BBA response to FSA CP11/31 Mortgage Market Review: Proposed package of reforms

Transcription

1 Lynda Blackwell Conduct Policy Division Financial Services Authority 25 The North Colonnade Canary Wharf London E14 5HS Submitted via 30 th March 2012 BBA response to FSA CP11/31 Mortgage Market Review: Proposed package of reforms 1. The British Bankers Association (the BBA ) is the leading association for the UK banking and financial services sector, speaking for 216 banking members from 50 countries on the full range of UK or international banking issues and engaging with 42 associated professional firms. Collectively providing the full range of services, its member banks make up the world's largest international banking centre, operating some 150 million accounts and contributing 50 billion annually to UK economic growth. 2. We welcome the opportunity to respond to this important consultation. BBA members who provide home loans are members of the Council of Mortgage Lenders (CML). The BBA therefore supports the CML response to this consultation and we do not seek to repeat those positions here. 3. Instead the BBA response addresses the questions in chapter 10 of the consultation in relation to tailoring the new regime for niche products. We focus on the key niche market areas of particular interest to our members, namely bridging finance; HNW lending; business lending. Q66: Do you have any comments on our proposal to define a bridging loan as a regulated mortgage contract with a term of 12 months or less? 4. The BBA believes that, in line with the draft EU Mortgage Directive, it is appropriate to define a bridging loan as constituting a contract of 12 months or less. Q67: Do you have any comments on how the affordability proposals should be applied to consumers taking out bridging finance? 5. The BBA supports the tailored approach proposed by the FSA which acknowledges that an income-based affordability assessment is not necessarily appropriate for finance advanced on an interest roll-up basis. Q68: Do you have any comments on our proposed read-across of our interest-only proposals to bridging finance? 6. The BBA believes it is appropriate to read-across the FSA s interest-only proposals to bridging finance. This allows lenders to take a flexible approach to assessing affordability based on the credibility of the customer s repayment plan.

2 2 Q69: Do you have any comments on our proposal that lenders consider the repayment or exit strategy of the borrower, and have a clear lending policy that reflects this? 7. The BBA believes that customers who access bridging finance on an interest-only or interest roll-up basis should have a credible repayment strategy and that lenders should have a clear policy to assess such strategies and to demonstrate a responsible lending policy. Q70: Do you have any comments on our proposals about extending bridging finance loans? 8. The BBA agrees that it is appropriate that a lender should reassess the affordability of the loan if planning to extend the term of the bridging finance. We support the FSA s intention not to require that new Key Facts or offer documents are issued. Q71: Are there any other factors that firms should consider in order to determine that a bridging loan is appropriate? 9. We do not have any additional suggestions. Q72: Do you have any comments on our proposal which requires that intermediaries who only offer bridging loans should describe the restriction on their service to the consumer? 10. The BBA has no comments on this proposal. Q73: Do you have any comments on the proposed prudential regime for bridging lenders? 11. The BBA understands that this proposed regime would not apply to BBA members. We therefore have no comments on this proposal. Q74: Do you agree with our views, summarised in the table at the end of this chapter, about the MMR proposals which are either not applicable or where a straight readacross to the bridging finance market is appropriate? 12. The BBA questions whether it is necessary or appropriate to include a straight read-across which mandates that lenders must periodically check the repayment strategy for a bridging loan, where the FSA is establishing that the loan will be limited to a maximum term of 12 months. Q75: In addition to the proposed tailoring set out above, is any other tailoring required for the bridging finance market? If yes, please explain. 13. We have no further comments. Q76: Overall, do you have any other comments on our proposed read-across of the MMR to the bridging finance market? 14. We have no further comments. Q77: What are your views on our approach to high net worth consumers? Should we adopt a more freemarket approach, recognising that for some consumers, regulation is not needed to protect them from the decisions they make? 15. The BBA strongly supports the free market approach to regulating mortgage lending to High Net Worth (HNW) consumers. Unlike mainstream mortgage lending, HNW finance is transacted on a bespoke basis with clients often presenting a unique set of needs and circumstances. Most HNW deals are negotiated individually based on existing client/bank relationships and often involve the client s professional financial advisors. A one-size fits all regime will not be appropriate in these circumstances. 16. We do not believe that a free market approach necessarily removes the protections and remedies available to other mortgage customers (as implied by the consultation) because lenders will still be subject to the FSA s Principles, which include TCF and customers would still be able to access the Financial Ombudsman scheme in relation to these principles.

