How implementing the Mortgage Market Review will shape the new market

Speech by Linda Woodall, Director of Mortgages and Consumer Lending, the FCA, at the Financial Services Expo, London. This is the text of the speech as drafted, which may differ from the delivered version.

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Good afternoon everyone. I would like to thank Robert for inviting me to speak here today – and to thank AMI for the constructive way they have worked with both the FSA and now the FCA in helping to shape and implement the Mortgage Market Review.

This is my first speech to a large group of intermediary firms since I became Director of Mortgages and Consumer Lending, so I thought it would make sense for me to give you my initial thoughts on the mortgage market as I see it today.

The financial services sector is very different to the one that existed prior to the financial crisis, and the mortgage market is one of the areas that has seen the most change. While most would agree that the lending boom in 2007 was unsustainable, I don’t think many thought that levels of lending would fall as far, and for so long.

Despite all of this, the mortgage intermediary market has survived, and while the number of firms has dropped, intermediary business continues to account for over 50% of all mortgages written annually. While the level of intermediary business has dropped from around 70% of all mortgages arranged pre crisis, the market structure was very different then. Specialist lenders, who were almost wholly reliant on intermediary business, accounted for an ever growing share of lending. And not all lenders active in the market today accept business from intermediary firms. So my take on this is that a 50% market share should not be seen as a marked decline but is in fact a good indication of the importance of this distribution channel for consumers.

MMR implementation

The MMR is something that we have all lived with now for several years. On April 26 next year, we will finally see the result of the combined efforts of the industry and the regulator working together to deliver a sustainable market that works well for consumers and firms.

However, we have never underestimated the amount of work needed to implement the MMR, and I would like to give you an update on how firms are currently progressing with their implementation plans. The good news is that progress to date is encouraging, with the majority of firms telling us that they are on track to implement the changes on time. Our readiness tracking survey, sent to 5,400 firms in May, not only helped us to gauge how far firms are in their planning, but also highlighted areas where we need to provide further help. Firms also told us that the survey was a useful educational tool, which prompted them to take action.

One of the areas intermediaries reported that they are still struggling with is the implementation of the new execution-only process. We are aware that prior to the MMR changes, very few intermediary firms offered a non-advised service to customers – the vast majority of sales were advised. We have also been told by some firms that if, in future, a consumer chooses to reject the advice they have given, firms will not proceed with the application.

On the basis that consumers choose the intermediary channel for advice, we think it’s unlikely that a consumer would then reject the advice given. However, if this were to happen, it would be in a firm’s interest to re-assess the consumers’ circumstances, to come to a common understanding, which may in some instances lead to the consumer accepting the recommendation after all.

However, it is not compulsory for firms to offer an execution-only service. If a customer chooses to reject the advice you give, you do not have to proceed with the sale and do not need to worry about building a process to support this. I am also aware that AMI have produced a very helpful factsheet on execution-only sales, which I think firms will find useful.

More generally, we know that firms will continue to have questions about implementation, so we are running some regional workshops in November for intermediary firms. These will be interactive, with exercises and scenarios that will help to bring the mortgage sales process to life. Firms will have the opportunity to understand our expectations, and to ask any last minute questions. Details are on the FCA website, and I would encourage you to book soon to secure yourself a place.

We will also be publishing new factsheets, and are thinking about issuing an updated webcast at a later date, as we know that the previous webcast was extremely well received.

Lastly, we plan to provide a limited number of ‘surgeries’ in February next year, where firms can meet the FCA face to face. Although close to implementation, some firms will have last minute, bespoke questions that they need to discuss, and this will allow them the opportunity to do so. We will provide information about these early next year, and will let firms know how to book what will be limited spaces. We will make sure AMI are provided with early notice so that it can relay the information to its members.

My final message on MMR implementation is that if you still do not have a plan in place, it’s not too late, but you need to act now. Our planning tools can help firms to put a plan together, but in summary, you need to ensure that your plan covers the following areas:

  1. Identifies the key actions required and who is responsible for them
  2. Includes key dates including a target completion date
  3. Sets out how you will mitigate any implementation risks

The new supervisory approach for Mortgage Intermediary firms

I’ll now touch on the new supervisory approach, and what this will feel like for mortgage intermediary firms. Once the MMR is up and running, the next step for us will be making sure firms are complying with the new rules. There are also a few other areas which we will remain interested in, which I’ll cover a little later.

But I just wanted to step back for a moment and reflect on the ongoing journey for the FCA, and the changes you can expect to see through all our interactions with you, and the market. As you know, a vital part of the FCA approach is to be a more pro-active and pre-emptive regulator, which aims to identify and head off issues before they turn into big problems for consumers.

