These terms of reference set out the steps we will take in our mortgage prisoners review.
We estimate there are 250,000 borrowers who have mortgages held by ‘inactive firms’. These are firms that are either not lending to new customers (known as inactive lenders) or are not lenders (known as unregulated entities). Not all of these borrowers are mortgage prisoners.
Mortgage prisoners are borrowers who are unable to switch to a new mortgage deal despite being up to date with their mortgage payments and, depending on their loan and borrower risk characteristics, could potentially benefit from switching.
The background to our review
On 26 April 2021, the Economic Secretary to the Treasury (EST) announced that the Treasury will work with the FCA to develop further detail, using our data, on the characteristics of mortgage prisoners. The EST also said that the FCA would review the effects of its recent interventions designed to remove regulatory barriers to switching for mortgage prisoners. These interventions are the modified affordability assessment, introduced in October 2019 and our intra-group switching rule change, introduced in October 2020.
We will provide the results to the Government, and the EST has committed to use them to establish whether further practical and proportionate solutions can be found for these borrowers.
Our programme of work
In order to provide insights that can be used by the Government to explore potential solutions, our work – known as ’the mortgage prisoners review’ – will provide information on the following areas:
1. Data review
Objective: We will review and update our data to consider the demographic and loan characteristics of mortgage prisoners.
Work programme: The pandemic is likely to have changed many individuals’ credit circumstances, and the economic environment and outlook may be affecting lenders’ lending criteria. We will use more recent waves of our Product Sales Data and Credit Reference Agency data to provide a more up-to-date view.
We have started our exploratory work ahead of the review. We believe that our July 2020 assumptions led to a low estimate of the number of customers who have mortgages with inactive firms and are unable to switch despite being up to date with payments. In the review we will take a fresh look at all the assumptions we made to establish the numbers of people who are able and unable to switch, including the criteria for whether an individual can switch. We will test different assumptions and clarify how they affect the results, providing ranges where appropriate.
Expected outcomes and work products: We expect that the change in economic conditions, more recent data and updated assumptions are likely to lead to an increase in our estimated number of mortgage prisoners. We expect it will also lead to an improved understanding of the current mortgage prisoner population.
We plan to provide an explanation of our analysis along with the outcome of the review so that our approach is transparent.
2. Interventions review
Objective: We will also review the effect of our recent interventions to remove regulatory barriers to switching. We will explore how firms have used the flexibility provided by our rules to ensure borrowers who have mortgages with inactive lenders benefit from switching options and whether any barriers remain. We will consider:
a. What effect our modified affordability assessment and the lender switching options prompted by this, had on borrowers with inactive firms:
i. being able to switch
ii. receiving other support eg referrals to debt advice
b. The effect of our intra-group switching rule change. This is intended to make it easier for borrowers in closed books – where the firm is no longer lending – to switch to a mortgage with an active lender within the same financial group.
Work programme: To review the effect of our modified affordability assessment, we will use data on take-up of the targeted resources and support provided by the Money and Pensions Service, FCA Product Sales Data, and data from mortgage brokers who have agreed to provide advice to mortgage prisoners. We will also engage with industry and other stakeholders on the effect of our modified affordability assessment. We will use this engagement to review the effect of our intra-group switching rule change, as well as looking at the extent of borrowers switching within lending groups through sources such as FCA regulatory data.
How we will communicate with stakeholders
We will lead on these elements of the review but will work closely with the Treasury throughout the review. We will engage with interested stakeholders, eg consumer groups, parliamentarians and industry, through a series of meetings to discuss our review plans and seek views on the effects of our interventions.
Data review and analysis: July - October
Engagement with interested stakeholders: July - August
Expected work products: We will report to Treasury on the outcome of this review and it will be laid before Parliament by the end of November 2021.