Changes in mortgage regulation

Speech by Jonathan Davidson, Director of Supervision – Retail and Authorisations, delivered at the Council of Mortgage Lenders conference, London. This is the text of the speech as drafted, which may differ from the delivered version.

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Good morning and thank you for inviting me to speak to you at today’s conference.

This is my first speech on mortgages since taking up my position as Director of Authorisations and Retail Supervision at the FCA. I did in fact start my FCA career on the day of the September Mortgage Conference, which I know many of you attended. Unfortunately that event came a little too soon for me.

Today I would like to talk about the future of the mortgage market. Strategically, the key forces that change the market are pretty much the same that are shaping all markets. These are:

  • regulation and legislation
  • technology
  • macroeconomics
  • demographics.

These forces create the 'known knowns' and the 'known unknowns' in the future. We can and should think through what the impact of these might be and prepare as far as possible to make them work consumers and for firms.

As for the unknown unknowns I will come back to them at the end of my remarks.

Regulation and legislation

The Senior Managers Regime

The ‘known knowns’ in the legislation and regulatory field are relatively straightforward since they are developed through consultation with the industry. As an example, I want to touch on the Senior Managers Regime, which comes into force for deposit-takers in March next year.

Since joining the FCA two months ago, I have been asking industry participants I meet what impact we have been having. It is absolutely clear the principles of good conduct and behaviour have taken root in boardrooms and in management teams throughout the industry. 

The Senior Managers Regime will further underpin this progress with three key components: the Senior Managers Regime itself (where we approve senior individuals), the Certification Regime (where firms are responsible for assessing the fitness and propriety of individuals performing functions that significantly affect conduct outcomes) and the Conduct Rules (which apply to all financial services staff).

The core principles of the new framework are positive for both firms and regulators. Knowing who is in charge and responsible for decision-making across an organisation and a Board is imperative to the sound running of a business and good risk management.

From our point of view the SMR ensures that good conduct is front and centre for senior managers.

Much has been discussed about what will happen in the event that things do go wrong. You will have seen that the Government has removed the presumption of responsibility for senior managers in the event of a breach. You might be wondering what that might mean for our regulation of firms. My view is that it changes very little indeed. Our objectives if things go wrong are exactly the same – namely first, to have the clarity of responsibility the regime provides, and second to hold individuals to account where they fail to meet our standards.

You will also have seen that the Government now intends to extend the Senior Managers and Certification Regime to all regulated sectors of the financial services industry. In doing so we will replace the Approved Persons Regime in its entirety. This is also good news. I welcome a consistent approach across all the financial services sector.

The precise detail of this change will be worked through in time, but the intention is that this should enter into operation during 2018. 

The Mortgage Credit Directive

A further known change is the Mortgage Credit Directive (MCD).

Many of your businesses continue to be engaged in implementing the changes required by the directive. We have a shared interest in minimising disruption and focusing on good customer outcomes. In line with this, our approach in transposing the MCD has been to minimise the changes as far as possible, emphasising the convergence with our MMR rules.

Nonetheless, the alterations to the mortgage sales process are not insubstantial. We know firms are working hard to understand the most efficient ways to implement the different provisions and I know many of you are working toward early switch-on of the rules to help manage your pipeline of business smoothly.

In line with this, our approach in transposing the MCD has been to minimise the changes as far as possible, emphasising the convergence with our MMR rules.

For second-charge firms the impact of the directive is more substantial, being brought within our mortgage regulation for the first time. I see this as a positive move for consumers and the industry because a second-charge mortgage can be a useful financial product. And high standards will increase confidence in the market.

Where are we with the application process? To date the number of applications we have received from second-charge firms, administrators and brokers are in line with our expectations. However I would still encourage any firms who are planning to apply to do so as soon as possible, and avoid the risk of being unable to conduct business beyond 21 March next year.

Responsible Lending Review

Now I will turn to the known unknowns in terms of regulation. In this category I put the work that we do with firms to look at the market – we know that it is aimed at seeing that all is well in how the market is working for consumers. The unknown part is because I take the view that this work may sometimes lead to regulatory measures, but it doesn’t have to.

The responsible lending review is the first example. As many of you will know, this is underway. It is our second market-wide review following the completion of the MMR. The review covers a wide cross-section of lenders and is examining how lenders have applied the new affordability rules in practice. Have they got it right? Gone too far? Have they understood the intention of our rules?

