Those involved in the mortgage market should not need reminding of the corner stone principles of statutory regulation which have served the industry well since the end of voluntary regulation over a decade ago. These principles are that regulated firms should know their customer, understand their customers’ needs, assess customers’ ability to repay and treat customers fairly. Such values are designed to ensure firms comply with the Financial Conduct Authority [FCA] principle 6 which requires and is worded to ensure ‘fair outcomes for customers’. It is, therefore, surprising to note that the FCA found, during their thematic review, some examples of contracts that provided mortgage lenders with the right to unilaterally convert interest-only mortgages to a capital and interest loan without a customer’s agreement and with no understanding of the customer’s ‘ability to repay’.
Interest-only borrowers need protecting
It is not surprising, when such terms and behaviour are identified, that the FCA felt the need to issue instructions to mortgage lenders and third-party administrators of residential mortgages. The FCA guidance shows that a significant number of borrowers will be left with no means of repayment at the end of their interest-only mortgage; and those customers need protecting.
As a result of the guidance, customers will be protected in a number of ways.
The three main actions mortgage lenders are required to adopt to protect customers are:
- Communicate early and frequently according to the potential risk of non-repayment within the firm’s mortgage book, communicating more regularly as customers approach the end of the mortgage term.
- Give customers enough time to consider maturity options, especially if the firm’s range of options is limited or if customers must meet specific criteria to be eligible; customers may wish to consider other options and should be given enough time to do so.
- 3Assess affordability if any variation to an existing mortgage significantly increases the monthly payment or where the revised terms extend the loan into retirement.
These requirements force mortgage lenders to think about their customers’ needs before their own, which is a positive step forward.
Another positive requirement in the guidance was the special attention that the FCA has given to ‘mortgage prisoners’ (those customers who are unable to enter a new regulated mortgage contract with a new mortgage lender). Clearly, there is a risk that such customers are not treated fairly as they cannot change supplier if they are not happy with terms that may be imposed upon them. The FCA rightly reminded mortgage lenders of their obligations under Mortgage Home and Finance: Conduct of Business Sourcebook [MCOB] requirement 11.8.1E insisting that mortgage lenders “are able to demonstrate how they have complied with Principle 6 (customers’ interests) in their treatment of such ‘trapped’ customers”.
With 2.6 million interest-only mortgages due to mature over the next 30 years the FCA was right to issue early and detailed guidance notes.