UK Mortgage Rule Review: FCA consults on 'first steps' aimed at simplifying rules and increasing flexibility

The FCA received ‘significant feedback’ on its mortgage rules as part of its recent Consumer Duty rule review call for input (see our related article here). Given these developments, and in light of the priorities in its new 5-year Strategy, the FCA is reviewing its mortgage requirements through its Mortgage Rule Review (MRR). The focus is on how its mortgage framework can be simplified to further support sustainable home ownership.

The FCA is running a short (4-week) consultation on proposed ‘targeted new flexibilities’ that could be introduced quickly while maintaining an appropriate degree of consumer protection. The idea is to help consumers navigate their financial lives by making it easier, faster and cheaper to make certain changes to their mortgage and engage with their provider. 

The proposed changes are permissive in nature and, if adopted, the FCA does not believe that an implementation period is required. Firms would simply be able to apply the changes at their discretion once final rules are introduced into the FCA Handbook (mainly in the Mortgages and Home Finance: Conduct of Business sourcebook (MCOB)).

In outline, the key changes are: 

• Advised sales: Currently, with some limited exceptions, when a firm interacts with a customer in a mortgage sale or contract variation, they must give them regulated mortgage advice. As a result, the  proportion of advised new sales remains consistently above 95%, leading to poor consumer experience. The FCA proposes to remove the interaction trigger for advice in MCOB and the associated rules and guidance.

The FCA will retain the requirement for customers to positively elect to proceed with an execution-only sale only where they have rejected advice. It expects firms will continue to encourage consumers to take advice where they consider this will deliver good outcomes, and it is not proposing to amend or revoke the prohibition on encouraging customers to opt out of receiving advice.

It is also proposing 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.

• Affordability changes:
  • Removal of the requirement for a full affordability assessment when reducing a mortgage term. Firms would be able to determine what form of assessment would be proportionate to the customer’s needs. However, they would still be expected to consider affordability in line with the Consumer Duty/PRIN 2A and their responsible lending policy where they choose to make use of the changes.
  • Widening the scope of the Modified Affordability Assessment (MAA) when remortgaging to permit lenders to enter into a new mortgage contract where it is more affordable than either:
    • A customer’s current mortgage; or
    • A new mortgage product that is available to that customer from their current lender.

The amended MAA would remain optional for lenders to use and depend on their risk appetite.

• Removal of guidance:
  • Retiring the interest-only mortgages guidance (FG13/7) and introducing a rule and guidance to the effect that firms must deal fairly with customers whose mortgage terms have expired with a balance outstanding and not take repossession action unless all other reasonable attempts to resolve the position have failed; and
  • Retiring the guidance for firms supporting existing mortgage borrowers impacted by rising living costs (FG24/2) as it is a restatement of its Handbook requirements (underpinned by the Consumer Duty).

In keeping with the tone of its response to the July 2024 call for input on its Consumer Duty rule review, the FCA’s ‘first steps’ mortgage proposals appear to be largely aimed at some (optional) low-hanging fruit rather than anything more radical.

In a related speech, Emad Aladhal, FCA Director of Retail Banking, highlights that with the introduction of the Consumer Duty, the FCA wants to ‘enable consumers and firms to take informed risks – and in doing so support a dynamic and competitive market.’ 

However, as the FCA itself points out in its cost-benefit analysis, there are some question marks over how keen lenders are really likely to be to take advantage of the new flexibilities. For example:

• Given that many lenders already allow limited mortgage overpayments (usually between 10%-20%) without an affordability assessment, term reductions that lead to monthly payments exceeding these limits may create affordability implications and lead to assessments being required by lenders.
• Likewise for the lighter touch affordability assessments when remortgaging. Lenders onboarding new customers are likely to be looking to protect themselves from potential future redress claims liability by carrying out their own affordability assessments - particularly given that they are unlikely to have access to any affordability assessments by the customer’s current lender.
• The FCA describes the way the proposal to remove the interaction trigger for advised sales/variations would be adopted by lenders as ‘variable and uncertain’. Among the potentially relevant considerations for lenders is the fact that the Consumer Duty outcomes - particularly those relating to ‘consumer understanding’ and ‘consumer support’ - will affect lenders’ approach to whether or not to require advice.

There may nonetheless be opportunities here, for example for challenger banks to enhance their streamlined digital offerings by taking advantage of some of the proposed simplifications - although clearly considerations around risk appetite will still be at play.

We may have to await the planned FCA discussion paper on the future of the mortgage market and conduct regulation in June for suggestions for more wide-sweeping reform. The themes to be explored in the discussion paper include the market’s collective appetite for risk, and how the FCA might approach managing changes to risk appetite.

The FCA highlights that, while all of the mortgage proposals would be supported by the Consumer Duty, two of them – removal of the requirement for a full affordability assessment when reducing mortgage terms and dealing with maturing interest-only mortgages - would rely on the Duty as the main standard for firms to apply when dealing with their customers.

The combination of our legal and consulting teams is ideally suited to assist you in reviewing how risk is currently managed within your business, and how this might have to be adapted with the shift to increasingly outcomes-based regulation. We can help you in developing approaches to decision-making based on outcomes rather than specific rules. Our combined offering can provide you with a full range of services, and clear guidance on how the solutions can be applied within your business.

If you would like to discuss how we can help you, please reach out to any of the people listed in this article or your usual Hogan Lovells contact.