FSA MORTGAGE MARKET REVIEW: PROPOSED PACKAGE OF REFORMS CONSULTATION PAPER. Response by the Money Advice Trust (March 2012)

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1 FSA MORTGAGE MARKET REVIEW: PROPOSED PACKAGE OF REFORMS CONSULTATION PAPER Response by the Money Advice Trust (March 2012)

2 CONTENTS Introduction About the Money Advice Trust 2 A partnership approach who we have consulted 2 Responses to individual questions 3 MAT RESPONSE TO THE FSA MORTGAGE MARKET REVIEW CONSULTATION PAPER Page 1

3 INTRODUCTION About the Money Advice Trust The Money Advice Trust (MAT) is a charity formed in 1991 to increase the quality and availability of money advice in the UK. We work with the UK s leading money advice agencies, government and the private sector to increase the availability of money advice, improve its quality, and enhance the efficiency and effectiveness of its delivery. MAT s vision is to help people across the UK to tackle their debts and manage their money wisely. MAT aims to support individuals and micro-businesses in the UK through their debts and into financial health, and to improve the capability, quality and efficient delivery of free independent money advice by: Delivering advice to the public via National Debtline, Business Debtline and My Money Steps; Supporting advisers; Making the case for free money advice; Co-ordinating initiatives to improve money advice; Sharing research and information to shape and influence policy. How we have drawn up this response In preparing this response, we have consulted our partner agencies in the freeto-client money advice sector in order to achieve a consensus view. These partners include: Advice NI Advice UK Citizens Advice Citizens Advice Northern Ireland Citizens Advice Scotland Institute of Money Advisers Money Advice Scotland National Debtline and Business Debtline (where relevant) Payplan. Some of these partner agencies will also submit their own separate responses to this consultation paper. These submissions may include issues not covered below. Please note, our partner agencies may not have provided views on this response MAT RESPONSE TO THE FSA MORTGAGE MARKET REVIEW CONSULTATION PAPER Page 2

4 where this consultation paper does not cover their specific jurisdiction. Please note that we consent to public disclosure of this response. Introduction We welcome the opportunity to comment on the Mortgage Market Review proposed package of reforms. There are many individual items that we would like to welcome within this set of proposals. However, we also have some concerns and are not convinced that overall this package of proposals is going to be sufficiently robust to prevent a return to risky lending and borrowing practices once the market becomes more buoyant. We note that there were several useful measures that it appeared the FSA was minded to implement when the individual consultations were published, but these have been watered down or removed in CP11/31. We refer to these measures throughout our response. We have reached the conclusion that the FSA appears to have placed more weight on the responses received from lenders and trade bodies than those received from consumer groups. Also, that the FSA has been reassured by the descriptions given by lenders and trade bodies of their current lending practices and internal controls. This seems to us to be potentially short-sighted. We agree that current lending practices appear to be more prudent and responsible than in the recent past, but this is likely to be driven by the current economic situation and the fact that less scrupulous lenders have left the market. We are concerned that a diminution of the regulatory controls that the MMR initially appeared to envisage, means that the mortgage reforms may not be future-proofed to the extent that the evidence from our clients points to being necessary and in particular, do not provide sufficient controls for less scrupulous lenders who may enter the market once the economy recovers. MAT RESPONSE TO THE FSA MORTGAGE MARKET REVIEW CONSULTATION PAPER Page 3

5 Responses to individual questions Chapter 3 Question 1 Do you agree that lenders should detail how they incorporate anti-fraud controls into their affordability assessments in their responsible lending policy? We agree that lenders should be required to detail how they incorporate anti-fraud controls into their affordability assessments. However, we query the decision to defer implementation of the Approved Persons Regime as it had been envisaged that bringing all who advise on or sell mortgage contracts into the Approved Persons regime would help to reduce fraud. We outlined in CP10/16 how before the downturn, money advisers often come across clients in mortgage arrears who recounted how they were encouraged by their lender or broker to provide inaccurate information regarding their income, in order to obtain the level of loan required. We accept that in the current economic climate, this type of activity is unlikely to occur, however as we have stated in our introduction to this response, it is important that the proposals are adequate to meet the challenges that will arise if less scrupulous lenders re-enter the market. Question 2 Do you have any comments on our income proposals? We are broadly in agreement with your proposed approach to assessing income. However, we are concerned that by allowing lenders flexibility and discretion on how they verify income, less scrupulous lenders will seize upon this as a loophole that will allow less care to be taken over assessing affordability and sustainability. Question 3 Do you agree with this approach to expenditure? Do you have any comments on the categories of expenditure? Do you have any practical concerns about implementing this approach? In general terms we welcome the approach to expenditure assessment. However, we would favour a more prescriptive approach (see below) as it seems that lenders will have a large degree of flexibility as to how they make their assessment. Our main concern regarding the implementation of this approach is that there will be inconsistency amongst lenders and this will create scope for irresponsible lending and borrowing. MAT RESPONSE TO THE FSA MORTGAGE MARKET REVIEW CONSULTATION PAPER Page 4