3 3 Q78: Would an elective approach similar to that adopted in the investment market be appropriate? 17. The BBA believes that an elective approach, as currently allowed under the MiFID regime, would be a way to provide a carve-out for HNW mortgage lending. But, in order for an elective approach to operate efficiently it would need to enable banks, if they so wanted, to establish the HNW customer s elective decision at the outset so the customer could be redirected to the bank s mainstream mortgage business if they wanted to benefit from the protections of the full regulatory regime. 18. As a full carve-out of HNW lending from the regulatory regime would achieve these same ends (i.e. customers could use mainstream mortgage offers for full protection or HNW offers without protection) we believe a clean carve-out of HNW from the regime would be the most straight forward approach. In addition and to ensure transparency, the rules could require that HNW consumers are clearly informed of the two options available to them. Q79: Would it be appropriate for all mortgage rules to be forgone? 19. As outlined in response to question 78, the BBA believes that a full carve-out would be the most appropriate approach for HNW lending. Customers would still benefit from the lender s obligations to meet the FSA s Principles and High Level standards and could still opt to transact under the mortgage rules if desired. Q80: Would it be appropriate for all regulatory protections for high net worth to be forgone or should some, such as redress, for example, be retained? 20. The BBA believes that HNW customers would still be able to access to the Financial Ombudsman Service with a relevant complaint even though the mortgage transaction was carved-out of the full regime. 21. Additionally, access to the civil and criminal courts would of course remain. Q81: What are your views on defining high net worth consumers what do you consider the appropriate figures for income and assets? 22. The BBA believes that flexibility is an important element in any definition applied to HNW, so that where appropriate banks can offer a HNW service to a consumer falling marginally outside these parameters where it is to the consumer s benefit to do so. 23. The FSA s proposed definition of 1m p.a. gross income and 3m p.a. net assets appears too high. CML s regulated mortgage survey data shows that in 2011 there were only 326 mortgages supported by a single income of 1 million or more. This equates to only 0.03% of all mortgages. 24. The BBA believes the HNW definition used within the Consumer Credit Act to be more appropriate with a net income level of 150k and net assets of 500k. This approach would provide consistency with consumer credit and better mirror the current approach used by many of our private and smaller banks. Based on this definition, in 2011 approximately 1.2% of all mortgages would be classed as HNW. Q82: Do you agree that it is appropriate to extend the definition to include high net worth consumers acting as guarantors? 25. The BBA agrees that consumers acting as guarantors should be able to benefit from HNW status, where they demonstrate the qualifying attributes. Q83: Do you have any comments on how the affordability proposals should be applied to high net worth consumers? 26. As outlined in response to question 79, the BBA believes that all mortgage rules should be foregone for HNW consumers. We note that on average, mortgage terms for HNW customers rarely exceed 5 years.

4 4 Q84: Do you have any comments on our proposal to extend the tailored disclosure rules to high net worth consumers? 27. As outlined in response to question 79, the BBA believes that all mortgage rules should be foregone for HNW consumers. Q85: Do you think that to achieve this, an elective approach similar to that adopted in the investment market would be appropriate? 28. Please see BBA s response to question 78. Q86: Do you agree with our views summarised in the table at the end of this chapter about the MMR proposals which are either not applicable or where a straight readacross to high net worth lending is appropriate? 29. As outlined above, the BBA believes that HNW mortgage lending should be carved-out of the mortgage rules. Q87: In addition to the proposed tailoring set out above, is any other tailoring required for high net worth lending? If yes, please explain. 30. Please refer to our responses to questions Q88: Overall, do you have any other comments on our proposed read-across of the MMR to high net worth lending? 31. No further comments. Q89: What are your views on our approach to business lending? Should we adopt a similar approach to that proposed for high net worth consumers, recognising that for some consumers, regulation is not needed to protect them from the decisions they make? 32. The BBA does not believe that an elective process, where the customer can choose to transact under the FSA mortgage rules, would be appropriate for business lending. The proposed rules do not take account of the differences between personal lending to purchase a home and business lending secured by a home and in particular the different rationales for borrowing and the different ways in which each type of borrowing is assessed. The elective proposal would require almost all of the rules more directly applicable to personal lending to be applied to business lending, but they are not easily transferable into a business lending environment 33. Business lending usually tends to be relationship driven, typically with a business operating a business bank account for day to day banking activities and perhaps at some point requiring credit for which it will speak to its bank. Based upon the business, the relationship and the proposition being put to the bank, the bank and customer will discuss viable options and will only then consider security options. This may or may not (depending upon the circumstances and availability of assets) include the use of a residence as security. Many business loans will be secured by other assets, meaning the lending falls outside of MCOB. This is in stark contract with domestic mortgage lending where the borrower and lender are in no doubt from the outset that the home (or some form of residential property) will be secured to obtain the loan. 34. The BBA therefore believes that business lending should be carved-out of the mortgage rules. Q90: How would we draw a line between those business borrowers able to take the risk and those who are not? 35. As outlined above, the BBA supports a full carve-out for business banking so does not believe it is necessary to make a distinction between those business borrowers able to take a risk and those not. 36. Micro-enterprises should still continue to have access to the FOS complaints process for matters covered by the FSA Principles and High Level standards and MCOB 13 could continue to be applied to ensure fair treatment of customers in arrears.

