RMBS Securitisation – FAQS – what you need to know about the FCA consultation on new rules for UK mortgages

Existing regulatory requirements

• Article 53A of the Regulated Activities Order (RAO) defines the activity of advising on regulated mortgage contracts. Under the existing rules there is a prohibition on execution-only sales where there is "interactive dialogue". This means that, with some limited exceptions, when a firm interacts with a customer in a mortgage sale or contract variation, they must give the customer regulated advice. This requirement was intended to remove the risk of consumers misunderstanding whether they had received mortgage advice.
• An advised sale requires a firm to take reasonable steps to ensure that a mortgage, or a change to mortgage, is suitable for that customer and requires an assessment of their needs and circumstances. An execution-only sale requires the customer to know the precise product they want to buy, or change they want to make to an existing one, and to have been told they will not benefit from the protections given by the FCA's rules on assessing suitability.
  
  

New regulatory proposals

• The FCA is not proposing to amend or revoke the prohibition on encouraging customers to opt out of receiving advice (MCOB 4.8A.5R of the FCA Handbook).
• The FCA will remove the interactive dialogue trigger from MCOB 4.8A7R (3) of the FCA Handbook and associated FCA rules and guidance. Making this change, in the FCA’s view, should improve customer journeys and would allow firms more freedom to interact with consumers during a sale or contract variation.
• The FCA also propose to introduce a rule to require that firms must consider whether processes are appropriate to identify execution-only customers for whom advice, or other customer support, may be necessary to avoid foreseeable harm as part of meeting its obligations under the Consumer Duty.
• The FCA does not propose to amend its rules which require advice in circumstances which may involve a higher risk to consumers and where advice is likely to be more important. These circumstances include when the main purpose of the loan is debt consolidation, when exercising a statutory ‘right to buy’ a home, shared equity arrangements or for lifetime mortgages.
• The FCA is proposing to remove the requirement for customers to positively elect to proceed with an execution-only sale where there is interactive dialogue with the firm (MCOB 4.8A.14R (5) of the FCA Handbook). This is consistent with removing the interaction trigger within the sales process.
• The FCA will maintain the requirement for customers to positively elect to proceed with an execution-only sale where they have rejected advice..
• The FCA expects firms to continue to encourage consumers to take advice where they consider this will deliver good outcomes in accordance with the Consumer Duty (which applies in both advised and execution-only mortgage sales).
  
  

Existing regulatory requirements

• The FCA rules currently require lenders to assess affordability when making a change to the mortgage which is likely to be material to affordability.. Term reductions are not in the non-exhaustive list of material changes set out in MCOB 11.6.4E of the FCA Handbook and firms must assess if a particular reduction is likely to be material to affordability.
• This means lenders take different approaches to establish what is material to affordability. For example, some firms use a nominal monetary threshold, while others compare the new monthly repayment to what the repayment could be on an applicable reversion rate.
• Many consumers have taken longer terms with the aim of reducing them when their circumstances allow. However, the FCA has been advised that some consumers may avoid contractually reducing their term, due to their assumptions about how long an affordability assessment would take.
  
  

New regulatory proposals

• The FCA propose to remove the requirement for a full affordability assessment when reducing the term of a mortgage. This would make it easier for consumers to reduce the term of their mortgage, where appropriate. This would, among other positive effects, reduce the risk of borrowers being unable to meet contractual repayments later in life, where lifestyle changes are likely.
• By removing the prescriptive requirement, firms would be able to determine what form of assessment would be proportionate to the customer’s needs. Firms would need to meet their obligations under the Consumer Duty, in particular to act to avoid foreseeable harm to retail customers (PRIN2A.2.8 of the FCA Handbook) and to equip them to make effective and properly informed decisions (PRIN 2A.5.3 (2) of the FCA Handbook).
• The FCA's rules on affordability assessments may disadvantage borrowers seeking to switch to a cheaper deal with a new lender. Under its rules, most borrowers switching to a new lender must undertake a full affordability assessment. This contrasts with a customer moving to a new product with the same lender, where no affordability assessment is required. This can lead to absurd outcomes where consumers applying for a cheaper, but otherwise identical, loan with a new lender must undertake more steps, potentially deterring them from switching to cheaper deals.
• Firms may vary a contract without assessing affordability when doing so solely for the purposes of forbearance where the customer has a payment shortfall, or to prevent one occurring (MCOB 11.6.3R(3)(c)). This could include extending the mortgage term into (or further into) retirement.
  
  

Existing regulatory requirements

• In 2019, the FCA finalised a modified affordability assessment ("MAA") to deal with concerns that some consumers could not switch to a more affordable mortgage despite being up to date with their payments.
• The MAA gives lenders the flexibility to carry out a modified affordability assessment where the consumer: (i) has a current mortgage; (ii) is up to date with their mortgage payments (at the point the new mortgage is applied for and over the previous 12 months); (iii) does not want to borrow more, other than to finance any relevant product arrangement or intermediary fee for the mortgage; and (iv) is looking to switch to a new mortgage deal on their current property.
• The lender is only allowed to enter into the proposed mortgage under the MAA where that contract is more affordable for the customer than the customer’s existing mortgage. This means that when interest rates are rising, the new mortgage is unlikely to be cheaper than the customers’ existing mortgage deal. Lenders can elect to use the MAA for eligible customers and are not obliged to use it. The FCA's regulatory data indicates that to date this option has not been widely adopted.
  
  

New regulatory proposals

• The FCA propose to amend the MAA to permit lenders to enter into a new mortgage contract where it is more affordable than either: (i) a customer’s current mortgage, or (ii) a new mortgage product that is available to that customer from their current lender.
• As with the current MAA, this would be optional for lenders to use and depend on their risk appetite. However, the FCA believes widening the scope of when a firm can use the MAA could increase the commerciality of this option and the number of customers who could get a better deal by changing lenders.
• Firms opting to use the MAA would have the choice to undertake a full affordability assessment andwould also be able to carry out credit reference checks and underwriting assessments to support their lending decision or determine whether to use the MAA or not.
• The FCA will retire the guidance in FG13/7 on interest only mortgages. Firms will be required to meet the existing standards established under the Consumer Duty and existing, applicable rules in MCOB. To avoid a potential unintended gap in its requirements the FCA propose to introduce a rule andguidance which would make clear that firms must deal fairly with customers whose mortgage terms have expired and not take repossession action unless all other reasonable attempts to resolve the position have failed.