6 Committed expenditure We support the plan to require lenders to assess committed expenditure but the proposal that lenders take reasonable steps to obtain the details of the applicant s credit commitments is lacking prescription and will mean that as is the situation now some lenders will do this very well and some will do the bare minimum. For example, the requirement upon lenders to corroborate any customer-declared information about credit commitments will, in our view, be of less benefit than identifying the information about credit commitments that customers choose not to declare. We urge that there is reconsideration of the decision not to require lenders to carry out a credit reference check. We also suggest that child maintenance and alimony and any related costs would sit more appropriately in the basic expenditure section of the assessment. We would be concerned that it could be overlooked if it remains where it is and should be a named item of basic essential expenditure. Basic essential expenditure We are in agreement with the proposal that the affordability assessment involves named items of expenditure however we would suggest that some other items are added to this. For example, there is no account of contents insurances and maintaining the fabric of the home. We have also stated above, our reasons why child maintenance costs and so on are included under this heading. Also we do not agree with your decision to include childcare as a basic quality of living cost. We note that you have justified its placement under this heading because it does not apply to all households but the same could be said of essential travel. Childcare costs are often one of the most expensive monthly outlays that a family makes. We do not think that it is at all advisable for this to be included under a list of discretionary expenditure items that lenders are not required to consider. Basic quality of living costs It is difficult to assess the usefulness of the inclusion of basic quality of living costs because without a prescribed list it will be assessed in a meaningful way by some lenders and only lip service paid by others. We would favour a prescribed high-level basket of goods approach. As we have stated above, we strongly support the inclusion of child care costs under basic essential expenditure. Question 4 Do you have any comments on our proposed approach to assessing affordability against future interest rate increases? We welcome the proposal to introduce stress testing against future interest rate increases into the process however we have no comments to make about how this is achieved. MAT RESPONSE TO THE FSA MORTGAGE MARKET REVIEW CONSULTATION PAPER Page 5

7 Question 5 Do you agree with our assumption that 90% of lenders already apply a stress-test? We are not in a position to comment. Question 6 Do you think that lenders are currently applying a stress test of a similar degree to the test we propose? We are not in a position to know whether or not this is the case. Question 7 Do you have any comments on our proposal to drop the requirement that affordability should be assessed on a maximum term of 25 years? Taking into account imminent changes to the retirement age, increases in life expectancy and the expectation that people will stay in work longer, it seems sensible to drop the requirement that affordability should be assessed on a maximum term of 25 years. Question 8 Do you have any comments on our proposals to protect credit-impaired consumers? We have stated in our response to Chapter 5 that we would favour consumers attempting to take out a mortgage for debt consolidation purposes to be treated in the same way as Sale and Rent back cases and as such, prevented from rejecting advice and proceeding on an execution-only basis. In our response to CP10/16 we did not rule out support for a buffer for credit impaired borrowers but we did have some misgivings about the proposal. Overall, we agree it is preferable that credit impaired borrowers are assessed for affordability as they will already be subject to higher interest rates and a buffer will present an even greater obstacle to obtaining a mortgage. Having said this, we are concerned that the assessment of expenditure proposals may not be sufficiently robust to ensure a consistent approach to affordability assessments. Our concern is that the extent to which the credit impaired, will receive an adequate affordability assessment will depend upon the lender that they are doing business with and that there is not sufficient prescription in place to minimise irresponsible lending and borrowing. MAT RESPONSE TO THE FSA MORTGAGE MARKET REVIEW CONSULTATION PAPER Page 6

8 Question 9 Do you think that our proposed enhanced sales standards will provide adequate protection for right-to-buy consumers? Are further measures required? We think that the proposed enhanced sales standards will go some way to protecting the right-to-buy consumer. We also approve of the proposal to exclude right-to-buy consumers from execution only sales. We have already stated our misgivings about the affordability assessment and we feel that right-to-buy consumers could be particularly vulnerable to a less than adequate affordability assessment. We refer you to a survey commissioned by Consumer Focus in 2009 which highlighted the vulnerability of right-to-buy consumers. 1 This group of consumers was found to be twice as likely as others to have mortgage repayment problems. 2 Right-to-buy owners with mortgages are also fifty percent more likely to have additional mortgages or loans secured on their homes. 3. The available evidence appears to indicate that right-to-buy consumers need thorough affordability assessments and also advice about any benefits that they may lose once they lose their status as tenants. Question 10 Do you think income multiples could work under our proposed rules? If not, why? We would favour a more personalised assessment of affordability with the provisos that we have included in our comments above. Question 11 Do you have any comments on our proposal to require lenders to take into account information about future changes to income and expenditure? We welcome your proposal to require lenders to make reasonable assessments of affordability based on likely future changes in income and expenditure Face-to-face research conducted on Consumer Focus s behalf by TNS in March/ April and May 2009 with 4,238 individuals, of whom 185 were right-to-buy mortgage-holders. Nearly one in 10 (eight percent) of right-to-buy mortgageholders had difficulty in making, or missed a mortgage payment in the last three months. This compares to less than one in 20 (3 percent) of other mortgage-holders. 3 Consumer Focus / TNS research March May Six percent of right-to-buy mortgage holders have at least one other mortgage or loan secured on their home, compared to only four percent of other mortgage-holders. MAT RESPONSE TO THE FSA MORTGAGE MARKET REVIEW CONSULTATION PAPER Page 7

