Will mortgage prisoners be saved by the FCA ‘closed book’ Consumer Duty rules?


We have heard about the plight of mortgage prisoners for well over a decade now.  Much has been written about their woes ever since this cohort of borrowers became locked into their existing mortgage arrangements, without the ability to remortgage, when many types of mortgage products were withdrawn after the global financial crash in 2008/2009.  Their situation then got a whole lot worse with the renewed focus on “responsible lending” as part of the Mortgage Market Review, which was implemented in 2014.  The more robust affordability assessments, enhanced interest rate stress tests and revised interest only rules shut down any optimism of early relief, via a remortgage, for these borrowers.

But within mortgage prisoner groups there is hope again.  The FCA ‘closed book’ Consumer Duty rules, i.e., rules for mortgages that were sold before the 31 July 2023, but have not been marketed or sold to new customers since, are now less than four months away from implementation deadline.  The suggestion is that these rules, which come into force in July this year, will finally rescue mortgage prisoners.

The suggestion is that these rules, which come into force in July this year, will finally rescue mortgage prisoners

Those who dismiss the plight of mortgage prisoners and suggest there is no evidence of harm within closed mortgage books need to understand the FCA’s own analysis on closed mortgage book interest rates.  The FCA showed, November 2021, 1) 50% of closed-book mortgages were charging an interest rate of 3% or less, compared with 82% of those in the then active market and 2) 47% of closed-book mortgages charged between 3% and 5%, compared with 17% in the then active market.

Additionally, documents held within the House of Commons library highlight the costly position of mortgage prisoners.  These suggest, “A mortgage prisoner with an average mortgage of £165,000 has overpaid in interest between £25,000 and £45,000 over the last decade.  If they had been offered a reasonable interest rate from the beginning, many homes would not have been repossessed and many thousands of families could have avoided other debt and paid down the capital on their mortgage.”  

Be in no doubt, there is a real negative impact on many lives!  Just after the FCA implemented special affordability arrangements designed to help mortgage prisoners remortgage, it estimated that there were about 250,000 borrowers whose mortgages were in closed mortgage books or held by a creditor not regulated by the FCA.

So why is there hope?  In a recent speech, the FCA Executive Director of Consumers & Competition, warned firms of the need for them to focus on providing fair value in closed mortgage books.  He said, “We know many firms have applied their laser focus on open book products ahead of the Consumer Duty coming into force.  But the clock is also ticking for closed products which will come under the scope of the Consumer Duty at the end of July.” 

The mortgage media is full of articles suggesting that the potential Consumer Duty difficulties within closed book are so great that we may even see a flurry of closed books coming to the market.  That might be the case, but it doesn’t solve the problem – it simply transfers the issue to another company.  The acquirer will still need to undertake a root and branch re-think around the way fair value is assessed within the closed book and how acquired portfolios are integrated into existing holdings, ensuring that one group of borrowers is not disadvantaged or that fair value is ignored for that cohort.

Closed book fair value assessments will need careful thought and the clock is already ticking – time is now very short.  And if anyone forgot, Consumer Duty comes with its own, new, Principle for Business, “A firm must act to deliver good outcomes for retail customers”.  So, the pressure is on, there is only around 4 months left to ‘right any wrongs’.


About Author

Avatar photo

Partner - Baxters Business Consultants - a business consultancy undertaking marketing, training, freelance journalism and expert witness services to the residential mortgage lending, building society and financial service industry (April 1993 to date) - www.baxtersbc.co.uk.

Leave A Reply