgage distribution. The collection and analysis of data on consumer outcomes can be used to identify consumer risks. This information can be used to improve product governance, for instance identifying when products are being sold to consumer groups outside of the target market or where target markets are not appropriately defined.
