The Financial Conduct Authority [FCA] today issued a “Dear Chief Executive” letter, generally seen as a warning shot across the bow, setting out their position on mortgage lenders requests to change mortgage contracts, including Standard Variable Rates [SVR] and Tracker Rates [TR]. The letter was issued because a number of lenders had engaged with the FCA regarding planned changes.
Customers not being ‘treated fairly’
It has recently been reported in the National media that the FCA was investigating whether mortgage lenders should be allowed to change borrowers’ contract terms after Bank of Ireland and West Bromwich Building Society raised rates for their TR customers, even though bank base rate remained steady at 0.5pc. Many customers feel that that they are not being treated fairly when a mortgage lender unilaterally increases its mortgage rates especially when that customer has specifically chosen a TR for ‘comfort reasons’ and the rate the mortgage has been linked to has not changed. Most financial advisers would agree that the majority of customers who choose a TR, do so because they want the certainty and comfort of knowing that the rate will not move unless the ‘linked rate’ (usually bank base rate) moves.
Which regulations are lenders likely to fall foul of?
The FCA warns that lenders, when considering such changes, need to consider that the proposed change may be unfair under the Unfair Terms in Consumer Contracts Regulations 1999 and incompatible with FCA Principles for Businesses and other rules.
MCOB breaches result in consumer detriment
In all these situations, the FCA high level Principles for Businesses and the Mortgages and Home Finance: Conduct of Business sourcebook [MCOB] should drive a mortgage lenders thinking. There are at least five of the eleven Principles for Businesses which are likely to be breached in such situations. They are:
- Integrity – A firm must conduct its business with integrity.
- Market conduct – A firm must observe proper standards of market conduct.
- Customers’ interests – A firm must pay due regard to the interests of its customers and treat them fairly.
- Conflicts of interest – A firm must manage conflicts of interest fairly, both between itself and its customers and between a customer and another client.
- Customers: relationships of trust – A firm must take reasonable care to ensure the suitability of its advice and discretionary decisions for any customer who is entitled to rely upon its judgement.”
Put simply mortgage lenders need to be aware that a change to a contractual term, which has not been individually negotiated, could be regarded as unfair if it causes a significant imbalance in the parties’ rights and obligations arising under the contract, to the detriment of the consumer.
The FCA intends to publish a Discussion Paper about fairness in the context of changes to mortgage contracts next year. The paper will consider the factors that are likely to be relevant when assessing the fairness of firms’ conduct when they make changes to their mortgage contracts.
Is it too late for some?
We all have to hope that this is not too late for some customers who are likely to suffer a ‘payment shock’ when faced with increasing monthly payments.