Feb 2012: The FSA has listened

The Council of Mortgage Lenders has been busy preparing its response to the MMR consultation. Paul Smee, director general of the CML, outlines some of the key features

As you read this, we will be almost half-way through the consultation period for the Financial Services Authority’s (FSA) mortgage market review (MMR). It has been a busy few weeks, but there is still a lot to do – and not only in finalising our response.

Beyond that, we will be seeking to ensure there is a workable set of final rules and the right kind of supervisory regime. We now believe, however, that the FSA is moving in the right direction, and we think we can help make its proposals work.

When the regulator published the current draft of the MMR before Christmas, it was clear that it had moved significantly from the first document it published in the summer of 2010. The CML provided a comprehensive response to that first draft, with arguments that were well supported by data, analysis and research.

And it is clear that the FSA has listened. There are now strong grounds for believing that the regulator can fulfil its desire to put common sense at the heart of lending, and we are ready to help.

As we continue the process of consultation with members, it is clear that the FSA has heeded the arguments on many of the key issues.

Income verification

On income verification, the FSA is now proposing a welcome degree of flexibility for lenders. It accepts that firms should be permitted to use automated processes, and outsource income verification to intermediaries if they wish to. These are important concessions for firms that want to provide an alternative to direct sales.

A reasonable assessment of a borrower’s ability to pay appears to be acceptable to the FSA, with the regulator acknowledging our argument, supported by research, that households are able to prioritise mortgage commitments and “flex” discretionary spending.

Helpfully, it is no longer proposed that firms should assess ability to repay over 25 years when the borrower has opted for a longer term.

It is also proposed that lenders can set their own rates against which to stress-test the ability to pay. Projections of future income for self-employed borrowers will also be acceptable, as long as they are robust. That will help ensure that those who work for themselves are not unnecessarily excluded from the mortgage market.

But on the fundamental principle that income must be verified in every case, and that lenders should take responsibility for this, the FSA has not budged. Firms will be required to take into account what they know, and should reasonably find out, in assessing the customer’s ability to repay and in accepting income projections for self-employed borrowers.

And in stress-testing the ability to pay, lenders will need to take into account market expectations for interest rate changes over the next five years and test against a minimum rise of 1 per cent, even if the market expects a lower rate of increase.

Interest-only mortgages

The FSA has accepted that interest-only mortgages should be available for some customers, but with tighter criteria that will essentially make them only a niche area of lending.

Affordability will have to be assessed on a repayment basis unless the lender has evidence of a repayment vehicle. And if there is a repayment vehicle, firms will need to take into account the effect on household budgets of making payments into it.

The FSA is proposing rules on checking the existence of repayment vehicles, when taking out the mortgage and during the lifetime of the loan, and for assessing its performance. But the FSA also wants to reinforce responsibility for borrowers.

So, having fulfilled requirements for assessing the performance of repayment plans, lenders will not be responsible for how they actually perform. Nor will they be liable in cases where the customer fails to divulge vital information to the lender after the loan has been advanced.

Advice

The proposal for advice to be a standard feature of the sales process may help clear up an area of uncertainty for consumers, but it comes at a price. Only a small number of customers – high net worth borrowers and mortgage professionals – will be able to opt out of advice and choose an execution-only service.

For everyone else, lenders will have to provide advice, even if the customer then chooses to ignore it and opt for another product on an execution-only basis.

At this stage, there is some uncertainty over how advice requirements will be met as part of telephone sales. But the consultation paper confirms that scripted questions should be permitted, and we are hopeful that many firms will be able to continue with similar arrangements to those they already use for telephone sales.

Progress

The progress we have made in these key areas – and many others – is encouraging. But, as I said at the outset, we are still less than half-way through the consultation process – and there are still many issues to be resolved. On many important questions, our views are crystallizing, but not yet set in stone.

So, if you are not yet engaged with us in the consultation process, I urge you not to miss your chance. It is crucial that our response to the FSA reflects all the issues and challenges faced by every type of lender, large or small, and whether operating in the mainstream or niche areas. There is still a huge amount to play for, and it is not too late to shape the outcome.