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Mortgage market review

Last reviewed 02/12/2014: any recent updates in this colour.

This page contains historic/contextual information about the Mortgage Market Review (MMR). All references relate to historic publications and speeches by the then FSA prior to the cut over to the FCA on 1 April 2013.

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Following the global financial crisis, the Financial Services Authority (FSA) announced that it would undertake a review of the mortgage market.

In February 2009, the FSA formally announced the mortgage market review (MMR) outlining that it would be a holistic review looking beyond conduct of business regulation stating that the review would cover 'the complete value-chain in the market (e.g. lenders, intermediaries and consumers), and will cover all aspects of regulation, including prudential, conduct of business, and financial crime.'

The FSA’s aim for the MMR is to deliver a ‘sustainable market for all participants and is flexible for consumers’.

The CML supports the stated outcome of the MMR process and, indeed, the need for a review of all aspects of mortgage regulation to help deliver a sustainable and flexible market.

Looking at some of the detailed points within the MMR, the CML, again, broadly agrees with the FSA that lenders are, and should be, responsible for assessing affordability. This includes the assessment of a borrower’s income.

Where we differ from the FSA is around the details of its policy and with the underlying principals that underpin the new approaches to conduct risk and consumer protection.

The CML made the case that the approach in the MMR's responsible lending proposals published in July 2010 would have negatively impacted on a broad range of creditworthy borrowers and have significant impacts for all housing tenures.

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Conduct risk and the MMR: ‘protecting consumers from themselves’

The new approach to conduct risk, outlined in a speech by the FSA’s chief executive, Hector Sants, in March 2010, is one based on pre-emptive action to address detriment before it occurs.

This approach necessarily requires the FSA to make ‘judgements’ on what it considers to be unacceptable practices that are likely to result in detriment for consumers. The MMR is the first sector-wide application of this new approach.

In the MMR, the FSA’s judgements on detriment are based on a view that consumers in the mortgage market have not generally acted rationally or in their best interests, and that regulatory controls are necessary to ensure that irrational consumers are protected from themselves by placing additional requirements on lenders.

Seeking to mitigate potential detriment through detailed conduct rules is likely to have significant and broad unforeseen consequences in significantly limiting legitimate borrowers access to the market.

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Responsible lending

To protect consumers in this way it requires the transfer of responsibility from the consumer to the lender. In the first responsible lending consultation, published in July 2010, the FSA did not get the balance right. By seeking to protect customers, it would have limited access to the mortgage market for a large number of borrowers.

In our response to the consultation paper, we highlighted both the range and number of consumer groups that would be impacted. These were:

  • The Impacts on existing consumers

On 5 October 2010, the CML published research looking at the impacts of the proposals on existing customers, concluding that 51% of transactions between 2005 and 2009 would not have been granted on the current terms.

  • Consumer impacts

On 4 November 2010, independent consumer research by Policis was published. Using data from a nationally representative sample of consumers, the report looks in detail at current affordability amongst mortgage borrowers, the impacts of the FSA proposals on current borrowing and the impact on future transactions.

The report concludes that only 5% of borrowers are currently struggling to make mortgage payments and that the overwhelming majority of these have either suffered either a reduction in income or unemployment. The majority of borrowers that have suffered similar income shocks are coping, the primary reason being their ability to flex and prioritise their budget to make key payments. An additional report looking at the detailed impacts of low rates on affordability was published by Policis on 15 November.

Looking at the impact of the FSA’s responsible lending proposals, Policis concluded that 19% of current borrowers would fail the new affordability test with an additional 30% being able to afford reduced mortgages.

Of those consumers wishing to move, 17% would fail the test with an additional 36% being able to afford reduced mortgages. The impact on prospective first-time buyers who choose to stretch their income is more pronounced with 15% failing the test and an additional 40% being eligible for a reduced mortgage.

  • Compliance and costs

The third research report, by Oxera reviews the cost to lenders of the income verification rules in CP 10/16 and how lenders can comply with the new, forward looking, elements of the affordability proposals.

The report concluded that the annual costs of the FSA’s income verification requirements would be between £7.1 million and £10.3 million a year. This is likely to result in some larger lenders not wishing to consider applications from borrowers with complex incomes.

Oxera conclude that the FSA’s requirements to take into account foreseeable changes in income and affordability are impractical in practice, and would result in significantly reduced levels of borrowing to compensate events that impact on income and expenditure that may never happen.

The full reports and supporting documents are available on the CML’s research webpage.

  • The CML response

The CML’s formal response to CP 10/16 was published on 15 November 2010 and looks in detail at all the proposals and outlines alternative suggestions that seek to enhance protection for customers in a proportionate and practical way. Given the weight of evidence around the impacts of the current proposals, the analysis of the detailed rules, the CML called for the FSA to re-consult on its responsible lending proposals.

Similar concerns were expressed by a range of stakeholders who have joined the debate including the FSA's consumer panel in its response and in an open letter to the Chancellor of the Exchequer by a number of housing and legal bodies.

  • Further consultation

In December 2011 the FSA published a revised set of responsible lending proposals in consultation paper CP 11/31. Although the core components of the policy remains unchanged - responsible lending must be based on the individual assessment of affordability, including the verification of income - the detail and prescription in the rules has been significantly reduced. This provides lenders with greater flexibility as to how they comply with the requirements.

We welcome the changes in the FSA's position and believe that the proposals are a significant improvement on its original position. However, we believe that the proposals will still have unintended consequences that will restrict access to certain types of borrowers.

In our response to the consultation paper we highlight issues created by an overlap between the lender's process of credit risk assessment and the proposed requirement to take into account foreseeable changes to income.

