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FCA publishes insightful data on mortgages. This week in regulation…

17/02/19

The speed read

  • FCA analysis of an evolving mortgage market
  • Has the growth of passive investing affected equity market performance?
  • Tackling market abuse requires a dynamic approach

FCA analysis of an evolving mortgage market

The FCA has released proprietary data highlighting the changing state of the mortgage market. The stats reveal:

  • In 2018 30% of all mortgages were due to mature when the borrower was 66 or over, an increase from 26% in 2015
  • The volume of interest-only mortgages has declined since stricter lending criteria were introduced
  • The median mortgage term has increased, with 41% of mortgages lasting more than 25 years
  • 39% of all 2018 mortgage sales were a result of remortgaging, a decrease on the 2007 highs of 50%
  • Lending at 90% LTV has increased to 14%, with building societies showing increased volumes in this area.

 

Has the growth of passive investing affected equity market performance?

The FCA has published a research note which outlines recent research into the impact the growth of passive investing has had on the market’s efficiency and effectiveness.

Passive investing has a number of benefits for investors, including lowering the cost of investing. However, active fund management supports the research, trading and monitoring activities essential for a well-performing equity market. There is a danger that the growth of passive investment may have an adverse impact on the market and the outcomes investors receive.

Passive investments accounted for 30% of total EU fund assets in 2017, up from 15% in 2007. This growth creates opportunities for active investors, while also limiting their ability to take advantage of them. It is currently very difficult to draw conclusions from the emerging literature, but as the situation develops the impact of passive investing on market efficiency may become clearer, with implications for the regulatory regime.

 

Tackling market abuse requires a dynamic approach

“Effective compliance with the Market Abuse Regime (MAR) is a state of mind,” was the opening gambit of a recent speech by Julia Hoggett, Director of Market Oversight at the FCA.

MAR compliance requires a number of significant, situational judgements to be made, which are critical to the health and integrity of the markets. A regulatory regime that relies on detecting events as they happen will never be as effective as one which also focuses on ensuring such events don’t occur in the first place.

One of the FCA’s current concerns is that firms aren’t monitoring for information leaking outside of their organisation as robustly as they are for information being shared inappropriately within the organisation. Firms need to consider this in greater detail and ensure that market abuse risks are being managed holistically. More work also needs to be done to improve monitoring practices around market manipulation, particularly in the non-equities market.

Firms should move away from the assumption that because individuals have legitimate access to information, they will use that information legitimately. By proactively reviewing information access levels, firms can help mitigate some of the risks associated with insider information.

The risk profile of financial services markets doesn’t stand still. It is constantly evolving and firms must also adopt a dynamic approach to keep pace with these changes and ensure their controls are robust.

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