9 Question 12 Do you agree, that to ensure these proposals work, we should define a credit-impaired consumer? Do you agree with our proposed definition? We agree that it is important to define a credit-impaired consumer. We are broadly in agreement with your proposed definition. However we suggest three small amendments as follows. The first descriptor is, in our opinion too restrictive. This states: within the last two years has owed overdue payments, in an amount equivalent to three months payments, on a mortgage or other loan (whether secured or unsecured), except where the amount overdue reached that level because of late payment caused by errors by a bank or other third party; We believe it ought to be possible for the borrower to put forward a mitigating argument relating to a unique set of circumstances such as: I was out of the country on a family emergency. My [close family member] died and I have missed the last three payments. I was in hospital and the bills weren t paid. However, this would need to be at the discretion of the lender. We would suggest that the second descriptor is amended to match the caveat in the first descriptor. This currently says:..has been the subject of one or more county court judgments, with a total value greater than 500, within the last three years. This should be amended to include: except where the amount overdue reached that level because of late payment caused by errors by a bank or other third party. Our reasons for this suggestion are that we have all become familiar with consumer stories in the press where credit ratings have been impaired by a forgotten or disputed mobile phone bill, or other contractual dispute. It would be unfair to treat someone as credit-impaired in this situation. We would further suggest an additional amendment to the second descriptor to exclude from the definition, borrowers who have paid off their county court judgments in full within the last three years. MAT RESPONSE TO THE FSA MORTGAGE MARKET REVIEW CONSULTATION PAPER Page 8

10 Even as amended, we can identify consumers who could slip through this description; in particular consumers who have recently undergone a change in circumstances and may have multiple debts. Also, people who on the-the-face of it, are up to date with their credit payments, but have significant levels of debt and are juggling their payments by using one credit card to pay another, for example. However we accept that it may be difficult to create a definition that is absolutely watertight. Also, we understand that lenders have the facility via credit reference software to identify potential borrowers in the latter category. Question 13 Which option do you prefer? Option 1, where the lender would be required to take reasonable steps to ensure that debts to be consolidated are repaid? Or option 2 where the lender would be required to assume that debts to be consolidated remain outstanding for purposes of assessing affordability? If you disagree with both options, what do you suggest as an alternative? In our response to CP10/16 we supported the proposal that lenders should be required to ensure that credit commitments to be cleared by debt consolidation are repaid as expected. We strongly believe that if a consumer has taken out a consolidation loan, that this is used to consolidate debts. Yet it is commonplace for money advisers to speak to clients who have obtained a consolidation loan and only used the loan in part to pay off their debts. Sometimes this is because they were not allowed to borrow enough to pay off all of their debt or because the consumer then decided to spend the money, or part of it, on something else. In such circumstances we can often identify this as the trigger that caused the debts to spiral out of control. We are concerned that the watered down proposal will fail to check outcomes such as these. We would like to reiterate here that taking out a secured loan to consolidate unsecured debt is often a measure taken by people in difficulty. If the result is that not all the unsecured debt is consolidated, the implications are serious. Also, we are unclear as to what is meant by the proposal that lenders are required to take reasonable steps to ensure that debts to be consolidated are repaid and are concerned that reasonable steps will to be defined in a wide variety of ways. We therefore do not favour either option and instead suggest that consolidation loans should be set up so that lenders are required to ensure that the funds are used to pay off the debts. If however, the FSA decides that lenders are not required to use funds from a consolidation loan to pay off all debts, we believe it is vital, where lenders offer to consolidate only some of the outstanding debts into a new mortgage, that the affordability assessment takes into account the amount due under the new monthly payments, as well as the monthly payments that still have to be paid on the remaining debts. MAT RESPONSE TO THE FSA MORTGAGE MARKET REVIEW CONSULTATION PAPER Page 9

