Client Briefing: Compliance, Conduct and Risk Bulletin January 2016

1. Targeted deregulation ‘could help mortgage market’ 

Paul Smee, Director General of the Council of Mortgage Lenders’ (‘CML’), has noted that regulators should now go easy on any reform to the mortgage market if competition within the market is to be encouraged. He believes that the Financial Conduct Authority (‘FCA’) should in fact consider deregulation if they wanted to increase competition within the market.

The CML see the newly imposed regulations as hindering competition and therefore, targeted de-regulation might make the market more competitive.

It is recognised that in general, the UK mortgage market is largely competitive. This is evidenced through the availability of thousands of different mortgage products from over 100 lenders in the UK. However, there are concerns that a great deal of lender resources are going into implementing changes caused by new regulations. A period without further regulatory change to help the market grow in competitive terms has therefore been called for by the CML Director.

Examples cited by Mr Smee of ‘modest deregulation’ include rules on assessing affordability when lending to those whose loans will continue on into their retirement, and ensuring that the rules on mortgage sales and advice are fit for purpose in a digital age.

In October 2015 the FCA called for feedback following the publication of their 2015/2016 Business Plan, in which the FCA announced its intention to review whether there are any barriers to competition in the mortgage sector. The FCA requested feedback on entry into and expansion of the mortgage sector, and/or the ability of consumers to make effective mortgage choices.

The CML is however concerned over the already “significant regulatory upheaval in the UK mortgage market” in the past few years. With the coming into force of the European Union’s Mortgage Credit Directive in March 2016, the CML believe that there is a serious concern that too much red tape in the market will slow things down, instead of allowing the creation of competitive products. 

Find out more: Financial Times Adviser 

2. FOS state lenders should extend terms indefinitely for older borrowers 

FOS have stated in 2 recent complaints rulings that older borrowers should have the terms of their mortgage extended indefinitely, to prevent the worry and reality of elderly people being made homeless.

In one case, the borrower had taken out an interest mortgage in his 70s with a 25 year term. The borrower, now in his 80s, contacted his lender as he was concerned at the prospect of having to sell his home in his 90s. The lender refused to extend the term, stating that the borrower had been aware of the terms of the interest only mortgage when it had been taken out.

FOS raised concern that the mortgage company hadn’t given personalised advice to the borrower, taking into account his age and circumstance. They directed the lender to extend the term of the borrower’s mortgage indefinitely.

In a second case, the borrower had taken out an interest only mortgage aged 75 and had now, as a widow in her 80s, been contacted by her lender who explained that her mortgage was coming to an end. The lender refused the borrower’s request to extend the term, on the basis that it was their policy not to extend the mortgage terms of borrowers aged over 75. The lender advised that there was no repayment vehicle in place to address the capital and they did not think it was fair to act outwith their lending policy as a lifetime mortgage would require constant reviews.

FOS took the view that the borrower was in an unfortunate position because of the actions of the lender and as such they took the view that it would not be fair to force the borrower to sell her home. FOS directed the lender to extend the term of the mortgage indefinitely.

Recently, FOS urged lenders to develop products to better suit the needs of older borrowers. Before April 2014, many lenders cut their maximum age limits, making it more difficult for borrowers to obtain finance if the loan extended into retirement.

Find out more: Financial Ombudsman 

3. Lenders under pressure to review maximum age criteria 

Prior to the Mortgage Market Review many lenders tightened their criteria when lending to borrowers whose loans extend beyond retirement or those wishing to borrower post-retirement. While many of the big lenders require borrowers to have paid off their loans by age 75, smaller lenders – building societies in particular – are sometimes more flexible when it comes to lending to older people. Two building societies recently relaxed their criteria, promoting calls for others to follow suit. Darlington BS raised its limit for those borrowing on a capital and interest repayment basis meaning borrowers must now repay their loans before their 85th birthday as opposed to 75 previously. Dudley BS also removed all such restrictions across its product range; previously the firm had a cut-off age of 75.

Legal & General Mortgage Club director Jeremy Duncombe says that many lending limits do not reflect modern lifespans and lifestyle choices. He said: “What lenders should be looking at affordability and the ability to pay for that borrower and make their decision on that, not on an arbitrary upper age limit.”

The Council of Mortgage Lenders, which has launched a working group to look at lending into retirement, says: “The issues and challenges associated with retirement borrowing are complex, and are often inter-linked with other decision for older people: about pension provision, their changing accommodation needs and the need for care, and how wealth acquired over a lifetime may be drawn upon to fund a range of lifestyle choices, in the right circumstances. The CML has stated: “Their differing circumstances mean that options, choices and solutions will not be the same for all older people. We therefore recognise a need to work with individual lenders, as well as consumer groups, pension providers, financial advisers, housing providers, think tanks, other trade bodies, regulators and government as we try to make progress in this area.”

Find out more: Mortgage Strategy