• We have consistently agreed with the principle that all mortgage applications should be assessed on the applicant's ability to repay the loan. Borrowers should be required to provide accurate and genuine information about their income to their lender. An affordability assessment omitting this will be of limited benefit.
• We remain concerned that the proposals will have a significant impact on self employed borrowers. We would urge the FSA to monitor the impact on self employed borrowers in light of the proposed requirements and issue further guidance for firms to ensure that self employed borrowers are not adversely affected by the proposals.
• We welcome the shift in the FSA's approach to the expenditure assessment. The original proposals in CP 10/16 were far too prescriptive and were at risk of transferring responsibility for affordability onto the lender and reducing the responsibility of the borrower.
• The revised proposals in CP 11/31 represent a much more proportionate approach to affordability and provide the lender with a sound framework on which to base their affordability assessment, whilst taking account of the individual circumstances of the borrower, recognising customers will flex their income. We are therefore supportive of the proposals and they reflect the general approach to affordability by many BSA members already.
• We welcome the clarification from the FSA that it does not expect lenders to 'crystal ball gaze' when assessing future changes to income. The revised rule in this respect is much clearer and proportionate.
• We remain concerned about the risk of conflict with existing discrimination legislation and impending legislation relating to age discrimination in services under the Equalities Act 2010.
• We would urge the FSA and the Government Equalities Office (GEO) to work together to produce some coherent guidance for firms in relation to the interaction of affordability requirements under the MMR and the Equalities Act 2010. This will ensure that lenders are not inadvertently being required to breach the Act in order to comply with MCOB, or vice versa.
• In our view, by seeking to protect 'trapped' borrowers, the prescriptive eligibility requirements significantly reduce the ability for lenders to assist these borrowers. The proposals themselves are complex and do not fit easily into an underwriting process.
• Rather than seek to rework the draft rules, we believe a better approach is for the FSA to allow lenders to develop an exceptions policy. This would be suited to each lender's individual lending policy and strategy and agreed with their supervisor. The exceptions policy will allow a lender to consider lending to a borrower who is unable to demonstrate affordability as a result of the MMR.
• This approach will allow lenders the flexibility to consider the individual circumstances of the borrower and allow them to make a sensible lending decision.
• We accept that in the past there has been some lax lending practices by some firms in relation to interest only lending, where the repayment strategy was not adequately assessed. However, we do not believe that this was widespread practice and therefore much of the concern is borne out of perceived consumer detriment, which has not and may not yet materialise.
• We would also question how the FSA truly views interest only. Currently it is not clear what the FSA expects in terms of an interest only market. It has recognised that the market expanded in the run up to 2007, as a result of a more general relaxation in lending policy and has since reduced again. However, it does not seek to confirm whether it prefers interest only as a niche product, or as a legitimate mainstream offering, causing uncertainty amongst firms as to what the regulator is really expecting in terms of a lending strategy for interest only.
• In our view the FSA needs to be clear as to how it views the interest only market so that firms can operate in a certain regulatory environment. Without this, firms could be reluctant to continue to offer interest only, causing detriment to those consumers who manage their interest only loan appropriately.
Distribution and Disclosure
• The BSA has been supportive of moving mortgage advising and selling away from being solely focussed on recommending or providing information on a product. A mortgage is the single biggest financial decision an individual will make and therefore we believe the advising and selling process should be focussed on holistic financial advice and/or information to ensure the mortgage is appropriate.
• It is disappointing that the FSA has not sought to review the mortgage market from this perspective and instead has made the process more product focussed and further reduced the choice for the consumer as to how they manage their personal circumstances, by proposing to move to a fully advised market.
• The definition of advice, given in the CP is also too simplistic and does not adequately define the point at which the sale commences. We are concerned that the shift away from a personal recommendation will lead to the whole advice process being rejected rather than just the final product that is presented to the customer. We do not see how this would work in practice and therefore would question whether this is the right approach.
• We are concerned that the focus of the CP is very much on the intermediary, with lenders being viewed as an after thought. This is a criticism we raised in our response to CP 10/28 and it is disappointing that this has not been taken on board. Of particular concern is the lack of regard for lenders with a limited product range, where advice would be inappropriate and impractical.
• The BSA believes that there is a risk that consumers may become less engaged if they are forced to take advice even if they don’t require it. They may pay less attention and have less interest in the mortgage process on the assumption that they will be provided the best mortgage for their circumstances. At a time when the Government is implementing major reforms through the Universal Credit regime with the objective of putting consumers in control of their finances, this proposal seems to be at odds with the Government’s policy.
• Consumer choice is vitally important and many consumers will be able to make an appropriate decision for themselves, either on a pure execution only basis, or by obtaining some factual information, through a non advised sale. The FSA recognises that the mortgage market has worked well for the majority of consumers, therefore we would question whether moving to a fully advised market is really what is needed to enhance consumer protection.
The full response can be accessed via the link below:
Mortgage Market Review CP 11/31 - Response by the BSA