The new rules are the result of consultation undertaken last December and were described by FSA Managing Director, Martin Wheatley, as an way to defuse "a ticking time bomb that has been created over the last 20 years". The majority of these proposals, published in December 2011, remain unchanged by the regulator in their final rules.
Martin Wheatley, managing director of the FSA and CEO-designate of the Financial Conduct Authority, said:
"These new rules will help create a more sustainable market that works well for everyone, whether a borrower or a lender.
"We recognise that many lenders are now using a far more sensible set of lending criteria than before, but it is important that these common sense principles are hard-wired into the system to protect borrowers.
"We want borrowers to feel confident that poor practices of the past, which led to hardship and anxiety, are not repeated. At the heart of the new measures is an affordability test to check borrowers can meet the repayments of the mortgage they want.
"To ensure the measures are effective but practical we spent a great deal of time discussing our proposals with consumers, firms, parliamentarians and numerous other stakeholders. I am therefore very confident that we have come up with a set of rules that are proportionate and sensible, and will create a more sustainable mortgage market where consumers are put at the heart of every decision."
The review covers the following areas:
Arrears management practices
- Firms must not apply a monthly arrears charge where an agreement is already in place to repay the arrears.
- Payments by customers in financial difficulties must first be allocated to clearing the missed monthly payments, rather than to arrears charges, which can be repaid later.
- Firms must consider all options for borrowers. Repossessions should always be the
last resort.
- All telephone calls regarding arrears handling must be recorded and kept for three years.
Rules bringing the above into effect came into force on 25 June 2010. Rules for the remaining proposals below are not yet in force.
Approved Persons
All mortgage advisers and those who arrange mortgage sales will be individually held accountable and required to demonstrate they are ‘fit and proper’.
Responsible lending
- Affordability assessment. Lenders must verify income and demonstrate the mortgage is affordable for the borrower, taking into account income and expenditure. This includes any known future changes to income and expenditure.
- Interest rate stress test. Lenders must take into account market expectations of possible
future interest rate increases.
- Interest-only mortgages.
- Lenders must assess affordability on a capital and interest repayment basis unless there is a clear repayment strategy in place to repay an interest-only mortgage. If affordability is assessed on an interest-only basis, the lender must take into account the cost of the repayment strategy.
- Lenders must obtain evidence of the repayment strategy.
- Lenders must contact borrowers at least once during the mortgage term to check on the status of the repayment strategy.
- Transitional arrangements. Lenders will be allowed to waive certain affordability rules for existing mortgage holders where it is responsible and appropriate to do this.
- Lenders must have in place a responsible lending policy, which has been approved by their governing body, which sets out their approach to all of the above.
Distribution and disclosure
- Advice: All vulnerable consumer groups (those purchasing equity release, right-to-buy, sale and rent back and those consolidating debt) must get advice. All other borrowers must get advice if the sale involves interaction between the lender and consumer, except for high net worth (HNW), professional and business borrowers who can elect for an execution-only service.
- Execution-only: Consumers can reject advice (except in sale and rent back sales) and purchase on an execution-only basis. Non-interactive sales (for example via the internet) may be execution-only. Consumers must know precise details of the product and the loan they require in order to proceed. Execution-only can also be used for post-sale contract variations (for example if porting to a new property) providing no new money is advanced.
- Sales standard: Firms have additional responsibilities to borrowers regarding further advances and the rolling-up of fees.
- Professional standards. All mortgage intermediaries must hold a relevant mortgage qualification.
Service disclosure. The Initial Disclosure Document (IDD) is no longer required. Instead firms must explain whether there are any limitations in the product range they provide and how they will be remunerated.
- Product disclosure: The Key Facts Illustration (KFI) does not need to be produced until the product has been recommended/chosen, or the consumer requests it.
Arrears management
- Arrears charges. Lenders must not attempt to collect more than two direct debits in a month.
- Concessionary rates. Lenders must not remove borrowers from concessionary interest rates if they have difficulties meeting their mortgage payments.
Niche markets
The proposals summarised above will be read across to the niche markets where appropriate, with some limited tailoring to reflect the particular nature of those markets