5 Q91: How would we prevent this proposal from being exploited as a means of circumventing our affordability proposals? To prevent a full carve-out being exploited to circumvent FSA rules, business lending could be defined by referencing the business banking relationship and the fact that the funds are forwarded into a business bank account rather than a personal account. A business banking relationship could not be easily falsified to circumvent the rules. Q92: Would it be appropriate for all mortgage rules to be forgone or should some, for example the arrears rules, be retained? 38. As outlined above, the BBA believes that MCOB 13 could be retained for business lending, whilst applying a carve out to the remainder of the rules. Q93: Do you have any comments on how the affordability proposals should be applied to business borrowers? 39. The BBA does not believe that the FSA s affordability proposals are appropriate for business lending for a number of reasons. 40. Business loans are assessed against the income and expenditure of the business (most of which is visible through the banking relationship and business bank accounts), the business proposition and consideration of external business factors (such as industry wide or local developments or future plans). Borrowing will invariably be used to enable either current trading or future expansion. 41. A detailed assessment of a business proprietor s income and expenditure in the manner proposed will not alter the viability of the loan nor should it replace the existing practices of lenders in reaching a lending decision on a business loan. Business proprietors tend to keep their personal finances entirely separate from their business accounts and are therefore unlikely to understand or appreciate a business banking discussion focusing upon their personal affairs. 42. There are more repayment options available to a business than there are to individuals for example, the loan itself might increase revenue and therefore the repayment is planned through such increased revenue or the sale of the business or business asset in due course might be the repayment strategy. Businesses may seek interest only repayments because their business is seasonal or they may wish to make certain specified capital repayments throughout the term but not on a regular monthly basis in order to match their cash or order flow. Q94: Do you have any comments on the proposed approach to professional standards in business lending? 43. The BBA does not support the FSA s proposed approach. The business banking relationship is not an advisory relationship and a relationship manager would not advise a business customer that the best course of action he could take is to use his home as security and enter into a regulated mortgage contract. The parties will assess available options and the business customer will choose the option which he wishes to pursue. Q95: Do you agree with our views summarised in the table at the end of this chapter about the MMR proposals which are either not applicable or where a straight readacross to business lending is appropriate? 44. As outlined in our responses to questions 89-94, the BBA believes that business lending should be fully carved-out from the mortgage rules except for the relevant MCOB 13 arrears provisions. Q96: In addition to the proposed tailoring set out above, is any other tailoring required for business lending? If yes, please explain. 45. As outlined in our responses to questions 89-94, the BBA believes that business lending should be fully carved-out from the mortgage rules except for the relevant MCOB 13 arrears provisions.

6 6 Q97: Overall, do you have any other comments on our proposed read-across of the MMR to business lending? 46. No further comments Q98: Do you have any comments on the draft rules specific to niche mortgage markets in the draft Mortgage Market Review (Conduct of Business) Instrument 2012 at Appendix 1? Do you think the rules reflect the stated policy intention? 47. No further comments. Please do not hesitate to contact me if you have any questions about the BBA submission. Yours sincerely, Paul Ross Director T +44(0) E paul.ross@bba.org.uk