11 Question 14 Do you agree with our proposals to strengthen lender s systems and controls around responsible lending? We are encouraged to see a strengthening of the systems and controls around responsible lending, although as we have indicated elsewhere, we would favour a more prescriptive approach. In particular, we have in mind the need to create a regulatory system that will exercise sufficient control to ensure that should less scrupulous lenders that have exited the market, decide to return, that they will be unable to find loopholes that will allow a return to business as usual. As we have stated in our response to Q3, we are concerned in general about the affordability assessment and have particular concerns for the credit impaired and other groups such as right-to-buy consumers and feel that sufficient controls may not be in place to safeguard detriment to the most vulnerable consumers. Question 15 Do you have any comments on our proposed transitional arrangements? Do you think they will be sufficient to address risks to consumers? Will they create any additional risks to consumers? We welcome the transitional arrangements but would like to see some additional considerations. In doing so, we are mindful that many of the individuals who may need to use these arrangements obtained their original mortgage in good faith but were misadvised as to its suitability or were not subject to sufficient checks to establish affordability. (Although we also accept that in many cases, the consumer will also have had a role to play in this.) We are therefore taking the view that the introduction of the MMR proposals will be a line in the sand and that as far as possible the transitional arrangements should have a can do spirit to them. With this in mind, we would like to suggest some revisions to Exhibit 8 in Section 2. Remortgage. We suggest that it would be unfair to exclude borrowers from the transitional arrangements where they are seeking to change the term, the payment method or the parties on the mortgage. Changing the term We see no reason why these arrangements cannot help a borrower who took on a challenging mortgage and who has a good payment record but who is now seeking to spread the payments to make them more affordable. MAT RESPONSE TO THE FSA MORTGAGE MARKET REVIEW CONSULTATION PAPER Page 10

12 Changing the repayment method In the case of borrowers with an interest only mortgage and no repayment vehicle we can find no reason why they should be excluded from the transitional provisions to allow a move to a capital and interest mortgage, particularly if this was combined with an extension of the term or staircasing gradually up to a full capital and repayment mortgage over a period of time agreed between the mortgage lender and the borrower. A National Debtline adviser recently spoke to a client with a good payment record but whose interest only mortgage term had come to an end with 45,000 still owing. When we spoke to this borrower, they were enduring a great deal of uncertainty whilst they waited for a decision from their lender. This appeared to involve a lengthy internal decision making procedure and even then, the borrower has been warned that the best they could hope for was an extension of their interest only mortgage for a further five years. Not surprisingly, this is extremely stressful for borrowers and causes long term uncertainty and pressure. Changing the parties on the mortgage We see no reason why these arrangements should not apply to a change to the parties on the mortgage. In both the case of a relationship breakdown and in the case of adding parties to the mortgage, we can see no detriment to the lender here and therefore, no good reason why such cases could not be covered by the transitional arrangements. We would also like to take this opportunity to suggest that once the proposals are crystallised that lenders should be required at the earliest opportunity to identify customers who might be negatively impacted by the introduction of the new rules. This will be with a view to opening up a dialogue with their customers to give them every opportunity to understand the implications of the new rules and the options they have so that they can begin to make any necessary decisions as to their future. Question 16 Do you think that there is sufficient protection for mortgage borrowers who are trapped with their current lender? If not, what additional protection do you suggest? Our advisers speak to clients who have found themselves trapped with their current lender and others who are finding it hard to find a new mortgage when an existing mortgage deal expires. We welcome the statement in paragraph that: lenders are expected to offer their existing borrowers who remortgage under these arrangements, the same products as other existing borrowers with similar characteristics... We suggest however, that there would be additional protection for this group of borrowers if this was a requirement rather than an expectation. MAT RESPONSE TO THE FSA MORTGAGE MARKET REVIEW CONSULTATION PAPER Page 11

13 Question 17 Do you think the eligibility requirements are appropriate? Should we allow these transitional arrangements to be used where the new monthly payment is higher? We think that the eligibility requirements look about right. We think that there should be scope for lender discretion where the new monthly payment is higher. We can foresee a variety of circumstances where a higher payment would be preferable to the alternative. For example, if the increase is only marginal, if there is a foreseeable change in circumstances that would have a positive impact upon affordability and so on. Question 18 Should we allow the transitional arrangements to be used where there is a material change to the mortgage, such as the removal of a borrower following a divorce? How could gaming be prevented? As we have stated in our response to question 15, we believe that transitional arrangements should be available where there has been a material change such as a relationship breakdown. We do not think it would be necessary for a divorce to have taken place as many joint mortgagors are not married or even in a relationship (for example, in cases where friends purchase a property collectively). Question 19 Do you think these arrangements will be practical to implement? How could they be improved or simplified? As a consumer organisation we are not in a position to comment on the practical implementation of these arrangements. Question 20 Do you agree that the draft rules on responsible lending in the draft Mortgage Market Review (Conduct of Business) Instrument 2012, at Appendix 1, reflect the stated policy intention? We believe that other respondents to the consultation paper will be in a better position to evaluate this. MAT RESPONSE TO THE FSA MORTGAGE MARKET REVIEW CONSULTATION PAPER Page 12

