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'.
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.
The FCA is largely implementing the changes as consulted on, with the following specific amendments to the consultation proposals:
The new rules allow eligible consumers to finance an intermediary fee, as well as a product or arrangement fee.
The FCA has sought to simplify the definition of a 'more affordable' mortgage to one where:
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.
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.
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:
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:
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.
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.
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).
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