This clash is likely to impact on lenders' ability and willingness to lend based on income that is either uncertain or variable. This will have implications for borrowers who are self-employed, fixed-term contracts or where the mortgage extends beyond the borrower's retirement age.

The interest-only proposals - which we broadly support - are likely to result in further restrictions by lenders, as it becomes a niche part of the market. Our views on the future of interest-only are detailed in a News and Views article published in February 2012.

  • Help for existing borrowers

In CP 11/31 the FSA has included rules that are intended to provide lenders with the flexibility to help existing borrowers who are trapped as a result of changes in regulation. In drafting these proposals the FSA rightly states that it cannot compel a lender to use the rules and the decision to lend remains a commercial one.

The rules are very restrictive and would not allow lenders to either lend more to the borrower or to increase their monthly payments (by moving to a fixed-rate deal, for example). In essence the only option that is open to the borrower would be to reduce their mortgage.

We think that this could leave some borrowers worse off than they would be at present, as the rules could create further restrictions on the options available to lenders and borrowers. In our response, we propose an alternative structure based on a process that some lenders will currently use to assess marginal cases.

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On 16 November 2010, the FSA published the third MMR consultation paper which included policy proposals for distribution and disclosure (CP 10/28). As outlined in our press release in response to the CP, we are concerned that the proposals continue to transfer responsibility (and risk) away from consumers.

In our response (and supporting press release) to the consultation paper, published on 25 February, we highlight a number of concerns with the policy proposals and a lack of consistency between the policy and rules. But welcome the FSA's approach to constructive consultation and dialogue with the industry.

  • A single sales standard

The FSA's new approach to conduct risk places a reduced emphasis on disclosure in favour of detailed regulation of the sales process (CP 10/28) and underwriting (CP 10/16) processes as a means of risk management.

This change in emphasis is based on the regulator's view that consumers, in general, do not respond to the risk messages through the disclosure process and would benefit more through more prescriptive regulation of firms.

It is for this reason that the major changes proposed in CP 10/28 focus on the sales process; in particular, the development of a single sales standard for both advised and non-advised sales.

In our response to the consultation paper, we looked at the performance of advised and non-advised sales and concluded that the majority of 'higher risk' consumers that would gain the most benefit from advice, had received advice when they bought their mortgage. Only a very small minority of 'high risk' borrowers chose a non-advised, where it may have been more appropriate to receive advice.

From this we draw the conclusion that applying the same standards to non-advised sales - primarily used by lower risk borrowers - would not be an appropriate or proportionate regulatory response, as it does not reflect the differences in consumers' financial capability, particularly as the sales standard proposed by the FSA would create an advised process in all but name.

  • Further consultation

A revised set of advice proposals were consulted upon in CP 11/31 - published in December 2011. These are very different from the original consultation proposals and significantly expands the scope of advice by defining it as being any 'spoken or interactive dialogue' between a lender and borrower.

This means that in all cases the borrower will have to receive advice. The proposals do not differentiate between the sale of new mortgages or simple transactions, such as contract variations and we believe that this removes choice from the market by creating a one-size-fits-all approach.

The FSA does allow certain borrower groups to opt-out of receiving advice, but these are very small numbers of borrowers (either those with an income of £1million or more or 'mortgage professionals) and it is unlikely that lenders will design a process to cater for this. The only other alternatives would be for a borrower to reject the advice they have received from the lender or to arrange their mortgage via the lender's website.

We are concerned that the proposed rules are based on a preconception that advice still occurs within the traditional medium of face-to-face advice. Yet we see continuing development and expansion of new channels for telephone and internet advice. We believe that the rules need revision if they are not to hamper this important commercial development (which clearly is attractive as an option to many borrowers). 

We also believe that the basic definition of advice is drawn too widely and needs amendment, if consumers are not to be unnecessarily irritated by a requirement to go through an advice process in circumstances where it may not be necessary to do so. The requirement to advise whenever there is ‘spoken or interactive dialogue’ (which is likely to have a disproportionate impact on lenders’ direct sales channels and particularly telephone and online sales), is far too wide and will drag into an advice process many consumers who simply want a piece of information, especially about post-sale contract variations. They are not after advice and their enquiries should not be within scope.

If the FSA persists with this approach, we suggest that, by imposing a process that is developed for face-to-face sales onto remote channels, they will hinder those channels which allow for a relatively easy point of access for new entrants into the mortgage market. We are concerned that advice proposals will make it even more challenging for new players to enter the market and thus the end effect will be to restrict competition.

In our response we recommend how the FSA can achieve the stated goals of its advice proposals, continuing to allow consumers to choose how they transact and lenders to use a range of distribution channels. We believe that the end outcome of following our approach will not be to damage the consumer protection goals of the FSA, but will allow a better range of options to become available to consumers. 

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With a changing and more limited role for disclosure, the proposals in this section of the consultation paper focus on the 'initial disclosure' messages, regarding the market coverage of a firm and the remuneration arrangements of the seller.

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The nature and scale of the changes proposed in the MMR cannot be underestimated. The FSA has stated that it intends to allow firms at least 12 months to implement the changes once the final policy has been published. Given the size of the task facing lenders – not only in implementing the MMR, but also broader regulatory changes – we recommend that the FSA gives firms a period of at least 18 months to plan, build and implement the bulk of the systems changes.

Implementation of the MMR must also be dependent on the outcome of the European Directive. The EU mortgages directive is currently progressing through the legislative process and, whilst the final detail remains uncertain, it will cover many of the same issues as the MMR (disclosure, advice and responsible lending). As far as is possible, the FSA must ensure that the MMR and Directive do not contradict one another, even in small particulars so that UK firms are not required to implement changes to the systems twice over a very short period of time.


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