The FCA has finalised changes to its responsible lending rules and guidance to introduce a modified affordability assessment for eligible consumers with immediate effect. Lenders who choose to take advantage of the new regime will see a relaxation of existing affordability requirements to help so-called 'mortgage prisoners' - longstanding borrowers on relatively high reversion rates (the interest rate that applies once any introductory rate ends) - to switch to new deals.
The proposals were consulted on in March this year, and the FCA is mainly introducing them "as is". Our blog post on the consultation has more information on the key changes. But as a result of both consultation feedback and wider FCA considerations, there are some amendments to the original proposals as well as some that won't now be brought in.
What has the FCA amended in the final rules and guidance?
Intermediary, product and arrangement fees aren't extra borrowing
While the criteria for a consumer to be eligible for the modified assessment are unchanged, intermediary, product and arrangement fees can now be added to the mortgage without counting as extra borrowing. The FCA is also allowing lenders to consolidate unsecured loans that are contractually linked to a mortgage when using the modified assessment.
A simplified definition of 'more affordable' mortgage
The proposed definition of a 'more affordable' mortgage differed depending on whether any product or arrangement fees have been added to the mortgage or the consumer is paying for them upfront.
In the final rules, the definition has been simplified to a test of whether the new mortgage has a lower total expected cost (including any fees if paid upfront) and lower interest rate, over the deal period or whole term if there is no deal period, than the current mortgage. The typical monthly payment under the new mortgage must also be lower than the monthly payment paid in every one of the last 12 months under the current mortgage.
New communication strategy requirement for inactive and unregulated lenders
The FCA proposed that inactive lenders and administrators acting for unregulated lenders be required to review their customer books to identify eligible consumers and write to them highlighting the rule changes and that they may be able to switch, and directing them to further information. This is a one-off requirement, to be carried out within 13 months of introduction of the new rules.
The final rules have been amended so that lenders have to create and implement a communication strategy. This still means they must contact consumers about the rule changes but - reflecting consultation feedback - it allows flexibility to make sure communications are more targeted and more frequent. The FCA requires that:
- the strategy must be in place within 6 months of introduction of the new rules
- any contact with relevant consumers should be made no later than 10 months after introduction of the new rules, ideally as soon as lenders are able to.
To avoid raising consumer expectations where they are unlikely to be able to benefit from the modified assessment, the FCA has included an extra condition excluding consumers who have outstanding fees and charges payable under their current mortgage (eg arrears administration charges) from any communications because they are not eligible for the modified assessment. In recognition of lenders' different risk appetites when applying the new rules, no other exclusions have been added.
The responsible lending implementation group set up with lender and other representatives in August 2019 is, among other things, developing proposals for the key messages to be included in consumer communications.
Transitional period to March 2021 for new and revised reporting requirements when submitting Product Sales Data reports
Along with the other new rules, the previously proposed new and revised reporting requirements for Product Sales Data reports are effective immediately, so firms are expected to report use of the modified assessment as soon as they start using it. The FCA will publish the technical documents (Data Reference Guide) in February 2020.
However, in recognition of the impact on lenders' reporting systems the FCA has also now included a transitional provision to let them align these reporting requirements with its Product Sales Data report (PSD001) changes as outlined in September's joint FCA/PRA policy statement on changes to mortgage reporting requirements. This transitional provision will be in place until the end of the implementation period for the Product Sales Data report (PSD001) changes, namely March 2021.
What changes won't now be happening?
No modified assessment for home movers
When consulting, the FCA asked for views on whether the modified assessment should be available to those looking to switch to a new mortgage deal on a different property (eg downsizing) as well as those looking to switch to a new mortgage deal on their current property.
It has decided not to allow the modified assessment to be available for home movers looking to switch to a new mortgage deal. It agrees with industry feedback that moving home is likely to involve potentially significant changes in income and expenditure that make an affordability assessment that considers these more appropriate. In the case of downsizing, many consumers should be able to pass a standard affordability assessment.
The FCA also points out that not extending the approach to home movers means its rules are still consistent with the FPC affordability recommendations applying to home movers looking to switch to a new lender.
No requirement for 'more affordable' mortgage to have lower reversion rate than current mortgage
In its consultation, the FCA asked for views on adding another condition to its proposed definitions of 'more affordable' that brings in the existing reversion rate of the new lender, but it acknowledged that this could restrict participation by some smaller or specialist firms.
It has decided not include this additional condition in the definition of 'more affordable' mortgage. It believes the risk of a consumer ending up on a higher reversion rate than they are currently on, or would have ended up on at the end of their deal, can be reduced in other ways. In particular, lenders must provide an extra disclosure to alert consumers to this possibility and they also have to have an internal switching policy where they offer the modified assessment.
FCA clarifies no cherry picking of individual rules when disapplying relevant MCOB rules
The FCA clarifies that the modified assessment allows lenders to disapply all the relevant current MCOB rules (eg those on income and expenditure) as a whole. Lenders are also allowed to disapply some relevant current MCOB rules as a package but continue to comply with another package of rules. For example, a lender using the modified affordability assessment could decide to disapply the income and expenditure rules but not the interest-only rules or vice versa.
But lenders can't cherry pick by disapplying one rule in a common set of rules but not the others, so for example they won't be able to disapply the income rule but continue to apply the expenditure rule.
Lenders using the modified assessment are also free to carry out their own assessment (eg their own interest rate stress test) where they are disapplying the MCOB rules.
A case for extending the regulatory perimeter for mortgages?
The FCA comments that it thinks there is a case for extending the regulatory perimeter to capture all mortgage loans, ie including those owned by unregulated entities. This wouldn't on its own solve the problems for consumers stuck with unregulated entities, with an assessment of the need for revised rules also needed. But the FCA thinks that a wider remit would go some of the way to increasing its ability to influence market behaviour via its Principles and rules.
All the rules outlined in the policy statement, as well as the changes to reporting requirements, come into force immediately. Lenders can choose to start using the modified assessment as soon as they are ready to do so.
The FCA recommends that eligible consumers looking to switch based on the modified assessment should check the Money Advice Service website.
The FCA's final position on changes to its mortgage advice and selling standards to address other harms identified through its Mortgages Market Study which were consulted on in May is expected before the end of this year. Take a look at our blog post on these other proposals for more information.