Baroness Neville-Rolfe DBE CMG
Minister for Intellectual Property
Parliamentary Under-Secretary-of-State 

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Baroness Hayter

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 	October 2014 	

Consumer Rights Bill:  Mortgage Contracts 

During our debate in committee on 22 October I offered to provide you with additional details on our approach to regulation of mortgages contracts.

There seemed to be two questions of particular significance
•	What is our view of the Bank of Ireland cases, where they increased the rates on some of their ‘tracker’ mortgages leaving some borrowers stuck on higher rates and unable to remortgage?
•	What protections are in place today for mortgage customers in the event of similar difficulties arising in future, which seems to be the important question for our consideration of this Bill?

If I may I will take the second question first.

Current Mortgage Protections

Since mortgage regulation was introduced in 2004, borrowers who have taken out a mortgage to buy their own home have benefitted from a strong set of protections:

•	The Financial Conduct Authority (FCA) has detailed rules on how mortgage providers must treat their customers. These rules were strengthened in April this year, following the comprehensive Mortgage Market Review. Among the key changes were improvements to sales standards and affordability assessments.

•	The FCA has powers to take strong and decisive action against firms that break the rules.

•	Individual consumers have access to the Financial Ombudsman Service, which has robust powers that allow customers to get redress for their complaints. 

The FCA published a discussion paper in July this year on the subject of ‘Fairness of changes to mortgage contracts’. In this paper the FCA set out some of the factors that they consider relevant when assessing changes to mortgage contracts and asks for views on these. This was designed to provide greater transparency to consumers and lenders about how the FCA views fairness in this area. The FCA is currently considering whether any follow up work is required in light of the responses it received to its paper. 

This Government and the FCA also recognise the difficult position faced by some borrowers who, having moved to a higher rate, find themselves unable to switch to a better deal, whether with their own or another lender. These borrowers are sometimes known as ‘mortgage prisoners’. Alongside the general requirements that borrowers treat customer’s fairly, there is a specific provision within FCA rules designed to protect borrowers in this situation. This rule (MCOB 11.8.1E) prohibits lenders from taking advantage of mortgage borrowers who are unable to switch to another mortgage, so that they cannot treat them less favourably than they would treat other customers with similar characteristics. 

In addition, the FCA has provided for transitional arrangements following the recent introduction of the new Mortgage Market Review rules to help existing borrowers who cannot find a mortgage due to the more robust affordability assessments it introduces. This provision (MCOB 11.7) allows lenders to waive the stricter requirements for existing customers seeking to remortgage, as long as they are not increasing the size of their loan. 

I know that the FCA is aware of the issue of ‘mortgage prisoners’ and the difficulties it may be causing some consumers. The FCA has already expressed concern that some firms do not seem to be applying its transitional arrangements in the spirit they were intended. More generally, the FCA is undertaking a review of its new mortgage rules, which will consider how the rules are working in practice and whether any adjustments or clarifications are required.

Buy-to-let mortgages

Changes to tracker rates may apply to buy-to-let mortgages as well as mortgages held by owner-occupiers. However, buy-to-let mortgages are outside the scope of FCA regulation. The Government has retained the distinction, introduced by the previous Government when mortgage regulation was first introduced in 2004, between the protections provided to owner-occupiers and buy-to-let landlords. 

This approach is driven by two key considerations. The first is that an owner-occupier’s own home is at risk, so there are potentially significant social policy implications if these borrowers are not adequately protected. Second is the acknowledgement that buy-to-let borrowers tend to be acting as a business. The government is committed to introducing FCA regulation only where there is a clear case for doing so, in order to avoid putting additional costs on firms that would ultimately lead to higher costs for borrowers. Businesses are expected to be better placed than consumers to judge whether contracts they make with other businesses are in their interest.

For completeness I should however point out that some new regulation will be introduced from March 2016 for buy-to-let lending to consumers as this is required by the European Mortgage Credit Directive. The Government is currently consulting on these requirements with a view to finalising the legislation implementing these changes in the new year.

Bank of Ireland

I now turn to the first question where I am afraid I cannot add a great deal.

Following the financial crisis, some lenders made decisions to increase the pricing of some of their existing tracker mortgages to reflect the higher funding costs they (as lenders) faced following the financial crisis. It would not usually be appropriate for me to comment in detail on the conduct of individual lenders. But in the case of the Bank of Ireland, Martin Wheatley wrote to the Treasury Select Committee at the time, setting out the view of the Financial Services Authority (FSA) that the contract term that the Bank of Ireland relied on did not appear to be unfair. However, the letter also noted that this is ultimately a judgment for a UK court rather than the FSA or its successor organisation, the Financial Conduct Authority (FCA).

His letter is also clear in setting out that the changes made by Bank of Ireland were to mortgages that did not fall within the scope of FCA’s regulation, either because they originated before mortgage regulation was introduced in 2004 or because they were unregulated buy-to-let mortgages. 

Conclusion

Whilst we are very aware of the problems people can have with mortgages, including of course obtaining them which is also important, Government is not in favour of taking legislative action on either of these issues in this Bill. We are not convinced that there is a case to introduce regulation retrospectively nor are we of the view that the case has been made to extend the scope of regulation to buy-to-let. 

The FCA, an independent regulator, is undertaking a review of its new mortgage rules and has the powers it needs to make changes if these are needed. On buy-to-let, which is different in character and less in need of detailed regulation, some new rules will be introduced in 2016 as a result of the European Mortgage Credit Directive.

I am copying this note to those who attended Committee on 22nd October and placing a copy of this note in the libraries of both Houses.

 

BARONESS NEVILLE-ROLFE DBE CMG