14 Chapter 4 Introduction We welcome the proposal that generally lenders must assess affordability on a capital and interest basis unless there is a credible capital repayment strategy. However, we have some strong concerns over other aspects of the interest-only proposals. Question 21 What is your view on our approach to assessing affordability for interest-only mortgages? In our response to CP10/16 we made it clear that we thought that all assessments of affordability must take into account the calculation of interest and capital. We are pleased to see that the FSA is going ahead with this proposal. Furthermore, we are pleased to see that as far as interest only lending is concerned, The FSA has stipulated that, where a repayment strategy involves a continuing financial commitment, this should be treated as committed expenditure for the purposes of the affordability assessment. Question 22 Do you agree that we should apply a consistent approach to regulating interest-only across the board and that we should not adapt our approach according to different consumer types? We agree with your conclusion that rather than approaching interest- only mortgages with broad consumer types in mind, it is more important to conduct individual assessments of prospective borrowers circumstances when assessing suitability. Question 23 Do you agree with our non-prescriptive approach to repayment strategies, or do you have any comments on this approach? We favour a more prescriptive approach. In our response to CP10/16 we set out our belief that very clear restrictions on permitted repayment methods were needed and that responsible lending includes lenders being accountable for ensuring that an appropriate investment vehicle is in place from the start. In our response to the MMR Responsible Lending paper 4 we stated: 4 ible%20lending%20paper%20part%202%20final.pdf MAT RESPONSE TO THE FSA MORTGAGE MARKET REVIEW CONSULTATION PAPER Page 13

15 We feel it is essential that very clear restrictions on permitted repayment methods are put in place in the proposed reforms. We agree that such plans need to be adequate to clear the capital as far as it is possible to predict (whilst accepting that nothing can ever be guaranteed ). Examples of repayment methods that we consider could be viewed as valid include appropriate investment products and investment properties/second homes that could be sold to repay the capital on the main home. Lenders need to be under the clear understanding that responsible lending includes ensuring that an appropriate investment vehicle is in place from the outset. Question 24 Do you agree that lenders should be free to set their own appropriate controls around repayment strategies? We do not agree with this proposal. We think it is important that robust controls on capital repayment strategies are set via regulation. We do not think that it is appropriate or sensible that lenders are free to set their own controls. This may have unintended consequences if individual lenders adopt policies that allow more tenuous repayment strategies to emerge. In the introduction to our response we explained our concerns that some of the proposals are not sufficiently robust from a future-proofing point of view once the market is more buoyant and less scrupulous lenders re-enter the market. This is one of the areas we had in mind. Question 25 What is your view of our proposals for lenders interest-only policies? If lenders are to be free to set their own controls, we agree that it is important that there is a clear framework and detailed policy. The suggested content for such a policy seem sensible. Question 26 What are your views on our approach to requiring lenders to assess the repayment strategy prior to entering into the mortgage? As we stated in our response to question 23, we believe that is clearly the lender s responsibility to assess the appropriateness of a repayment strategy and that they should do so, bearing in mind the consumer s circumstances. We feel that the approach you have taken here is sensible and balanced. MAT RESPONSE TO THE FSA MORTGAGE MARKET REVIEW CONSULTATION PAPER Page 14

16 Question 27 What is you view of our proposals for the ongoing management of interest-only loans? Do you foresee any practical issues? We do not agree with your proposals for the ongoing management of interest-only loans. This is one of the areas we had in mind when we expressed our overall concerns in our introduction. We think it is regrettable that your position has moved from a more rigorous policy of proposing 5-yearly checks to a single check at an undefined point in the term. In our response to CP10/16 we recommended annual checks or alternatively, biannual checks, moving to annual checks in the last 10 years of the term. We feel that a single check is inadequate and that the FSA should also stipulate at what stages regular checks should be carried out. This becomes even more relevant for repayment vehicles which require the borrower to make periodic repayments of capital or rely on changing market or family conditions for example when selling and downsizing a property. Question 28 Do you have any comments on the proposed changes to the glossary term, or the consequential changes? We have no comments to make regarding the proposed changes to the glossary. Question 29 Do you have any comments on the draft interestonly rules set out in the draft Mortgage Market Review (Conduct of Business) Instrument 2012 at Appendix 1? Do you think the rules reflect the stated policy intention? As demonstrated in our responses to this section, we do not fully support the policy intention reflected in the draft interest-only rules. We feel strongly that the firm should be required to advise the customer on a credible repayment strategy. There should be clear rules requiring lenders to make regular ongoing management checks throughout the lifetime of the mortgage. MAT RESPONSE TO THE FSA MORTGAGE MARKET REVIEW CONSULTATION PAPER Page 15

