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Mortgage market review

02 February 2010

Last October the FSA published its mortgage market review discussion paper setting out its case for regulatory reform of the mortgage market.

It is the FSA’s belief that the current regulatory framework is not effective in limiting high risk lending and unaffordable borrowing.

DP09/3 contained a significant number of proposals aimed at impacting on the way mortgage providers and intermediaries conduct their business pre and post sale. The Paper also set out proposals seeking to change customer behaviours. There were areas of DP09/3 where the FSA stated its intention to move quickly.

On 26 January it published Consultation Paper 10/2 (CP10/2), which addresses two of the issues set out in DP 09/3: strengthening the FSA’s arrears rules, and the extension of the approved person regime.

In setting the key areas for reform, the FSA surprised some when stating that it remained to be convinced that implementing loan to value (LTV) or loan to income (LTI) limits is necessary; but the FSA will keep this issue under review.

It does, however, think there may be a case for prohibiting certain combinations of high LTV, LTI and other high risk indicators, such as unstable income or impaired credit history.

More controversially, the FSA feels there is a clear case for product regulation of self-certified or fast track mortgages. These products were originally designed to meet the needs of the self-employed, but recently the lending of such products has extended to consumer groups beyond which they were intended.

The FSA’s analysis shows that self-certified borrowers take out larger loan amounts than borrowers with standard products, and fall into arrears much more frequently. It therefore proposes to require income verification for all mortgage applications. The self -employed may find it increasingly difficult to get a mortgage.

As well as making income verification a regulatory requirement for all mortgage applications, the FSA proposes requiring all lenders to assess the level of a consumer’s expenditure in determining the affordability of a mortgage product, thus ensuring lending decisions are based on a consumer’s free disposable income.

This does not mean the FSA will necessarily reduce its affordability requirements for intermediaries, but new mortgage rules will make it clear that ultimate responsibility for affordability lies with the lender, irrespective of the distribution channel chosen.

The FSA believes advisors should not just focus on initial affordability, and that stress testing should be introduced to reflect the possible upward movement in rates, and focus on long-term affordability of the product. It seems that affordability calculations could therefore get more complicated and a uniform approach to assessing affordability would be welcome.

The FSA is also looking to raise the bar concerning non-advised sales, although it does not think it would be proportionate to move to a fully advised market. Instead it is proposing to retain the existing distinction between advised and non-advised sales whilst enhancing the protections consumers have in a non-advised sale by imposing a basic standard of affordability and appropriateness test.

In order to assist in ensuring consumers are provided with suitable products, the FSA is proposing to change the information requirements that need to be disclosed to consumers. It intends to remove the requirement for an initial disclosure document, and instead permit firms to disclose fees information and information about the level of service on offer in the firm’s terms of business. However, it intends to keep the key facts illustration.

DP09/3 contained initial discussions on arrears and repossessions handling which is built upon by CP10/2. The FSA has made it clear in both DP09/3 and CP10/2 that the high level approach currently contained in the Mortgage Conduct of Business Sourcebook (MCOB) has not sufficiently protected consumers, and that this is another area where the FSA intends to take much more robust and interventionist approach.

The key proposals in CP10/2 are to:

The FSA is also proposing to extend its approved persons regime to mortgage advisors and arrangers, and those responsible for compliance oversight within mortgage intermediaries.

Although this would inevitably carry significant costs to the industry in the form of the individual fee required to apply for Approved Person’s status, the FSA believes the benefit derived from potentially reducing financial crime and an overall increase in confidence in the financial system somewhat outweighs these costs. 

Conclusion

Although the FSA’s review is by no means complete, it is clear it will adopt a much more intrusive approach when it comes to mortgage regulation.

The FSA's announcement that it is taking enforcement action against six firms in relation to their arrears handling procedures shows that it means business, and firms should review their procedures ahead of the re-writing of MCOB. The FSA, should, however, proceed with caution in moving towards a ‘one size fits all’ approach in relation to a complex mortgage market which caters for the financially vulnerable on the one hand and those with considerable wealth on the other.

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Paul Estlin

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