In our view, the need for change is accepted, but the key questions are how and when it should be implemented.
In introducing reforms, we believe it is crucial to take a holistic view of what consumers really need. Regulators should take a proportionate view of requirements for enhanced consumer protection, recognising that measures that permanently exclude swathes of customers in a market that is already risk-averse are damaging to wider consumer interests.
Protecting consumers
In recent weeks, a range of different consumer bodies have expressed contrasting opinions on what needs to be done to ‘protect’ mortgage customers.
One of them is the Financial Services Consumer Panel, an independent statutory body set up to represent the interests of all consumers in the development of policy for the regulation of financial services.
Earlier this month, it set out what it wanted to see from the Financial Services Authority’s ongoing mortgage market review. It outlined a six-point plan for a sustainable and healthy mortgage market. We support each of its objectives:
- Effective regulation to support consumers.
We agree with the panel’s view that "to help consumers, the FSA’s policy needs to be based on a robust cost-benefit analysis, which quantifies not only the compliance costs of the MMR and the benefits of fewer arrears and possessions but also the costs imposed on creditworthy consumers who nevertheless have to settle for a less preferred property, or who are forced to rent."
- Regulatory policy to take account of wider social and economic implications.
We support the panel’s view that "an overly prescriptive approach could have serious implications for the unregulated buy-to-let market, the rental market and the market for social housing." We endorse the panel’s plea for "joined-up thinking" on the MMR and its wider implications for housing policy.
- Lenders required to judge affordability and suitability for individual consumers.
We agree with the panel’s view that lenders should be responsible for assessing the ability of borrowers to repay "according to their individual circumstances and ability, if necessary, to curtail discretionary spending, with an intelligent, tailored assessment of potential risks, rather than having overly prescriptive rules which could be unfair to some consumers."
We also concur with the panel when it says it:
- doubts the need for credit-impaired customers to have an “extra buffer” on top of standard affordability assessments;
- dislikes restricting the maximum mortgage term to 25 years, which “fails to recognise changing working patterns and increased longevity;” and
- sees interest-only mortgages as a legitimate option for some customers, who may have a variety of reasons for making this choice.
- Transitional arrangements which take account of the implications of the changes for all segments of the market. We support the panel’s argument that "the FSA needs to ensure transitional arrangements adequately provide for consumers who have historic mortgages that may now lie outside the responsible lending criteria."
On this issue, we also agree that timing is crucial, and that consumers who find their applications rejected solely because they do not comply with MMR requirements could find their options restricted at a time when lending is already constrained.
We support the view that "to avert this danger, implementation of new affordability rules should be delayed until the housing market has demonstrably recovered."
- A future regulatory structure responsive to consumers’ needs. The panel is concerned that the new Financial Policy Committee may not consider carefully enough consumers’ interests in making decisions about the mortgage market.
"It is vital that the interests of consumers are adequately represented," it says. "Instruments, such as loan-to-value caps, may be effective in stabilising the financial system but may additionally have serious adverse consequences for some consumers, limiting their options."
The panel proposes that the FSA should work with the FPC, on an interim basis, to seek to ensure that proposed macro-prudential requirements are subject to rigorous cost-benefit analysis "which takes account of the goals of financial stability and consumers welfare."
The aim should be to select those macro-prudential tools that contribute most to financial stability but are least damaging to consumers, in their cost and impact on the availability of financial services, including mortgages.
The panel goes on to argue that, other than in an immediate crisis, it would expect the fully operational FPC to consider with the Financial Conduct Authority the impact of macro-prudential requirements on "consumer welfare."
- Balanced debate which overcomes the polarised views on the mortgage market. Once again, we agree with the panel’s view that the debate about the MMR has become unhelpfully polarised between those speaking out on behalf of vulnerable consumers and industry representatives (like the CML) which focus on the market overall.
The panel said it wanted to "represent all consumer interests" and work with the FSA "to achieve good consumer outcomes."
It continued:
"A healthy market needs to achieve a balance between freedom for those who are able to repay their mortgages and understand the risks, and those consumers who are vulnerable and need greater protection."
The panel concluded that, in order to encourage responsible lending, the FSA had proposed a series of requirements for checking affordability, most of which were overly prescriptive. We agree.
What’s best for consumers?
A