17 Chapter 5 Introduction We agreed with your proposal in CP10/28 to apply the same basic sales standards across all sales, whether advised or non-advised. Our view is that the best way to achieve this would be to remove non-advised sales from the market. This would create absolute clarity for the consumer and would remove consumer confusion on the difference between advised and non-advised sales that the FSA acknowledges is currently a problem. It would also be clearer for firms. We are disappointed therefore that although this consultation paper proposes the removal of non-advised sales it also proposes what we consider to be a get-out clause through execution-only sales for some consumers and some lenders. Also, once advice has been given, that this can be put to one side and rejected by some vulnerable consumer groups; who could then go on to purchase a product on an execution-only basis even though they had been advised against it. We think that this proposal is regrettable and this is a theme which will follow in our answers to the questions below. We understand that the FSA is mindful of the need to protect freedom of choice for consumers; however there is also a need to protect some more vulnerable - consumers from inappropriate mortgage products. We would also point out that at various points in this consultation paper, the FSA points to evidence of poor consumer decision-making regarding mortgage purchases. We do not see how execution-only sales are going to assist matters. We would also point out that, according to the responses you received to both CP10/28 and the Cost Benefit Analysis survey, lenders are saying that the vast majority of sales are now being advised (whether they need to be or not). If this is the case, then we question whether the new proposals which are designed to increase the number of advised sales may conversely result in the opposite effect. This is because we fear that execution-only sales may acquire a larger share in the market in future. Question 30 Do you have any comments on our proposed approach to intermediaries role in assessing affordability? We support the proposal to introduce responsible lending rules to place ultimate responsibility for affordability with the lender in all cases. We agree that the role of intermediaries ought to be limited to checking that the consumer meets the lender s eligibility criteria. MAT RESPONSE TO THE FSA MORTGAGE MARKET REVIEW CONSULTATION PAPER Page 16

18 Question 31 (i) Do you have any comments on our proposed approach which allows high net worth consumers and mortgage professionals to opt-out of receiving advice and purchase on an execution-only basis? As we have stated in the introduction, we believe that it would be clearer and there would be less scope for detriment if all sales resulted from advice. We see no reason why this should not apply to high net worth consumers or mortgage professionals. (ii) Do you have any comments on our proposed definition of a mortgage professional? (A question about the definition of a high net worth consumer is at the end of paragraph in Chapter 10.) We have nothing to say on this matter. (iii) Is there anything we can do to mitigate the risk of intermediaries using these exceptions to circumvent the rules? We would suggest that the best way of ensuring that the rules are not circumvented is to create a market that requires all sales to be advised. The exceptions that are proposed in the concept of execution-only sales will be the very areas that less scrupulous intermediaries will inevitably use to find ways of circumventing the more exacting sales process. (iv) Are there any other consumer types you think should be able to purchase on an execution-only basis in an interactive sale? We accept that there are some individuals with the capacity to make informed decisions and who could safely purchase on an execution-only basis; however we would find it hard to identify particular consumer types that would fall into this category. To avoid loopholes and to safeguard the average consumer, we have a strong preference for a clear policy that no one should be able to purchase an execution-only mortgage. It seems to us that one of the main drivers behind execution-only sales is to provide convenient access to mortgage products for high net worth individuals and mortgage professionals. However, we fear that an unintended consequence of this will be that some ordinary consumers will find themselves saddled with inappropriate mortgages. MAT RESPONSE TO THE FSA MORTGAGE MARKET REVIEW CONSULTATION PAPER Page 17

19 Question 32 Do you have any comments on our proposed approach which allows consumers to opt-out of advice when purchasing products online or by post and allows them to purchase on an execution-only basis? We are very concerned by this proposal and see it as a potential get out clause from regulation. We feel that a balance has to be found between consumer choice and protecting some consumers from themselves. Your findings on how well consumers understand financial products even with the assistance of financial advice, demonstrates that people do not easily understand the implications of their financial decisions. As we have stated above, the MMR must seek to create a market that is futureproofed and will operate in consumers best interests, even when the market is less depressed and there is a greater appetite for lending. The inevitable rise of internet sales provides the perfect arena for a pure mortgage purchase without advice. The fact that very few consumers currently use a pure online process to obtain a mortgage is not so surprising for the reasons outlined in the consultation paper. We feel however, that there has not been enough regard given to how the pure online market could balloon as we move towards greater reliance on the internet for transactions that would previously have been face-to-face or via the post. We are concerned that this proposal could result in a rise in unsuitable mortgages purchases. Question 33: (i) We are proposing that consumers who are vulnerable (i.e. equity release, Home Purchase Plan, Sale and Rent Back or right-to-buy consumers and those who are consolidating debt) should always be advised and therefore will not be able to purchase their mortgage through a non-interactive process. Do you have any comments on this approach? As we stated in our introduction, we would like to see all sales being advised. As such a measure is not included in the FSA s current proposals; we view the proposal for lenders to be required to give advice to consumers with vulnerable characteristics as a welcome amelioration. This will go some way towards protecting these consumer types. We would however like to see an extension of the list of consumer types who would be regarded as vulnerable (see question 33 iii). MAT RESPONSE TO THE FSA MORTGAGE MARKET REVIEW CONSULTATION PAPER Page 18

