CML news & views

In our response to today’s consultation by the Financial Services Authority (FSA) on responsible lending, we recognise the inevitability of the drive to regulatory change but point out that there may be unwelcome side effects for consumers.

In current market conditions, the FSA’s proposals are likely to make it more difficult and expensive for some borrowers to get a mortgage, at a time when the main complaints from consumers are of a shortage of funding and the difficulties experienced by some borrowers in taking out a loan. 

In our view, the risks are that consumers and firms will be forced to bear the costs of regulatory requirements now, in market conditions in which they may not currently be needed. Any potential benefits to consumers from the FSA’s proposals may only be felt at some unspecified time in the future, while there are significant costs in introducing them prematurely.

The FSA’s proposals also place a high degree of responsibility on lenders for making sure that borrowers are only able to take out mortgages that are suitable for them. But, while acknowledging the arguments in support of this, we also believe it is important for consumers to make responsible choices and decisions when considering whether to take out a mortgage.

The FSA believes that “irresponsible lending goes hand-in-hand with poorly informed or even irresponsible borrowing.” It cites the misuse of self-certified mortgages, the taking out of interest-only mortgages on the basis of short-term affordability and excessive focus on initial product rates as examples in which borrowers could be failing to protect their own interests.

In finding the right solution to problems arising from decisions made by consumers, it is important to be clear about what stage in the process it is best to offer help. It is crucial to help ensure consumers make the right decisions at the outset, before taking on a long-term financial commitment.

The regulator believes its proposed approach to income verification encourages consumers to think more carefully. However, just as some customers may not have used product information in the ‘key facts’ illustration before deciding to borrow, we do not believe that verifying income will itself discourage some borrowers from over-committing themselves. Income verification is very specific to the decision to take out a mortgage and does not preclude other forms of "irrational" over-borrowing, for example on credit cards.

We welcome the fact that the FSA and the recently established Consumer Financial Education Body (CFEB) will continue to work closely together to explore whether there is a role for better guidance before taking out a mortgage for high-risk borrowers – a point we made in response to the FSA discussion paper in January. The CFEB will be developing the guidance available on the moneymadeclear website, such as the Stay on top of your mortgage campaign.

We welcome the CFEB’s intention to seek to help consumers who go through a life-changing experience but before it results in them falling into arrears. The CFEB is planning to add more information to the moneymadeclear website on some of the causes of increased rates of mortgage possession.

However, we think the CFEB needs to do more to help promote financial capability for the vulnerable mortgage borrowers who need it most.

The FSA’s solution is to make lenders responsible instead. A potential unintended consequence of this is that customers who may be making rational borrowing decisions – and can afford their loan – may not get a mortgage because the lender will not accept a risk that the borrower could over-commit themselves. 

Those most affected are likely to be would-be first-time buyers, whose aspiration to become a home-owner may be hit by the FSA’s risk-averse approach.

• The next issue of CML News & Views will contain a more detailed response to today FSA consultation paper.