The Financial Conduct Authority (FCA) and financial press have highlighted the plight of so-called “mortgage prisoners”. These are customers trapped in expensive deals and unable to remortgage because of the tightening, in recent years, of affordability assessment criteria and/or because their “zombie banks” no longer offer new products. With the problems being exacerbated following the Bank of England’s base rate rise in August 2018, Rob Aberdein asks how firms and the FCA might help these customers to wake from their mortgage market nightmare
The problems
A decade on, UK consumers are still feeling the effects of the last financial crisis. Increased regulation of consumer lending prompted by lessons learned from the crisis and brought into effect in 2014 means that many mortgage customers who took out a loan prior to 2014 now no longer meet affordability assessment criteria and cannot necessarily obtain a remortgage when their fixed term expires. Under the terms of their existing deals, those customers then find themselves either rushing into unfavourable new deals or ‘trapped’ into paying mortgage interest on lenders’ standard variable rates (SVRs). SVRs are generally much higher than fixed term rates, and can mean a significant increase in monthly repayments. With lenders’ SVRs being linked to the Bank of England’s base rate, the recent base rate rise [footnote 1] has exacerbated the problem.
The financial crisis also led to several firms becoming ‘closed book’ lenders – that is, lenders that no longer offer new products and instead subsist only on running down their existing accounts. Northern Rock (as was) is a well-known example of this type of lender – now often termed, in the media, as “zombie banks”. The crisis also prompted the assignment of many mortgage accounts to non-regulated third parties. Post-fixed term remortgaging opportunities for customers of such unregulated lenders or zombie banks are also limited or non-existent.
FCA and industry action
The FCA highlighted these issues in its interim report into the mortgage market, published in May 2018. In July 2018, in response to that interim report, lenders representing some 93% of the UK’s mortgage market agreed a cross-industry voluntary initiative that will see existing customers on SVRs who are up-to-date with repayments but would otherwise not meet current affordability criteria offered the opportunity to remortgage.
It is anticipated that that may help some 10,000 qualifying borrowers whose accounts are currently with active, regulated lenders. However it will not help the customers of inactive and/or unregulated lenders [footnote 2].
The FCA has called for more innovation to help affected consumers – but what can be done?
Innovative solutions?
- Improve communications. One immediate step which both financial services firms and the FCA could take is to improve communications about these issues. As well as more clearly highlighting the problems to customers and the general public, firms and the FCA could explain the importance of customers acting early to give themselves as much time as possible, before expiry of their fixed terms, to shop around for possible suitable remortgage deals.
- Develop tools to find and compare deals. Firms, the FCA and intermediaries could also work together to develop tools – possibly utilising advancements in digital and mobile technology – to help customers to better understand which mortgage/remortgage products they qualify for and also to help customers more easily compare different options.
- Innovative new options. Firms should consider whether there is any scope for approving re- or new mortgage deals for affected customers – especially where those customers are up-to-date with payments – even despite current affordability criteria restraints. For example, might alternative solutions or securities be available (such as guarantors or additional assets)? Might an individual borrower’s changed or extenuating circumstances be more specifically taken into account? Can additional weighting be given to a clean mortgage payment history? Can new products with longer mortgage terms and/or other different conditions be devised to meet this market?
- Discretion and forbearance. When customers fall into arrears, lenders frequently deploy discretion and a host of forbearance measures. It is possible that proactively adopting a similar approach (the agreement of payment plans, mortgage holidays, and the like) may also assist mortgage prisoners – ideally to head-off more serious affordability issues as the account endures.
- Harnessing technology. More generally, harnessing new technologies such as Paylink Embark, which provide enhanced visibility and accessibility for customers throughout the life of an account, as well as providing firms with key ‘touchpoint’ opportunities to send real-time alerts and documentation to customers, could also go a long way towards identifying and addressing affordability, fixed-term expiry or other issues before they develop into the types of problems which many mortgage prisoners now face.
What’s next?
The FCA has acknowledged in its interim report that these problems arise primarily from the responsible lending regulatory correction rules which it imposed in 2014 and it has clearly stated its intention to resolve what it has termed this ‘legacy issue’. The July 2018 cross-industry initiative is a very positive first step, but further industry-driven solutions will be required. The FCA intends to publish its final findings, a summary of feedback received and proposed next steps before the end of the year.
In related news, Citizens Advice (CA) launched on 28 September, a super-complaint which it claims (while not limited to the financial services industry and not dealing specifically with the mortgage prisoner problem) was prompted by the treatment of mortgage customers who end up on SVRs. CA are calling on the Competition and Markets Authority and the FCA to take action to stop long-term customers being penalised for their loyaltyIn the financial services context, CA suggests that this might involve requiring lenders to proactively ensure that existing customers – in particular vulnerable customers and those who might lack digital or other skills which would enable them to easily shop around – are on the best deals available to them. CA has also suggested that limiting the difference between the best and worst deals offered within the mortgage market might represent a solution.
Walker Morris will monitor and report on key developments.
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[footnote 1] from 0.50% to 0.75% as of 2 August 2018
[footnote 2] In May 2018 Zoopla estimated that to amount to some 140,000 customers: 20,000 with zombie banks and 120,000 with unregulated lenders
This piece was originally published on Walker Morris' website.