Commitments by major mortgage lenders and government

HM Treasury has announced that, following a meeting between the Chancellor of the Exchequer, leaders of the UK’s major mortgage lenders, the Chair of the FCA and Martin Lewis of Money Saving Expert, lenders have committed to help all their customers by:

• enabling customers who are up to date with payments to switch to a new competitive mortgage deal without another affordability test;
• providing well-timed information to help customers plan ahead should their current rate be due to end;
• offering tailored support to those who start to struggle with payments which will vary by lender, but may include extending the term of the mortgage to make monthly payments lower, a short term reduction in monthly payments or accepting interest-only payments for a period where appropriate; and
• ensuring highly trained and experienced staff are on hand to help where needed.

In addition, the government confirmed:

• action to make Support for Mortgage Interest easier to access (those on Universal Credit may be able to receive help with their mortgage interest payments after three months); and
• record levels of funding for the Money and Pensions Service to provide debt advice in England.

The HM Treasury statement also confirmed that discussions will continue to take place with lenders on what more they are able to do to inform and support their customers going forward.

Firms will need to assess how the initiative impacts them not only in relation to their direct lending but also to securitised books.  Whilst there is no specific mention of mortgage prisoners, the government and the FCA will be concerned that forbearance measures are available to these customers in the same way as to other borrowers.

The FCA draft guidance

To support the initiative, the FCA are consulting on draft guidance. It makes reference to relevant parts of the Handbook provisions in the Mortgage Conduct of Business Sourcebook (MCOB) as well as the Tailored Support Guidance (TSG) and June 2022 Dear CEO letter, and states that it should be read alongside them.

Providing forbearance, including at scale

There is a reminder that the Dear CEO letter stated that the TSG is also relevant to borrowers in financial difficulties due to the rising cost of living. This means that if a customer indicates that they are experiencing or reasonably expect to experience payment difficulties due to the rising cost of living, firms should offer prospective forbearance to enable them to avoid, reduce, or manage any payment shortfall that would otherwise arise. This includes customers who have not yet missed a payment.

The draft guidance points out that there are many different types of forbearance which are not limited to the options set out in MCOB, but that not all firms will be able to offer contract variations.

The TSG confirms that firms have flexibility and scope to tailor their approach to meet the operational challenge of many customers needing help at the same time. Firms can use automation or digital tools to:

• automate processes, such as asking borrowers to provide information on their circumstances, including their income and expenditure;

• offer a customer a forbearance option the firm has identified as appropriate to the customer’s individual circumstances, and seek the customer’s agreement to it;

• offer a customer a range of options that the firm has identified as appropriate to the customer’s individual circumstances for the customer to choose from.

In the context of the rising cost of living, a firm may be able to offer a group of customers with similar needs and circumstances a range of options that are appropriate to their circumstances. However, the FCA highlights the need for firms to have the necessary policies, procedures and controls in place to avoid agreeing inappropriate forbearance arrangements with customers who may have more complex needs, including those in vulnerable circumstances such as physical or mental illness or unemployment. The availability of a range of communication channels and the ability of customers to switch between them is also key, in accordance with the TSG.

Contract variations

The draft guidance covers options such as:

• extending the mortgage term;

• switching to interest-only for a temporary period;

• moving to a different interest rate; or

• making reduced monthly payments for a temporary period.

Exceptions to the requirement to provide advice and assess affordability

There is a reminder of the greater flexibility in relation to the requirement to provide advice under MCOB when varying a contract, including variations to the mortgage contract made solely for the purposes of forbearance and variations not made for forbearance purposes, provided they do not involve additional borrowing and, where the change includes a rate switch, the customer is presented (via a non-interactive channel) with all products offered by the firm for which the customer is eligible.

Again, the guidance points out that, where appropriate, firms could provide forbearance or offer borrowers options, such as term extensions up to retirement and rate switches, at scale on an execution-only basis via digital channels, eg to meet requests for support in volume.

The FCA has also clarified that firms have flexibility as to when they need to carry out an affordability assessment – this is especially important given the likelihood that any new fixed rate offer is likely to be more expensive than the offer which is coming to an end following the increase in interest rates.  The FCA states that when firms are deciding whether a change would be material to affordability (and therefore whether the requirement to undertake an affordability assessment will apply) firms can compare the proposed new rate to the rate the customer would pay if not for the change – such as any standard variable rate (SVR) that would apply once the current deal expires.  This will support the lenders’ commitment to enable customers who are up to date with payments to switch to a new competitive mortgage deal without another affordability test.  Similarly if the borrower is requesting a term extension a new affordability assessment will not generally be needed for term extensions up to retirement age if there are no other changes to the mortgage.

FCA information for mortgage borrowers affected by rising prices

The FCA has also published information on options and available support for borrowers struggling with their mortgage due to higher living costs and interest rate rises. This includes information for both existing mortgage borrowers and those looking to take out a mortgage for the first time.

There is signposting to further help and support for first timers on the MoneyHelper website, and for existing borrowers there is a link to the FCA’s resources on how to manage your financial situation.

Building on existing work to tackle cost of living challenges

In a related press release, the FCA points out that these latest publications build on what it has already done to make sure firms treat customers fairly and support those struggling financially due to the rising cost of living. In particular, it highlights how it has previously reminded firms of how they should support borrowers in its June 2022 Dear CEO letter and how they need to improve their treatment of those in financial difficulty in its November 2022 Borrowers in financial difficulty final report.

Next steps

The FCA’s consultation on the draft guidance is open for a short period until 5pm on 21 December 2022. Comments should be sent to: [email protected].

In the draft guidance, the FCA states that it will continue to engage with firms to monitor how they are providing the support borrowers need and the outcomes they receive. It will consider if there are further steps it can take to help firms to support their borrowers, including at scale.

Publication of the draft guidance is another indication that the FCA wants to apply the spirit and intent of its new Consumer Duty towards the challenges created by the current difficult economic landscape to ensure good outcomes for consumers. There is therefore little doubt not only of the importance of firms having effective forbearance policies, procedures and controls in place but also that they should be reviewing them through a Consumer Duty lens. While speed and scale may be necessary due to the crisis, the draft guidance makes it clear that this is no excuse for disregarding customers who may have more complex needs - reflecting the new consumer support outcome under the Consumer Duty.

Please get in touch with us if you would like to discuss the potential impact of this development on your business.

Authored by Julie Patient and Virginia Montgomery.