20 (ii) What are your views on our proposal to allow high net worth consumers and mortgage professionals to opt out of receiving advice irrespective of whether they are considered to be vulnerable? As we have stated above, we believe that all sales should be advised. We are hesitant to comment on high net worth consumers because they are outside of the consumer group we are familiar with. Having said that, we are aware of a number of high-profile cases where high net worth individuals have displayed poor judgment on matters of a financial nature. Also, if someone is vulnerable, we do not see how it would matter whether they are considered to be in a high net worth category or not. We believe that this group of consumers are not immune from exposure to inappropriate mortgage products. We therefore see no good reason why high net worth consumers should be allowed to opt out of receiving advice. Like the population as a whole, it is not unknown for mortgage professionals to display errors of judgment. We would suggest that some mortgage professionals may need protecting from themselves and that they should also not be able to opt out of receiving advice. (iii) Are there any other consumer types you think should always receive advice? We believe that consumers should always receive advice. If the FSA creates a market where only consumers with certain characteristics are required to receive advice, we agree that this should apply to those involved with equity release, Home Purchase Plans, Sale and Rent Back, Right-to-Buy and those consolidating debt. In addition we would extend this list to include first-time buyers, the creditimpaired and those approaching retirement age. Question 34 Do you agree that, except in the case of Sale and Rent Back, we should allow consumers to reject advice and proceed on an execution-only basis? We are dubious about this proposal. We have noted the reference to a safeguard in the consultation paper that: in order to [reject the advice and go ahead with the purchase] the consumer would need to have done their homework in advance and be in a position to give specific instructions about the product they want to purchase, with no need for further discussion or information from the intermediary. MAT RESPONSE TO THE FSA MORTGAGE MARKET REVIEW CONSULTATION PAPER Page 19

21 Whilst we can see that informed consumers may well do their homework and engage in the way described above, however we are doubtful that this presents sufficient protection for the less savvy consumer and can foresee a profusion of information on the internet on how to jump through the hoops to obtain an execution-only mortgage. If the proposal to allow consumers to reject advice and proceed on an executiononly basis persists we strongly suggest that those seeking a debt consolidation mortgage or equity release are also treated in the same way as Sale and Rent Back cases and are not permitted to reject the advice and follow the executiononly route. Question 35 (i) We are proposing that intermediaries monitor their execution-only business. Do you have any comments on our proposed approach to monitoring? As we have stated above, we do not agree that the proposed sales regime should include execution-only sales. If however, this measure is introduced we agree that careful monitoring will be essential. There should be clear and comprehensive guidance or rules on how monitoring should be carried out. This should also cover how the regulator will ensure intermediary compliance with the monitoring rules. (ii) Are there any other steps we should take to ensure that consumers are protected when purchasing on a noninteractive basis, e.g. should we place any other limitations on the types of consumers who are able to purchase online? As we have stated above, we do not believe that non-interactive sales are in the long term best interests of consumers. We are concerned that some less scrupulous firms will direct consumers to an execution-only product when the advised sales process has drawn a blank. Question 36 Do you agree that we should be specific about the appropriate method of disclosing service fees that are not simple flat fees? Yes, we agree it is important to be specific about the appropriate method of disclosing service fees that are not simple flat fees. This is central to ensuring a consistent and transparent approach. MAT RESPONSE TO THE FSA MORTGAGE MARKET REVIEW CONSULTATION PAPER Page 20

22 Question 37 Do you have any comments about our revised approach to the requirements for the messages on product range and remuneration to be given clearly and prominently? We note the FSA s findings that consumers do not take messages on board from the Information Disclosure Document (IDD) and that instead they tend to rely on what they have been told. We also note the guidance in the rules regarding how compliance can be demonstrated. However, we think it is regrettable that the compliance information is only guidance. Overall, we share the FSA s concern about avoiding information overload and ensuring that key messages are not drowned out, but we are not convinced that the proposals will produce the desired outcome. We feel that the safeguards do not justify the proposal to remove the requirement for information regarding fees to be given in a durable medium. We consider a more sensible course of action would be to review the IDD process and consult interested parties on more effective methods of providing such information and devise rules as a result of these findings. Also, we think this proposal might be premature in view of the European Mortgage Credit Directive and the possibility that this may require intermediaries to provide information in a durable medium. Question 38 Do you consider that the combined IDD template remains useful with respect to mortgage service disclosure? In view of our response to question 37, we think it is premature to withdraw the IDD template. Question 39 Do you agree that we should not apply the independent and restricted labels to the mortgage market, but instead require intermediaries to explain to the consumer in clear and straightforward terms any limitations to their service? We agree that the variety of intermediary labels are a very confusing area for borrowers and in the main, most borrowers are unaware of the potential differences. Borrowers will generally place their trust in the broker to give them good advice that is in their best interests. MAT RESPONSE TO THE FSA MORTGAGE MARKET REVIEW CONSULTATION PAPER Page 21

