We’re consulting on draft guidance explaining a range of options firms have to support customers, including varying a contract for forbearance purposes.
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March 2023 update
This consultation closed on 21 December 2022. On 10 March 2023 we published finalised guidance.
Guidance for firms
Many mortgage borrowers face higher mortgage payments alongside other increases in the cost of living. Borrowers may approach lenders needing or wanting to reduce, or smooth increases in, their monthly payments.
This guidance explains how firms can support their customers including through automated processes and digital channels. It sets out the flexibility firms have when providing forbearance to those who need it, and the scope firms have to vary contract terms for other borrowers who want to reduce their monthly payments.
In the Dear CEO letter, we said that the TSG is also relevant to borrowers in financial difficulties due to the rising cost of living. So, if a customer indicates that they are experiencing or reasonably expect to experience payment difficulties due to the rising cost of living, firms should offer prospective forbearance to enable them to avoid, reduce, or manage any payment shortfall that would otherwise arise. This includes customers who have not yet missed a payment (TSG paras 3.3, 5.9).
There are many different types of forbearance which are not limited to the options set out in our rules (at MCOB 13.3.4AR). Firms may offer payment concessions where they agree to accept less than the contractual monthly instalment (resulting in a payment shortfall), but they may also offer contract variations such as term extensions and temporary switches to interest-only. Not all firms will be able to offer contract variations.
Firms must act honestly, fairly and professionally in accordance with the best interests of their customers (MCOB 2.5A). Given this, Principle 6, and MCOB 13.3.4AR, any forbearance option(s) should be appropriate to a customer’s individual circumstances.
Firms should be able to justify a decision to offer a particular forbearance option (MCOB 13.3.4CG, Principle 6).
Providing forbearance at scale
The TSG (para 2.8) confirms that firms have flexibility and scope to tailor their approach to meet the operational challenge of many customers needing help at the same time. Our rules and guidance do not impose prescriptive requirements about how a firm collects information on a customer’s individual financial circumstances or how it ensures any forbearance option proposed is appropriate for that customer given their individual circumstances (TSG para 2.9). Firms can use automation or digital tools to:
- automate processes, such as asking borrowers to provide information on their circumstances, including their income and expenditure
- offer a customer a forbearance option the firm has identified as appropriate to the customer’s individual circumstances, and seek the customer’s agreement to it
- offer a customer a range of options that the firm has identified as appropriate to the customer’s individual circumstances for the customer to choose from
In the context of the rising cost of living, a firm may be able to offer a group of customers with similar needs and circumstances a range of options that are appropriate to their circumstances.
Firms should have policies, procedures and controls in place to avoid agreeing inappropriate forbearance arrangements with customers who may have more complex needs, including those who may be in more vulnerable circumstances due to physical or mental illness, unemployment or other characteristics of vulnerability.
Information can be provided to customers digitally, although some may not have access to online channels or may find digital interactions difficult. Firms should therefore offer to engage with customers in different ways, including through a range of channels and, where possible, give customers the ability to switch between them (TSG paras 5.33-5.34).
Contract variations for the purposes of forbearance
Firms may vary a contract without assessing affordability (as set out in MCOB 11.6.2R) when doing so solely for the purposes of forbearance where the customer has a payment shortfall, or in order to prevent one occurring (MCOB 11.6.3R(3)). This could include a contract variation which switches a repayment mortgage onto an interest-only basis for all or part of its term, or extends the mortgage term into (or further into) retirement.
When dealing with a customer who is in or at risk of payment shortfall, firms may, where appropriate, vary a contract to accept payment on an interest-only basis for a temporary period without evidence of a clearly understood and credible repayment strategy (MCOB 11.6.43R). A variation is only likely to be considered appropriate and temporary if, after the temporary period is over, the customer is obliged to make payments of interest and capital which are designed to repay the mortgage in full over the remaining term.
If permanently varying a contract to an interest-only mortgage, a firm would need to have evidence of a clearly understood and credible repayment strategy.
A firm would need to demonstrate that in offering a variation under forbearance it is acting fairly and in accordance with a customer’s best interests (Principle 6, MCOB 2.5A), and that the change is appropriate to the customer’s individual circumstances.
