UK Mortgage Rule Review: FCA takes first step in introducing targeted flexibilities into the regulatory framework

The changes that were proposed in Consultation Paper 25/11 (CP25/11 – see our related article here) have mostly been taken forward by the FCA, as summarised below. See Policy Statement (PS25/11) here and the related Handbook instrument here for more detail.

Advised sales

• Spoken or interactive dialogue between a firm and a customer during a sale will no longer trigger a requirement for the firm to provide regulated mortgage advice. This will make it easier for execution-only customers to get the right information before taking out a mortgage.
• The FCA has decided to retain the requirement that customers positively elect to proceed with an execution-only sale where they have had interactive dialogue with the firm. This is to mitigate the risk of customers thinking that they have received advice and benefit from the protections of the FCA’s rules for assessing suitability.
• Firms need to consider whether processes are appropriate to identify execution-only customers for whom advice, or other customer support, may be necessary to avoid causing foreseeable harm in relation to entering into or varying a regulated mortgage contract.

Affordability assessments

• The requirement for a full affordability assessment when reducing a mortgage term has been removed. Firms can therefore assess affordability in a way that is proportionate to the customer’s needs if a customer seeks this change to their mortgage contract. However, they must keep in mind their obligations under the Consumer Duty. For example, they should monitor and assess customer outcomes to ensure that their affordability assessments are appropriate.
• The modified affordability assessment may now be applied to a new mortgage contract with a new lender where it is more affordable than (a) the customer’s current mortgage, or (b) a new mortgage product that is available to the customer from their current lender.

Whether lenders will take advantage of the flexibility introduced by the FCA will ultimately depend on their risk appetite and a customer’s individual circumstances.

Removal of non-Handbook guidance

The following non-Handbook guidance has been retired:

• Interest-only mortgages guidance (FG13/7); and
• Guidance for firms supporting existing mortgage borrowers impacted by rising living costs (FG24/2).

As part of this, there is a new rule and guidance in the FCA Handbook to clarify that firms must deal fairly with customers whose mortgage terms have expired with a balance outstanding and not take repossession action unless all other reasonable attempts to resolve the customer’s position have failed.

Gibraltar

Having assumed in its consultation proposals that there were no Gibraltar-based consumer mortgage lenders passporting into the UK, the FCA’s latest data shows there are a small number of Gibraltar-based mortgage lenders with permission to enter into mortgage contracts in the UK. The FCA has therefore now added a rule to clarify that the changes will apply to any Gibraltar-based mortgage lenders who may want to lend within the UK in the future.

The FCA highlights that the removal of the requirement for a full affordability assessment when reducing mortgage terms and dealing with maturing interest-only mortgages would rely on the Consumer Duty to be the main standard for firms to apply when dealing with customers.

Our combined legal and consulting teams are well placed to assist you in reviewing how risk is currently managed within your business, and how this might have to be adapted with the shift to increasingly outcomes-based regulation. We can help you in developing approaches to decision-making based on outcomes rather than specific rules.