23 We agree with the proposal to ensure that intermediaries effectively explain any limitations to the range of products they offer and that labels are not a helpful way of achieving this. On balance, we think the FSA should ensure that the proposed guidelines are effectively complied with by incorporating them into rules. Question 40 Do you have any views about our updated proposals for product disclosure? Your updated proposals for product disclosure seem generally sensible and we think they will help to ensure that consumers receive appropriate information at the most appropriate time. Question 41 Do you have any comments on the draft rules on distribution and disclosure as set out in the draft Mortgage Market Review (Conduct of Business) Instrument 2012 at Appendix 1? We have nothing further to add to our comments above. Chapter 6 Question 42 Do you have any comments on the proposed policy approach on the calculation of payment shortfall charges? Our aim is to protect borrowers in mortgage arrears from unreasonable charges being added to their mortgage account. Consumers are generally not in a position to switch away from higher default charges, so there is no competitive pressure on firms charging behaviour. We welcome the increased transparency that the requirements will bring to the calculation of arrears charges. We believe that the proposed policy approach on the calculation of arrears charges is reasonable. It appears to balance the competing interests involved such as the concerns of the smaller building societies. This policy approach appears to be a sensible outcome following the previous consultations on the issue. We particularly welcome the requirement for firms to demonstrate that their arrears charges are a fair reflection of the additional costs of administering mortgage accounts in arrears as stated in paragraph 6.23 of the paper: the charge is a reasonable calculation of the cost of the additional administration, rather than a reasonable estimate of the cost. We believe that the FSA should be prepared to intervene if a particular firm s arrears charges are high compared to the market norm. MAT RESPONSE TO THE FSA MORTGAGE MARKET REVIEW CONSULTATION PAPER Page 22

24 However, we are disappointed to note that no further consideration appears to have been given to the serious issue of addressing the problem of charges being imposed on borrowers for a visit from the lender s debt counsellor. We note that this issue is not at present dealt with in this consultation. In some of the cases seen by advice agencies, it seems that the charge is imposed whether or not the borrower needs the help provided by the debt counsellor. We have raised this in our response to the Arrears and approved persons response 5: Advisers are still seeing many cases where clients mortgage arrears problems are exacerbated because of hefty arrears charges made in other situations. Advisers are particularly concerned about the practice of lenders sending out financial managers or debt counsellors to visit borrowers who are struggling with mortgage arrears. Often it is implied that borrowers must agree to being visited by one of these counsellors before their lender can discuss their arrears situation with them, even in cases where the borrower is being represented by an adviser working in the not-for-profit sector. The result is that someone who is already struggling financially is hit with a charge for the visit and in the worst cases, also for any subsequent phone calls and letters. We are still receiving calls at National Debtline and Business Debtline regarding this practice. We have reproduced an example below. Business Debtline case study The client has some mortgage arrears but has an arrangement in place. The mortgage company periodically send letters stating that they have just taken a 50 arrears administration fee from the latest payment, causing the client to be further in arrears which then results in further charges. The client had received a new letter from the lender. It stated that a debt counsellor would be sent to her home. The debt counsellor would not be able to give any financial advice, but may signpost to some organisations where the client can get further free advice. There would be an 80 charge for this visit, and if the client wished to cancel, she must telephone the company. The client was not allowed to cancel by post and a 50 cancellation charge would be made. Question 43 Do you have any comments on the proposed policy approach on direct debit payments? We welcome the clarification in the rules that lenders will be required to limit the number of times a borrower can be charged for failed direct debit requests. However we have previously favoured the intention to allow lenders to only make one charge per month rather than twice in one month. In our response to the MMR Responsible Lending paper we stated: 5 ible%20lending%20paper%20part%202%20final.pdf MAT RESPONSE TO THE FSA MORTGAGE MARKET REVIEW CONSULTATION PAPER Page 23

25 Yes, we agree that MCOB should be amended to limit the number of times fees for missed payments can be charged and we welcome that fact that this will mean that lenders will only be able to make one charge per month for re-presented direct debits. We also believe that lenders need to act proactively at the first hint of payment difficulty. We suggest that immediately after the first missed payment, lenders are required to send out a letter enquiring if the borrower is experiencing any difficulties (e.g. does the payment date need to be altered) and stating that the situation can be rectified without further charge - as long as a payment is made by a specified date. We also support the imposition of a limit on the number of times a lender can request a direct debt to two in any one month. We also believe that lenders need to act proactively at the first hint of payment difficulty. We suggest that immediately after the first missed payment, lenders are required to send out a letter enquiring if the borrower is experiencing any difficulties (e.g. does the payment date need to be altered) and stating that the situation can be rectified without further charge - as long as a payment is made by a specified date. In addition, we also support the proposed requirement on lenders to review the payment method with the borrower where at least one direct debit has failed in each of two consecutive months. If there is a problem with the borrower s current account, or the timing of money being paid into the account, there is clearly a responsibility on the lender to mitigate possible charges by looking at whether the appropriate payment method is being used. This might also help to mitigate charges from the borrower s bank for failed payments. Question 44 Do you have any comments on the proposal to extend the application of MCOB 12.4 and 13.3 rules to include payment shortfalls? We strongly support the proposal to extend the application of MCOB 12.4 and 13.3 rules to include payment shortfalls and not just sums owed that fall into the technical definition in MCOB of arrears (defined as a shortfall equivalent to two or more payments). We are still of the opinion that the phrase payment shortfall can be easily confused with the term sale shortfall used in MCOB to describe what is commonly referred to as a mortgage shortfall. We suggest that the use of the term payment shortfall be looked at again in the future. MAT RESPONSE TO THE FSA MORTGAGE MARKET REVIEW CONSULTATION PAPER Page 24