Mortgage prisoners - FCA implements changes to its affordability rules

The FCA has announced new rules which will allow lenders to conduct a more proportionate affordability assessment for consumers who meet certain criteria, such as being up-to-date with payments under their existing mortgage and not looking to move house, or borrow more (except to finance certain fees).

These changes have been introduced to help 'mortgage prisoners'.

Background

In Consultation Paper 19/14 the FCA set out its concern that some consumers could not switch to a more affordable mortgage product despite being up-to-date with their mortgage payments.This included those who couldn't switch because of changes to lending practices during and after the 2008 financial crisis and subsequent regulation that tightened lending standards. This group of consumers are often referred to as 'mortgage prisoners'.

In Policy Statement 19/27, published this week, the FCA provided its feedback on the consultation and final rules and guidance.

What's changed since the Consultation Paper?

The FCA is largely implementing the changes as consulted on, with the following specific amendments to the consultation proposals:

Financing fees

The new rules allow eligible consumers to finance an intermediary fee, as well as a product or arrangement fee.

'More affordable' mortgage test

The FCA has sought to simplify the definition of a 'more affordable' mortgage to one where:

• the new mortgage has a lower total expected cost and lower interest rate over the deal period (or whole term if there is no deal period), than the current mortgage; and
• the typical monthly payment under the new mortgage (during the deal period or, if there is no such period, across the whole mortgage term) must be lower than the monthly payment paid in every one of the last 12 months under the current mortgage.

Communication strategy

The new rules require inactive lenders and administrators of unregulated entities to develop and implement a communication strategy for contacting relevant consumers.

Notably the FCA has chosen not to allow the modified affordability assessment to be used where the consumer is looking to switch onto a new mortgage deal on a new property or to require the new mortgage (as part of the 'more affordable' mortgage test) to have a lower reversion rate than the rate the customer was paying.

When can lenders apply the new rules?

The new rules apply immediately, but there are various steps that lenders will need to take in readiness to implement the new rules – see below.

What do lenders need to consider when implementing the new rules?

Now that the final rules have been published, lenders can begin to analyse how they fit with their respective lending policies and risk appetite.    In particular, we would highlight the following key  considerations associated with implementation:

Consumer engagement

The FCA has been keen to stress that whether a lender lends to an eligible consumer is a matter for its own commercial and risk appetite.  Lenders should develop a strategy to:

• identify and contact consumers about possibilities presented by the new rules;
• explain the changes to consumers in a simple and engaging way;
• assess the eligibility of consumers for new remortgaging opportunities (or enable consumers to self-identify whether they might be eligible);
• explain to other stakeholders e.g. intermediaries their approach to application of the rules;
• respond to those customers contacting them who may be unable to secure a new mortgage or are ineligible (for example, customers in current or recent arrears).

In addition inactive lenders and administrators now have until 1 May 2020 to put in place a customer communication strategy (adopted or approved by their governing body) to notify their customers (by 1 September 2020) that the new rules may mean they can switch to a new lender.  The timing of these notices should align with lenders readiness to apply the new rules, but not be left until the end of the specified window.

Development of risk disclosures and changes to mortgage documentation

Lenders using the modified affordability assessment must tell consumers the basis on which their affordability has been assessed and provide additional disclosures about potential risks.    The quality of these disclosures will be important, particularly in cases where the switch may materially impact on the amount of interest a customer will pay e.g. where the modified affordability assessment is being coupled with a term extension.

Regulatory reporting

Lenders are required to report which sales have involved the modified assessment when they submit Product Sales Data to the FCA, so will need to make changes to regulatory reporting processes and procedures to capture this data.  The FCA is likely to have a keen interest in this reporting as it is likely to use this to assess the effectiveness of these new policy changes.  A  further technical document (Data Reference Guide) will be published in February 2020 and transitional arrangements have been introduced to align these requirements with new Product Sales Data report changes published recently (PS 19/23).

Responsible lending and internal switching policy

Lenders should ensure that their responsible lending policy is updated to address how they will apply the new rules and must also introduce and operate an internal switching policy.  Both the responsible lending policy and internal switching policy must be approved by the firm's governing body so this may take some time to put in place and obtain the necessary internal approvals.

We will watch with interest whether if implementation of these changes is successful, it reignites debate about broadening the FCA's affordability rules further, for example, to allow rental income to be taken into account as part of an affordability assessment.  

Please contact us if you would like to discuss these changes in more detail.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at October 2019. Specific advice should be sought for specific cases. For more information see our terms and conditions