This proposed guidance relates to the following rule(s) in the FCA Handbook
- Principle 6
- MCOB rules may apply in particular situations
- SYSC 4
This guidance is likely to be of most relevance to residential mortgage lenders and third-party residential mortgage administrators.
Background to this consultation
We wanted to understand the risks to consumers when interest-only mortgages reach maturity and borrowers do not have the capital to repay the balance due. And we wanted to develop – with the industry – ways of tackling this issue.
So we conducted a thematic review on the maturity of interest-only mortgages.
We reviewed a sample of firms’ current strategies, policies and practices for interest-only mortgages to better understand how firms are dealing with these customers. This guidance is based on the findings from the firm review as well as other industry practice information we have received.
When looking at this matter, we considered Principle 6 of the FCA’s Principles for Businesses, which states that ‘a firm must pay due regard to the interests of its customers and treat them fairly’.
We expect firms to act in line with Principle 6 when dealing with interest-only mortgage customers and this guidance indicates what actions we expect firms to take to abide by this Principle to achieve a fair outcome for their customers.
We recognise that customers are responsible for repaying their mortgages, repayment of the capital at the end of term is a contractual requirement, and that firms are not obliged to offer options at maturity.
This guidance relates to the ‘back book’ of existing interest-only mortgages. Separately, under our Mortgage Market Review, new rules for new mortgages contracts will come into effect in April 2014. The enhanced lending standards included in the new rules are expected to reduce the risk of future maturity issues occurring.
Summary of the key issues
This guidance sets out what we expect firms to do to ensure the fair treatment of customers who are unable to repay the capital sum at the end of the term.
The guidance sets out the FCA’s views on how firms can act in line with Principle 6 to achieve a fair outcome for their customers. It is not intended as a prescribed course of action and is not the only way firms can act to abide by Principle 6.
We expect a firm to:
- have a written strategy setting out its policy and procedural framework for managing mortgage loans that may not be repaid in full at the end of the term;
- consider what options can be offered to interest-only customers, either during the mortgage term or at maturity, demonstrating why the firm offers some options and not others;
- give front-line staff guidance on how to execute the firm’s policy with appropriate monitoring to ensure fair and consistent consumer outcomes;
- collate enough management information to enable the firm to monitor its interest-only back book and review the performance of mitigation actions taken during the mortgage term or after maturity;
- communicate early and frequently according to the potential risk of non-repayment within the firm’s mortgage book, communicating more regularly as customers approach the end of the mortgage term;
- give customers enough time to consider maturity options, especially if the firm’s range of options is limited or if customers must meet specific criteria to be eligible – customers may wish to consider other options and should be given enough time to do so;
- assess affordability if any variation to an existing mortgage significantly increases the monthly payment or where the revised terms extend the loan into retirement; and
- consider MCOB 11.8.1E. Some interest-only customers may be unable to change their mortgage or move to a different provider. Firms should be able to demonstrate how they have complied with Principle 6 (Customers’ interests) in their treatment of such ‘trapped’ customers.
Cost benefit analysis
A cost benefit analysis (CBA) is included in this consultation.
We invite your views on
- Our proposed guidance in general including examples of good and poor practice; and
- Our cost benefit analysis of this proposed guidance (Annex 3)
Do you have any comments on the proposed guidance?
Do you agree with the cost benefit analysis?
Are there any other costs or benefits we have omitted?
Please respond by 3 June 2013 (4 week consultation)
Please email your responses to:
Or send your responses to:
The Financial Conduct Authority
25 The North Colonnade
London E14 5HS