Posted: 16th April 2014
The implementation date of the Mortgage Market Review (MMR) is rapidly approaching. Those responsible for MMR at their firms will now be turning their minds to, amongst other things, likely areas of regulatory focus beyond 26 April 2014. Here, in the last of the series of articles on issues to consider post MMR implementation, we discuss those areas we expect the Financial Conduct Authority (FCA) to focus on after the new rules commence.
The FCA has signalled its intention to review the mortgage market six months after the implementation of MMR. While it is not yet possible to pinpoint the FCA’s precise activities, keep an eye on these areas:
Large lenders and intermediaries
These firms have a significant role to play in ensuring a smooth transition to the new regime. The large providers and distributors will be a key barometer to provide assurance to the FCA that the market has adopted the new rules and is operating as intended. These firms have already been heavily involved in sharing their implementation plans with the regulator and can expect to be involved as the new regime goes live.
One of the cornerstones of the MMR is that the ultimate responsibility for the affordability assessment of the borrower rests with the lender. This assessment should be based upon a full understanding of the customer’s personal and financial circumstances. It is a requirement that this is fully evidenced by the borrower.
In the run up to the MMR lenders have already started asking a greater depth of question than previously. Many of these questions come as a result of individual lenders’ revised responsible lending policies put in place to ensure that appropriate information is being captured.
The focus of the regulator will be on ensuring that individual approaches to customer circumstances are explored and understood to an appropriate level. The aim is to make a rounded assessment of customers’ ability to repay their mortgage today and, based upon reasonably foreseeable circumstances, in the future.
While what needs to be considered in terms of income is set out in detail within the new rules, the key test here will be on how firms seek to record and demonstrate this so that the lending decision is supported and so that customers understand.
Higher risk lending
In terms of risk appetite the mortgage market has been relatively conservative in the years since the financial crisis in 2008. There are signs, however, that lending criteria is slowly being loosened again as volumes begin to pick up in new lending. It is worth remembering that one of the stated aims of the MMR is to ensure a sustainable mortgage market for the future.
Undoubtedly, any firm increasing its risk appetite at the moment – and into the future – is likely to become a focus for the regulator. This is in order to understand the rationale behind this and how this fits with the new responsible lending requirements being implemented by MMR.
Execution only sales
The FCA has signalled that it expects firms to have increased controls around execution only sales. This is to ensure that this sales channel is not being abused, that it operates in a controlled way and does not encourage customers to use it without understanding the protections they lose by doing so.
Senior management will be expected to monitor this area and be able to explain why customers are selecting this channel against other routes if challenged by the FCA.
These are the likely areas that the regulator will be focussing on in the post MMR implementation months. Senior management within firms should take note of these, but more generally ensure that they understand how their organisation’s post implementation activity is delivering against their own plans.