The Financial Conduct Authority has launched its consultation on proposed changes to its responsible lending rules and guidance, in a move to help mortgage prisoners stuck with inactive and unauthorised lenders.
Alongside the final report of its Mortgages Market Study published this week (March 26), the regulator published a consultation paper setting out plans to reduce barriers faced by consumers who cannot switch to a more affordable mortgage despite being up-to-date with their mortgage payments.
These consumers are predominantly borrowers who took out a mortgage before the financial crisis but are now blocked from switching to better rates due to changes in lending practices.
In a letter sent to Nicky Morgan, chairwoman of the Treasury committee, at the beginning of this year Andrew Bailey, chief executive of the FCA, already said the regulator would consult on changes to its responsible lending rules to help free mortgage prisoners.
Yesterday (March 26) the FCA suggested amending its rules to give lenders the option to undertake a "modified affordability assessment" for such consumers.
This means they no longer have to abide by certain affordability rules, such as to verify the consumer’s income.
But under the modified assessment lenders must not enter into a new regulated mortgage contract with an eligible consumer unless they can demonstrate that the new mortgage is more affordable than their present one.
The regulator also proposed inactive lenders and administrators acting for unregulated firms should review their customer books to identify eligible customers and highlight the rule changes to them.
Lenders who use the modified affordability assessment will be required to disclose to consumers the basis on which their affordability has been assessed and provide some additional disclosures about potential risks.
Lenders will also need to flag which mortgages have been sold using the modified affordability assessment when submitting product sales data reports to the regulator.
Christopher Woolard, executive director of strategy and competition at the FCA, said the mortgage market was working well for many, with "high levels" of customer engagement and competition being present.
He said: "The package of remedies we are taking forward will benefit consumers by encouraging innovation and making it easier for them to find the right mortgage."
Mr Woolard said the regulator was particularly concerned about mortgage prisoners who are currently unable to switch.
He said: "That is why we are acting now to help remove potential barriers in our rules. These changes should make it easier for consumers to get a more affordable mortgage."
An industry-wide voluntary agreement was established in July last year in response to the FCA's interim mortgage market study, to allow the 10,000 mortgage prisoners of active lenders to switch to a better deal.
However, about 120,000 mortgage prisoners are still trapped on a higher interest rate with unauthorised firms and 20,000 mortgage prisoners are believed to be stuck with inactive lenders.
The regulator has previously admitted that the removal of regulatory barriers would not help all mortgage prisoners, as it was up to lenders to offer remortgage opportunities to customers.
In a letter to Ms Morgan in February, Mr Bailey said some mortgage prisoners will have circumstances likely to "put them outside" the risk appetite of some lenders, including if they have arrears or other considerable debts, have a very high loan-to-value mortgage or have mortgages in negative equity.
In response to this week's consultation Ms Morgan said the welcome confirmation of the FCA's decision to act in favour of mortgage prisoners had followed "constant pressure" from the committee.
Whilst Ms Morgan acknowledged the regulator's proposals should make it easier for some mortgage prisoners to switch providers, she warned the FCA's decision to introduce the new rules towards the end of this year could cause issues for consumers.
She said: "For some families, this may be too late. Speed is of the essence in this case, and every month will count."
Ms Morgan added: "This will not be a panacea for those ‘mortgage prisoners’ who are in arrears, or are regarded as ‘risky’ for other reasons.
"Some of those may have been pushed into arrears due to the high rates they pay. That may require more thought by government.
"Lending is a commercial decision so the FCA cannot force firms to lend to these mortgage prisoners. But once the regulator’s new rules have come into force, industry should be ready to step up to help those borrowers that meet their risk profile."
Will Hale, chief executive of Key, said: "The FCA's announcement will come as a relief to the thousands of mortgage prisoners across the UK.
"While naturally we need to ensure that people can afford their mortgage repayments, common sense is vital and taking a serious look at how we can help people these people – especially those with inactive lenders - to improve their financial situations makes sense."
But Mr Hale said while the proposed changes to the affordability rules are a positive step forward, he does not believe it replaces the need for good quality advice.
He said: "Managing mortgage repayments are unlikely to be the only issue that these customers face and we need to make sure that they receive the support they need to make the right choices for their circumstances.
"This is particularly true for older customers who currently have a wide range of options to choose from including downsizing, equity release, later life mortgages and retirement interest-only mortgages."
Yesterday the FCA stated it was concerned consumers were 'unnecessarily' taking mortgage advice.
rachel.addison@ft.com