To turn this into a reality we are focussed on doing three key things. These are:

  • making better judgements
  • being more forward looking
  • being more outcome-focused

To make better judgements requires us to have a deep understanding of the sectors we regulate and what the end consumer is really experiencing. Our approach is based on us making forward-looking judgements about firms’ business models, product strategies and how they run their business. Our work with the industry to deal proactively with the issue of interest only maturity shortfalls is good example of this. Many of the problems that have occurred in the past have been because firms did not have business models based on a sound foundation of fair treatment of consumers.

To be forward-looking doesn’t mean we can predict the future or anticipate every issue that’s likely to arise. What it does mean is that we are now more focused on the big issues that matter, and better at spotting risks to consumers and markets. We also need to deal decisively with events that come to a head, and do all of this more quickly, and with better results for consumers. A recent example of this in practice is how we reacted when we received intelligence from the industry about an unregulated firm. This firm was promoting self-certified and 100% mortgages, and encouraging buyers to apply for BTL mortgages, in order to get around affordability requirements. Within a very short period of time we issued a Consumer Alert, and warned the trade press. While this was a good result, we are aware that many other rogue firms may be doing the same thing so it’s important that you continue to alert us to firms like this in future.

And finally, we are being more outcome-focused. We are not in the business of supervising individual rule breaches - although rule breaches do matter, because they are usually symptomatic of a wider problem. It is more about looking at the end result for the consumer. So for example, although good record keeping is crucial, it isn’t good enough to keep meticulous records of sales, if the ultimate outcome for the customer is walking away with a product that isn’t right for them.

Our new supervisory approach has been developed to reflect the size of the firm and its impact on consumers. There are three different ways that we are now supervising firms:

  • Our ‘Firm Systematic Framework’
  • ‘Event driven’ work
  • ‘Issues and products’ based, thematic work

These all may sound a bit like ‘regulator speak’, so I will explain each of these in turn.

Firstly the Firm Systematic Framework. For smaller firms like yours, it’s an evolution of the TCF assessment programme rather than a direct replacement. As you all know the TCF assessment process ran for three years and allowed us to review around 8,000 firms to assess whether they met our expectations for treating customers fairly. The aim of the new framework is to make sure that firms are capable of identifying and mitigating risks to their business and to their customers, and to determine whether or not they have sufficient controls in place. It operates on a four year rolling programme so we will have contact with all firms at least once every four years, although it could be more.

In common with the TCF assessment process – we are identifying firms by region and inviting them to attend a Business Risk Awareness workshop. These interactive sessions are designed to improve firms’ understanding of the importance of good governance, having an appropriate culture and robust controls in place. We will then follow this up with the regulatory review process, which is designed to probe the issues highlighted in the workshops in more detail.

All firms will be subject to a regulatory review of some sort or another, with the intensity linked to the risks posed by the firm. Higher risk firms are likely to receive a face to face review. Lower risk firms will be asked to complete an online survey, which could result in the need for more intrusive work if we identify areas of concern.

We have found that this approach works for many types of firms, and helps to improve standards across the sector. It allows us to deal with the very poor firms, who are either wilfully non-compliant or just completely disengaged. However, it also helps the firms who are trying to do the right thing but need a bit of extra help, by providing us with the opportunity to feedback on key areas of development.

Moving on, we undertake ‘event driven’ work in cases where there is a heightened risk to consumers or market integrity. For instance, where consumers have experienced some loss and we need to act quickly to stop the situation from worsening.

Another live example is when we recently received information suggesting that a mortgage intermediary had been removed from three lenders’ panels due to suspected mortgage fraud. Following a short investigation, which included a review of some of the firm’s customer files, we called in the firm’s principal for a meeting. It was clear to us that the firm had insufficient controls to protect itself from being used for mortgage fraud.

We presented our evidence, which included false payslips and insufficient employment checks. The principal agreed that the evidence was compelling, and recognised that our expected improvements to their systems and controls would be extensive. As a result, the principal voluntarily cancelled the firm’s mortgage permissions with immediate effect, and applied to cancel the firm’s regulated status in full the very next day.

And finally we will also undertake ‘Issues and Products’ work – also known as thematic work. Many of you will be familiar with this and will have seen the findings from various mortgage thematic projects – mortgage quality of advice, self-certification, and lifetime mortgages.

We are currently in the midst of our third thematic review into arrears and forbearance practices. While the review will be looking at how lenders treat customers in arrears, this is primarily a pre-emptive review to assess and mitigate the risks of a growing forbearance ‘bubble’.

