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Mortgage and home finance regulation in 2021

The Covid-19 pandemic and its impact on homeowners has been the driving force behind much of the regulatory developments in mortgages and home finance in 2020. 

While this is set to continue, the new year also brings significant opportunities for product development – not least around green mortgages and products for the first time buyer market. 

The FCA has also indicated a number of priority areas where lenders and intermediaries can expect to see further regulatory interventions in 2021, including in the later life lending market.

Here are seven themes to look out for. 

Covid-19 payment deferrals

With continuing financial strain on borrowers (and some borrowers having reached the six-month limit for payment deferrals), lenders will need to be on hand to continue to offer support and their forbearance policies will continue to be in sharp regulatory focus.

Lenders should focus on the governance and oversight arrangements they have in place in relation to payment deferrals, in particular ensuring they have an appropriate customer outcomes testing framework and that the results of this are used to inform future updates to their policies and processes.

Breathing space

The Breathing Space Regulations come into force on 4 May 2021, establishing the first part of a debt respite scheme for individuals in problem debt. 

They look to encourage people in problem debt to access professional debt advice, to do so sooner, and to enable them to enter the debt solution that is most appropriate for them. 

Firstly, they give eligible customers access to a sixty-day period in which interest, fees and charges are frozen and enforcement action is paused. 
 
Secondly, they give customers receiving mental health crisis treatment an alternate route to access the protections of a moratorium, which stays in place for the duration of their crisis treatment.

As the final regulations were only published on 19 November 2020, many lenders will be working on their implementation programmes in the early part of next year. Key things to consider are the scope of their application; capitalised mortgage arrears; their relationship with existing financial regulation, including the FCA’s Mortgage Conduct of Business Rules; and taking enforcement action.  

Mortgage prisoners

Protecting mortgage prisoners is high on the political and regulatory agendas. However, the FCA has been very cautious in its response to specific calls to action. 

On the call for a price cap on standard variable rates, it said it would first need to be confident that this would be the most proportionate and effective response. It would also want to understand how the interventions set out in its recent policy proposals (including PS20/11) affect mortgage prisoners.

On the question of extending the regulatory perimeter, it says this is a matter for HM Treasury and parliament. 

I expect to see further consideration of a range of potential measures that could support mortgage prisoners in 2021, including the potential for government intervention, such as equity loans. 

Green mortgages

Historically, a particular challenge for lenders looking to enter this market has been demonstrating the connection between mortgages against energy-efficient properties and a lower probability of default. 

However, there is growing demand for this from an increasingly sustainability-minded customer base, and we have seen a number of products launch in the UK, with more due for launch in 2021.  

I have also been involved in the extensive work being undertaken at a UK and international level to demonstrate the business case for energy efficient mortgages and to design a strong regulatory framework within which providers, intermediaries and borrowers can operate. 

Changes to the regulatory framework to give mortgage intermediaries greater ability to recommend these products is something that anecdotally I know is needed to help drive this market forwards. 

Read more about green finance on our hot topic page.

Equity release and the later life lending market

An increase in later life borrowing and product availability has inevitably brought this into the regulatory spotlight, including in the intermediary market. 

In particular, the FCA wants to ensure that intermediaries have made the necessary changes to reflect its findings from its exploratory work earlier this year in relation to the equity release sales and advice process.

The FCA is also considering how intermediaries describe the fees and charges payable to the customer (included the level fees are set at) and the impact of the pandemic on the quality of firms’ advice.

A letter sent to lifetime mortgage providers at a similar time confirms that the later life market is high on the FCA's priority list from a provider perspective too. Areas under review include product design and governance, post-sale systems and controls, introducer oversight and inappropriate sales. 

LIBOR transition

As the cessation of LIBOR at the end of 2021 draws closer, lenders will continue to focus on the transition of legacy LIBOR-linked mortgage portfolios including the legal mechanism to enact this.  

Lenders will need to determine the alternative interest rate to transition to, finalise the communications strategy (which will play a key role in ensuring good customer outcomes), and engage with third parties (including intermediaries and third party service providers).

I expect to see the majority of lenders and portfolio-holders begin to communicate with mortgage borrowers about what LIBOR transition means for them in the first half of 2021.

Affordability and stress testing

On 11 December, the Bank of England announced it would review the stress testing assumptions it uses for the purposes of mortgage affordability assessments. The potential recalibration of the stress rate downwards would recognise the continued low interest rate environment. 

The Financial Policy Committee is expected to report on its conclusions from this review in early 2021. Such a move would follow several other adjustments to the responsible lending rules made by the FCA during the course of 2020. 

I expect regulators to continue to consider the impact of the responsible lending rules on the mortgage market during 2021, especially as the government continues to champion new policy initiatives to support first time buyers onto the property ladder.

In particular, as part of its climate finance initiative, we would encourage the regulators to consider changes to the policy landscape (and in particular the responsible lending rules) that are necessary to help open up the green mortgage market.

This article was first published by Mortgage Finance Gazette 

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at December 2020. Specific advice should be sought for specific cases. For more information see our terms & conditions.

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