Implications of forbearance arrangements
Firms must give customers adequate information to understand the implications of any proposed arrangement (MCOB 13.3.4AR(2), TSG paras 4.7 and 5.29-5.30). Firms should ensure they give customers timely information to enable them to understand their financial position and their options (TSG para 5.29). This could include information on the impact of deferring payments of interest or capital on the total amount payable.
Firms should ensure they are clear in their communications about the credit file implications of any forms of support they offer customers, including rescheduling or refinancing of accounts (TSG para 4.7).
Customers not requiring forbearance – but wanting to reduce their monthly payments (contract variations)
Firms may offer a range of contract variations to support borrowers who would like to reduce their monthly payments, and our rules allow this regardless of whether customers are facing payment difficulties. A firm can vary or replace an existing contract without undertaking an affordability assessment provided there is no additional borrowing or change to its terms which is likely to be material to affordability (MCOB 11.6.3R).
Interest rate switches
Many firms offer borrowers who are up to date with payments the ability to switch their interest rate. Where there are no other changes to the terms of their contract, and the interest rate change is not material to affordability, the requirement to undertake an affordability assessment will not apply (MCOB 11.6.3R).
A borrower may be switching from an expiring fixed (or otherwise incentivised) rate to a higher incentivised or fixed rate. To determine whether this change would be material to affordability (and therefore whether the requirement to undertake an affordability assessment will apply) firms can compare the proposed new rate to the rate the customer would pay if not for the change – such as any standard variable rate (SVR) that would apply once the current deal expires.
Some customers seeking to reduce their monthly payments may want to extend the term of their mortgage. An affordability assessment will not generally be required for term extensions up to the customer’s expected retirement age if there are no other changes to the terms of the mortgage (MCOB 11.6.3R).
Where the term is extending into (or further into) retirement, it is more likely that the change would be material to affordability (see MCOB 11.6.4E), in which case an affordability assessment would be required.
Variation to interest-only
Some borrowers seeking to reduce their monthly payments may want to switch their repayment mortgage onto an interest-only basis for all or part of its remaining term.
A firm may agree to vary a contract from a repayment mortgage to an interest-only mortgage (permanently or temporarily) if it has evidence that the customer will have in place a clearly understood and credible repayment strategy (MCOB 11.6.41R).
A firm will need to undertake an affordability assessment (under MCOB 11.6.2R) and the cost to the customer of their repayment strategy must form part of this (MCOB 11.6.5R(2) and 11.6.48R). This would include situations in which the repayment strategy is for the mortgage to revert to a capital and interest repayment basis after an interest-only period.
Implications of contract variations
MCOB 7 sets out relevant disclosure requirements when making certain types of contract variations (see for example MCOB 7.6.28R when the variation would change the amount of each payment due). More generally, firms should give customers relevant and timely information to enable them to understand the implications of any variation of terms (Principles 6 and 7).
Exceptions to the requirement to provide advice
MCOB 4.1.4R(2) explains that MCOB 4 applies in relation to any form of variation of a regulated mortgage contract. These rules often require a firm to provide advice as part of an interactive sale (MCOB 4.8A), but there is greater flexibility when varying a contract. This flexibility includes:
- variations to the mortgage contract made solely for the purposes of forbearance (MCOB 4.8A.19R) and;
- variations not made for forbearance purposes, provided they do not involve additional borrowing and, where the change includes a rate switch, the customer is presented (via a non-interactive channel) with all products offered by the firm for which the customer is eligible (MCOB 4.8A.10R).
This means that, where appropriate, firms could provide forbearance or offer borrowers options, such as term extensions up to retirement and rate switches, at scale on an execution-only basis via digital channels, for example to meet requests for support in volume.
The purpose of this guidance is to ensure firms are clear about the effect of our rules and the range of options they have to support their customers who are facing higher interest rates alongside other cost of living increases.
We will continue to engage with firms to monitor how they are providing the support borrowers need and the outcomes they receive. We will consider if there are further steps we can take to help firms to support their borrowers, including at scale.
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