UK: The Mortgage Market Review: Major Reform For The Mortgage Market

Last Updated: 5 November 2009
Article by Jean Price and Kate Duke

FSA has proposed a fundamental change in its approach to regulation of the mortgage market, its hope being that these radical proposals will not only eliminate the irresponsible behaviour of some firms but also "help protect consumers from themselves". In it recent discussion paper DP09/3: Mortgage Market Review FSA appears to have finally recognised that the recent difficulties suffered in the sector are not solely down to lenders and intermediaries but that irresponsible borrowing was also to blame. What is disappointing is that, once again, it will be for lenders and intermediaries to impose order rather than for borrowers to take responsibility for their borrowing decisions.

Inevitably, to achieve FSA's stated objectives, there will need to be increased regulation in the UK mortgage market and the series of proposals set out in the discussion paper cover everything from a reform of prudential requirements for "high-risk lenders" to widening the scope of regulation to include buy-to-let and second charge mortgages.

While the broad aims of the review are to ensure that there is a flexible market that works better for consumers and is sustainable for all market participants, they do, as FSA admits, reflect a more "intrusive and interventionist" style of regulation. Clearly, stability in the sector is in everyone's interests, industry and consumers alike, but what remains to be seen is whether such proposals (if adopted) lead to the current situation of mortgages being out of reach for a significant proportion of the population becoming the regular position.

Key Elements

The discussion paper contains a wide-ranging set of proposals, the key elements of which are as follows:

Prudential Reform

FSA's prudential framework is currently undergoing fundamental reform with developments underway in relation to new quantitative liquidity standards, the new stress test based approach to capital adequacy and the proposals set out in The Turner review. As a result, FSA considers there to be no general need to propose additional prudential measures specific to mortgage lending but is not certain that the current reforms are sufficient to address the issue it sees in relation to non-bank lenders. These lenders were responsible for a large proportion of the loans now in default while benefitting from the lower prudential requirements of MIPRU. FSA is therefore considering whether particular asset limits and increased prudential requirements should be imposed on non-deposit taking lenders. It is also seeking views on whether it should carry out more direct intervention through business model analysis. In practice, new market entrants seeking authorisation are already finding their business models subject to far more intense scrutiny than was previously the case.

Product Regulation

FSA considers that loans containing a 'toxic' mix of high-risk factors put borrowers at greater risk and therefore should be banned. This will mean that a significant number of potential borrowers could find themselves disenfranchised. Borrowers requiring a high LTV with a credit-impaired history and unstable income may be unable to find any lender able to provide a mortgage facility. While there will always be those for whom a mortgage is not a viable proposition, the current proposals have the potential to remove the possibility of home-ownership from a far wider population.

It also proposes a ban on self-certified mortgages. These products have always been acknowledged as being open to abuse by those seeking to borrow more than they sensibly should, but FSA's proposals do seem to be throwing out the baby with the bathwater. The product is particularly useful for the self-employed borrower – especially in the case of a relatively new business. Without doubt, it is right to question the availability of self-certified mortgages to employed mortgage applicants where income verification is a fairly straightforward matter and it would therefore seem more sensible to make verification mandatory in such circumstances.

Sales Regulation

The paper sets out proposals for greater prescription around affordability assessments. This will particularly affect those lenders who take LTV as the key element of a lending decision. Assessment will need to be based on free disposable income and lenders will be required to check that the level of expenditure declared by an applicant is plausible. For many lenders this will mean that affordability checks will become more time-consuming and therefore more expensive to conduct – a cost that will ultimately be borne by borrowers.

While there is no plan to move to a fully advised market, FSA intends to address what it considers to be the most significant areas of customer detriment by imposing a basic standardised affordability and appropriateness test for non-advised sales. This should make it easier for intermediaries to demonstrate that a sale was non-advised – especially when later faced with an allegation of an advised sale.

While the current disclosure rules are among the most prescriptive in the financial services sector, the current KFI does not record details of the consumer's needs and circumstances nor an explanation as to why the particular personal recommendation was given. The MCOB rules require this information to be kept but FSA's findings have been that this has not always been done. As a result, it proposes the early disclosure of key service information and that suitability letters become a compulsory standard.

It is proposed that the Approved Persons regime be extended to mortgage advisers, arrangers who deal with consumers and those responsible for compliance. In our view, this move is to be welcomed since is should result in improved standards among individual mortgages advisers and make them personally accountable for the advice they provide.

Arrears and Repossessions

FSA has been disappointed at the lack of forbearance exercised by lenders dealing with those in arrears and is therefore considering converting the current MCOB guidance on arrears handling and repossessions into binding rules. This will not only impact current arrears handling policies and procedures but will also need to be taken into account if lenders securitise mortgage portfolios. It will, however, lead to certainty for firms in an area in which has been the subject of intense scrutiny and significant criticism by FSA.

It is also proposed that firms will not be permitted to make arrears charges when a borrower is adhering to a repayment plan, thereby ensuring firms do not profit from people in arrears. This would be a significant loss of revenue for a number of firms.

Increased Scope

It was only a question of time before buy-to-let loans became subject to some form of regulation given that a significant proportion of buy-to-let purchasers are not traditional landlords but those seeking the investment opportunity offered by bricks and mortar, in many cases in a single property in addition to the main family home. With second charges, although many of these fall within the protections of the Consumer Credit Act 1974, from a consumer perspective there is little to support the current distinctions between first and second charges. It therefore is sensible for both types of secured lending to fall under FSA regulation and will provide certainty for lenders and borrowers alike. The government is due to consult on the extended scope shortly.

Analysis

The proposals, if adopted, will have a significant impact on existing business models. Lenders and intermediaries must therefore ensure they are aware of the proposals for increased regulation and take steps to make certain that their voices are heard at this early stage. Comments on the discussion paper must be made by 30 January 2010.

A feedback statement is expected in March with further analysis of the proposals due to take place prior to any phased implementation.

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

The original publication date for this article was 04/11/2009.

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