One particular issue we are considering is how firms are treating existing customers wishing to refinance their mortgage when their existing deal ends but can’t because they are being prevented from doing so by new affordability assessments. We have specifically eased the regulations for creditworthy borrowers in this position, so this is an area where we feel some lenders should be doing more to allow such borrowers to change their mortgages. We will be sharing our findings with you on this review next year.

Mortgage market study

As second example of us looking at the mortgage market is a possible study of competition in the market. 

The introduction of the FCA’s objective to promote effective competition for consumers was, I think, one of the most significant changes to financial services regulation after the crisis. The FCA is unusual among financial regulators in having a specific competition mandate. We now consider competition, in the interests of customers and firms alike, in everything that we do. In particular, we are responsible for examining competition in all of the financial services markets we supervise.

Competition is a complex thing to study and subsequently improve. While there are similarities across financial service markets, each market has differing characteristics and idiosyncrasies.

So, we have recently launched a Call for Inputs ahead of a possible market study in mortgages. I believe you have a session on this specifically this afternoon. We recognise that the mortgage sector has seen considerable change in recent years, both as a result of regulatory change and macroeconomic conditions.

One particular issue we are considering is how firms are treating existing customers wishing to refinance their mortgage when their existing deal ends

In this first step we are therefore interested in your assessment of the factors that affect competition on the supply and demand side. 

On the supply side, your assessment of how specific features of the mortgage marketplace and ancillary services affect competition, and how this may affect consumers. We are seeking to identify and understand whether there are potential barriers to innovation, entry or expansion. And this includes looking at the role of regulation. 

On the demand side, we are also keenly interested in your assessment of the extent to which consumers are able to access information about mortgage products and services, assess that information, and act to make informed choices.

The unknown part is what the scope and timing of any future market study might be given the Call for Inputs. So we are therefore also interested in your views on the scope and timing of any future market study.

More known unknowns

I have talked about what is coming down the line from regulation and legislation.  I will turn now to talking about the impact of macroeconomics and demographics. 

From a problem-solving point of view, the long-term nature of most mortgage products means that foresight is particularly important. As an industry, we are continually scanning the present for indicators of the medium and longer-term future such as digitisation to make large-scale and long-term investment decisions; we are looking at the medium term performance of the back book; we are looking at the long-term outlook when we make affordability calculations for individual sales every day.

But with these insights we are presented with a choice – do we take proactive, preventative action now, or do we step back and ‘wait and see’?

The former presents hard decisions regarding prudent investment and first-mover advantages and disadvantages. To delay could store up problems for the future and be more costly in the long run – but we might develop a better understanding of the problem we are facing. 

Looking forward I believe there are three big challenges that the mortgage sector is facing that we need to face up to now: the maturity of interest-only mortgages, a rise in the Bank of England base rate and the risks this poses for lenders and consumers, and the UK’s changing demographics and household composition. 

We know these things are happening. I believe that we need to work together collaboratively to plan for what might happen.

Interest-only mortgages

The joint efforts of the regulator and mortgage industry on the risks presented by the maturity of interest-only mortgage sets a strong precedent for joint problem solving. Our published analysis of the maturity profile, the commitment from the industry to proactively contact consumers, and the action consumers are now beginning to take are a testament to our joint efforts.

It is a strong start. But, as we know, the maturity profile, both in size and in outstanding loan to value worsens, with peaks in 2017 to 2018 and the mid 2020s. It is vitally important that you continue to work with your consumers who are at risk of not being able to repay their capital at the end of their mortgage.

Base rate rise

The second challenge, albeit on a shifting horizon, is the base rate rise. The CML’s own figures suggest that when the rate rise comes potentially over one million mortgage holders will have to deal with an increase in monthly payments for the first time. The Bank of England estimates that 280,000 households could really struggle as and when this happens.

In addition to mortgage debt, unsecured borrowing is also rising. A recent PwC report estimated that by 2016 the average household will have ten thousand pounds of outstanding unsecured debt and that by 2020 the household debt-to-income ratio will be approximately 172 percent – higher than its pre-crisis peak.