We are also now scoping what our post-implementation MMR testing may look like. We know our testing will be substantive, and will have strands touching on lenders, intermediaries and other market participants of all sizes. Whilst it is too early to tell you any more detail today, I think it would be a safe for you to assume that one of our first priorities will be to ensure that firms are complying with the new responsible lending rules.

I hope this gives you a better insight into what FCA supervision will look like. We’ve built on what we have learnt from the TCF assessment programme, and from the data and intelligence we already have and continue to gather from firms. We believe our new approach will help good firms needing a little extra help, but will also help us to better target and deal with poor firms, which is what I think everyone in this room would expect us to do.

Other areas of interest

Moving onto other areas of interest. Since becoming the Director of Mortgages, there are a few areas that have crossed my radar and I thought I would use the opportunity to raise these with you today.

Firstly, I’ve already mentioned our recent work with the industry to act pre-emptively on interest only maturity shortfalls. This is a good example of the way that we want to work with the industry in future, in order deliver fair outcomes for consumers.

We know from our work that for a variety of reasons, some customers will not be able to repay their interest only mortgages in full at the end of the term. In addition to lenders working to provide solutions for their existing customers, we are also aware of the development of new products aimed at addressing the issue. We are calling these hybrid Lifetime Mortgages because although they meet the regulatory definition of a Lifetime mortgage, they are primarily designed to allow the customer to make monthly interest payments, some with the option of rolling up interest at a later date. There has been a view expressed by some, that perhaps firms should be able to sell these hybrid products without having the relevant Lifetime Mortgage qualifications. I’d like to clarify my view on this.

The reason we have additional qualifications and separate sales rules is to address the specific risks and features of the equity release market. The products are generally more complex, customers are more vulnerable and there are tax and benefits implications that must be considered.

We know from our MMR work that the industry has steadfastly supported the concept of enhanced protections, and additional T&C for equity release, so my view is that any mortgage that meets the Lifetime definition can only be sold by advisers with the appropriate qualifications.

However, as we clarified in the recently issued interest only guidance, not all mortgages that extend into retirement meet the regulatory Lifetime definition. And so whether additional qualifications apply or not really depend on the regulatory status of the product, which a firm needs to assess.

Bridging finance

I know that in the past, the regulator has expressed concerns about the bridging finance sector of the market. I am of the generation who remembers bridging only being sold to help unlock property chains. But I am aware that bridging finance is now sold for a wide range of reasons, many of which may be valid. However, a continuing concern is the potential for these products to be sold to borrowers in financial difficulties, where the bridging loan may simply put off the inevitable, without any clear evidence that this is in the consumer's best interest.

The MMR rules have been tailored to provide better protection for bridging customers, and I am pleased that there has been support for these protections from the FCA regulated bridging sector. So, for example, where a bridging loan is sold for credit repair purposes, unless the customer can provide evidence that a mainstream lender will offer them a mortgage at the end of the bridge, we will consider this to be a breach of our rules.

However, our rules will not protect consumers who take out bridging finance from non FCA regulated firms, whose activities and sale practices remain a concern. The good news is that come April 2014 many of these firms that are currently regulated by the OFT will have to apply for interim permissions with the FCA as a result of the transfer of consumer credit. This will allow us to be able to take a good look at the bridging sector as whole and to improve standards across the sector by identifying firms operating at odds with our regulatory expectations.


Lastly, I thought I’d touch on packagers. Although I am aware that there are far fewer packagers in the market today than pre crisis, we are hearing that some of the unregulated firms still active in the market may be overstepping the mark, and undertaking regulated activities.

I believe our regulatory position on packagers is clear. So long as the packager has no contact with the customer and has a business to business operation, they do not need to be regulated. However, where a packager deals directly with customers, the firm will need to be regulated and must ensure that staff have the appropriate qualifications. It is important that mortgage intermediaries realise where a packager is not regulated but is offering more than a business to business service, they are ultimately responsible for any advice provided to the consumer. And I would question if this is really a good position for mortgage intermediaries to find themselves in.


So in summary, it’s fair to say that much has changed for all of us over the last few years.

We have been challenged to build a regulator that can make a real difference for consumers, and the market, and help restore confidence in financial services. Intermediary firms have faced several years of challenging market conditions and have had to adapt their business models to cope with a much smaller mortgage market than we have seen for many years.

The next challenge we all face is the successful implementation of the MMR. Consumer protection has always been at the heart of these reforms and it is a good example of the way the FCA will continue to operate. Lots of work has already been done, but none of us, including the FCA, can be complacent about what we still need to do to make the mortgage market work better for everyone concerned in future.

As I hope you have learned from this speech, we are still on hand to help struggling firms and those with last minute questions, so please continue to check out our MMR implementation pages on the FCA website.