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FCA to publish “mortgage prisoner” consultation paper

Financial Conduct Authority chief executive Andrew Bailey has written to chair of the treasury committee Nicky Morgan raising concern over the on-going “mortgage prisoner” issue, in which he details plans to publish a consultation paper this spring.

The term refers to borrowers who have been moved to reversion rates and are unable to switch to a cheaper mortgage due to changes in affordability assessment rules following 2016’s mortgage credit directive. The FCA estimates that there are 140,000 people who face such a barrier.

In his letter, Bailey writes that the consultation will focus on potential changes to the body’s responsible lending rules, “with the aim to deliver a more proportionate affordability assessment.

“We intend to move the affordability assessment from an absolute test to a relative test. Thus, the test would be whether the mortgage costs are more affordable than the current mortgage costs.

“Our focus will be on those customers who are seeking to move to a cheaper mortgage and are not borrowing more to ensure that a new mortgage is more affordable for these customers,” he adds.

Bailey also calls on the industry to help matters by offering remortgaging products once the barriers he speaks of are removed. However, he adds that “participation will be a commercial decision… not all will have the risk appetite to participate,” highlighting the fact that borrowers in arrears, with high LTV deals, who have “considerable” debts or are in negative equity may prove problematic still.

In response to the letter, Morgan says: “These customers are trapped on a far higher interest rate than is necessary through no fault of their own.

“The FCA has today announced that it will consult on changing its lending rules to allow such customers to switch to an active lender, with whom they may be able to get a better deal.

“The regulator must now act swiftly to help these 140,000 mortgage prisoners, and not use this consultation to kick the issue into the long grass.”

Treasury Committee member Rushanara Ali adds: “The FCA appears to be taking steps in the right direction to ensure that mortgage prisoners aren’t stuck making higher-than-necessary mortgage payments.

“Whilst there is clearly more work to be done by the regulator, industry also has a vital role to play. As Mr Bailey said, firms need to be willing to offer re-mortgaging opportunities to these customers once the regulatory barriers are removed.

“I hope the FCA will ensure the regulatory barriers are removed as soon as possible and that the FCA closely monitors the actions of the lenders in this regard.”

UK Finance director of Mortgages Jackie Bennett comments: “It is a positive step that the FCA has set out the action it will take to help those customers stuck on reversion rates who are with inactive or unregulated lenders.

“We will continue to work constructively with our broad range of members and the FCA to help ensure those customers who want a like-for-like mortgage can switch lenders more easily.”

Intrinsic managing director Gemma Harle says: “Andrew Bailey’s letter to Nicky Morgan published today encouragingly shows that the FCA is entering into the new year still determined to find a solution to the absurd situation that mortgage prisoners find themselves in.

“While the FCA has already set out some measures in their interim report to solving the mortgage prisoner conundrum for active lenders, the problem is more complex when it comes to inactive lenders or unregulated firms.

“Similarly, although new challenger banks and lenders inject new opportunities and offer customers greater breadth they can be more susceptible to economic conditions which cause them to fold, in turn creating a new breed of mortgage prisoner. For example, we have recently seen some lenders apply to get their permissions removed which could leave customers in a tricky position.

“The FCA needs to simultaneously act to tackle the age-old mortgage prisoner problem while making sure that new customers don’t suffer when new players in the market go out of business. A communication plan is essential so that these customers left in the lurch are supported.”

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