It falls to households to prepare as best they can for the rate rise, but inevitably there will be some financially vulnerable people for whom this will be too difficult.

Lenders can take a number of actions now to prepare for this situation. Firstly, prudent lenders, and I know many are undertaking this kind of analysis, will proactively identify their borrowers who are at risk of default. In doing so they can understand both their own exposure and that of individual customers.

Once the size of the problem is understood, lenders can then begin to develop strategies to assist these customers and ensure they are treated fairly.

Last year, in our thematic review into arrears management and forbearance, we called on the industry to assess what improvements it could make to support and empower front-line staff to consider individual customers’ specific personal and financial circumstances. 

Many firms have taken this very seriously. Nonetheless, it is concerning to hear the Financial Ombudsman Service highlight recently that it is receiving a number of cases where people, worried about falling behind on their mortgage, have been told by their lenders not to get in touch until they are actually in arrears. 

From an operational point of view this may be a complicated problem to solve, but isn’t it in everybody’s interest to explore some of the options that may be available to improve a customer’s ability to cope with financial difficulties before they reach the arrears stage?

Resolving this is not impossible. We have seen good pre-arrears practice from a number of lenders. Now is the time to review your approach for dealing with customers who could experience payment difficulties, and now is the time to consider the different options you may be able to offer to them to ease the burden.  

Ageing population

The final challenge I want to talk has been studied for some time but has gained significant traction this year - our ageing population.

I know this was discussed at the FCA September mortgage conference, and is something that many of you across the industry have been thinking about. We look forward to receiving the CML’s report into a variety of interesting questions for the market later this year.

The Office for National Statistics recently summarised the UK’s demographic situation as one that is both growing and ageing. Over the next 25 years the number of people of aged 80 or over will more than double and those aged 60 or over will account for almost 30% of the population. Currently it is 23%. The impact of the UK’s changing population has the potential to affect every aspect of our lives – our lifestyle choices and tastes, our employment and our financial needs.  

Increasingly, consumers are taking out mortgages that will extend into their retirement, or looking to make use of their assets by taking out new mortgage products when they are already in retirement. Clearly, not all older consumers are the same, and there is increasing demand for a wide range of mortgage products to meet those diverse needs of older consumers.

However, the current market will struggle to meet the future challenges presented. It will not have escaped those of us in this room that how people perceive and use their homes, and therefore their mortgage, has changed and continues to change as our lifestyles and longevity change.

While a mortgage was once a relatively simple, standardised product  – a means to home ownership, cleared in 25 years and before retirement, now people aspire for their home to provide a pension, finance for long-term care, a deposit for children and grandchildren and inheritance – sometimes simultaneously.

Many of these older households are forecast to be asset-rich but income poor. Equity release is an established market and serves some specific financial needs, but it is not a panacea for this problem. There is, I believe an opportunity for a range of flexible products which could work around people’s lives as well as the underlying asset, and we are keen to support innovation in this area that is in the interests of consumers.

The joint efforts of the regulator and mortgage industry on the risks presented by the maturity of interest-only mortgage sets a strong precedent for joint problem solving. 

Our rules do not prevent lenders from offering mortgages that extend into retirement. The market data we have shows that lending beyond 65 maintains its long-term, rising trend. While many lenders have taken the commercial and strategic decision to set their own maximum age limits, others are beginning to find ways to lend affordably into retirement.

The ageing population is one of the biggest policy and social challenges of our time. The mortgage market will come under strain if it does not find ways to adapt to the changing needs of consumers. And, the regulator is not immune from this pressure – we will continue to consider what differences we might make to support a market that works for its customers. The issues of lending to older consumers span across many policy areas, and therefore solutions need to be driven through collaboration. By working together, key players across industry, regulators and beyond will be able to encourage markets that better meet the needs of our ageing population.

And of course it is not only the mortgage market that faces challenges by the ageing population. It has implications across the entire financial services sector.


To conclude, I feel we are making good progress in establishing one of the world’s leading mortgage markets. One that works to meet consumers’ aspirations and is commercially viable for the businesses that compete for their custom.

However, change and challenge is a constant part of financial services markets – and there are some important challenges for the regulator and the industry to begin tackling together right now. And of course there are the 'unknown unknowns' that we are all seeking to identify, and these are often the things that often cause us the greatest problems.

Thank you.