While FCA Dear CEO letters are usually targeted at a particular type of regulated firm, they should always be of interest to similar firm types in any connected sector. The recent FCA letter to Retail Mortgage Lenders [‘RMLs’] is no exception. While, of course, it will be scrutinised in detail by the Boards of RMLs, it should also be considered by any person or firm that is involved in arranging or advising on retail mortgages. The identification of the key risks of harm to customers and the FCA expectations of how those risks should be managed and mitigated is simply a ‘must read’ for all those involved in the mortgage industry.
The FCA has a number of strong work themes going on. In this article, I focus on just three, the ones that I consider apply to both lender and intermediary readers of T-CNews, but I am sure the FCA would welcome a wider understanding of all of its work themes across the whole mortgage industry. Intermediaries who introduce mortgages to lenders have always asserted that the client remains theirs, and not the lenders. Now is the time to prove that such a relationship applies, throughout the product life-cycle and, not just when arguing over a refinancing procuration fee.
There are around 1.5 million full interest only and part capital repayment outstanding mortgage accounts in the UK.
Looking forward then, what do lenders and intermediaries need to consider in 2022?
- Supporting mortgage customers in financial difficulty:
Borrowers, and those aspiring to take out a loan, are facing a ‘perfect storm’. Inflation and rising interest rates will result in more people falling into financial difficulty over the coming months. These factors hit at a time when it is predicted that nearly half of those with mortgages have less than three months’ worth of essential expenses saved. Lending industry media commentators are quick to point out, when discussing increasing rates, that ‘x’ percentage of borrowers hold fixed rate loans and that they are, therefore, shielded from a particular rate rise. However, such shielding is only a temporary respite. Such comments give the illusion of security without taking into account the potential long term position, which will, of course, be further compounded by any further rate increases. To help RMLs provide short and long term support to customers, the FCA has issued Tailored Support Guidance. This is designed to ensure that customers receive appropriate forbearance based on their individual circumstances. All FCA firms, RMLs and intermediaries, should recognise the characteristics of vulnerability and respond to customers’ individual particular needs.
- Managing maturing interest-only mortgages:
There are around 1.5 million full interest only and part capital repayment outstanding mortgage accounts in the UK. In the next few years, at least up to a decade, increasing numbers will require repayment. The peak is forecast for 2032! Anecdotal evidence highlights that many borrowers reaching the end of their mortgage term are facing full repayment demands, particularly where the mortgagee is a ‘closed book’ lender.
Again, this is not just a lender issue, it makes sense that the original mortgage arranger also commits to a communication strategy that gives customers enough time to act where there is doubt about their ability to repay their interest only mortgage. This will help customers have a better understanding of their situation, responsibilities, and options. It is always easier to replace a mortgage before the stressed situation of a repayment demand!
- Responsible lending:
A failure to consider responsible lending has always risked consumers being subject to unintentional harms. Factors, such as rising interest rates, and other inflationary pressures continue to put additional strains on customers’ disposable income, and this will continue in the coming months and years. From the first version of MCOB [MCOB 11] and then subsequently in DP09/03 it was clear that the ultimate responsibility for affordability lies with the lender, irrespective of the distribution channel chosen. However, given that many consumers rely heavily on advice from intermediaries it is also incumbent on intermediaries to assess an applicant’s ability to repay, particularly in these times of increasing wider costs.
While the RML Dear CEO letter may be addressed to a particular audience it highlights the direction of travel for all those in the mortgage industry. Time to read and act!