What sort of consumer protection do we need?
Published: 15 June 2011 | Author: Bernard Clarke
On behalf of lenders, we recently affirmed that the industry supports reform to reinforce protection for consumers. In our view, the need for change is accepted, but the key questions are how and when it should be implemented.
In introducing reforms, we believe it is crucial to take a holistic view of what consumers really need. Regulators should take a proportionate view of requirements for enhanced consumer protection, recognising that measures that permanently exclude swathes of customers in a market that is already risk-averse are damaging to wider consumer interests.
In recent weeks, a range of different consumer bodies have expressed contrasting opinions on what needs to be done to ‘protect’ mortgage customers.
One of them is the Financial Services Consumer Panel (FSCP), an independent statutory body set up to represent the interests of all consumers in the development of policy for the regulation of financial services. Earlier this month, it set out what it wanted to see from the Financial Services Authority’s (FSA) ongoing mortgage market review (MMR). It outlined a six-point plan for a sustainable and healthy mortgage market. We support each of its objectives:
- Effective regulation to support consumers. We agree with the panel’s view that "to help consumers, the FSA’s policy needs to be based on a robust cost-benefit analysis, which quantifies not only the compliance costs of the MMR and the benefits of fewer arrears and possessions but also the costs imposed on creditworthy consumers who nevertheless have to settle for a less preferred property, or who are forced to rent."
- Regulatory policy to take account of wider social and economic implications. We support the panel’s view that "an overly prescriptive approach could have serious implications for the unregulated buy-to-let market, the rental market and the market for social housing." We endorse the panel’s plea for "joined-up thinking" on the MMR and its wider implications for housing policy.
- Lenders required to judge affordability and suitability for individual consumers. We agree with the panel’s view that lenders should be responsible for assessing the ability of borrowers to repay "according to their individual circumstances and ability, if necessary, to curtail discretionary spending, with an intelligent, tailored assessment of potential risks, rather than having overly prescriptive rules which could be unfair to some consumers."
We also concur with the panel when it says it:
- doubts the need for credit-impaired customers to have an “extra buffer” on top of standard affordability assessments;
- dislikes restricting the maximum mortgage term to 25 years, which “fails to recognise changing working patterns and increased longevity;” and
- sees interest-only mortgages as a legitimate option for some customers, who may have a variety of reasons for making this choice.
Transitional arrangements which take account of the implications of the changes for all segments of the market. We support the panel’s argument that "the FSA needs to ensure transitional arrangements adequately provide for consumers who have historic mortgages that may now lie outside the responsible lending criteria."
On this issue, we also agree that timing is crucial, and that consumers who find their applications rejected solely because they do not comply with MMR requirements could find their options restricted at a time when lending is already constrained. We support the view that "to avert this danger, implementation of new affordability rules should be delayed until the housing market has demonstrably recovered."
- A future regulatory structure responsive to consumers’ needs. The panel is concerned that the new Financial Policy Committee (FPC) may not consider carefully enough consumers’ interests in making decisions about the mortgage market. "It is vital that the interests of consumers are adequately represented," it says. "Instruments, such as loan-to-value caps, may be effective in stabilising the financial system but may additionally have serious adverse consequences for some consumers, limiting their options."
The panel proposes that the FSA should work with the FPC, on an interim basis, to seek to ensure that proposed macro-prudential requirements are subject to rigorous cost-benefit analysis "which takes account of the goals of financial stability and consumers welfare." The aim should be to select those macro-prudential tools that contribute most to financial stability but are least damaging to consumers, in their cost and impact on the availability of financial services, including mortgages.
The panel goes on to argue that, other than in an immediate crisis, it would expect the fully operational FPC to consider with the Financial Conduct Authority the impact of macro-prudential requirements on "consumer welfare."
- Balanced debate which overcomes the polarised views on the mortgage market. Once again, we agree with the panel’s view that the debate about the MMR has become unhelpfully polarised between those speaking out on behalf of vulnerable consumers and industry representatives (like the CML) which focus on the market overall. The panel said it wanted to "represent all consumer interests" and work with the FSA "to achieve good consumer outcomes." It continued: "A healthy market needs to achieve a balance between freedom for those who are able to repay their mortgages and understand the risks, and those consumers who are vulnerable and need greater protection."
The panel concluded that, in order to encourage responsible lending, the FSA had proposed a series of requirements for checking affordability, most of which were overly prescriptive. We agree.
What’s best for consumers?
At the end of last month, the housing charity Shelter published the results of a survey of first-time buyers it had commissioned from YouGov on the need for regulatory reform. In reporting the findings, it took a narrower view of the interests of mortgage customers than the FSCP, highlighting the need for consumer protection but without fully acknowledging that some borrowers could be disadvantaged by over-prescriptive rules that may unnecessarily deny them access to mortgage credit.
Perhaps illustrating the FSCP’s view of the polarised debate between some consumer groups and the lending industry, Shelter claimed that the voice of the consumer had been "completely drowned out by the mortgage industry." It also said that it was "high time the housing minister stopped bowing to the banking lobby."
In reporting the findings of its survey, Shelter also quoted Matt Griffith, of the first-time buyer group Priced Out. "What we don’t need is a housing market that behaves like a casino," he said. "We expect the government to protect us from irresponsible lending and make sure our interests are put before those of the mortgage lobby.”
Matt Griffith also co-authored an Institute of Public Policy Research (IPPR) report published at the end of last month, entitled Forever Blowing Bubbles? Housing’s role in the UK economy. The report looked at the relationship between volatility in the housing market and instability in the wider economy.
Housing market volatility
The report concluded that the regulation of credit was the most effective tool for controlling housing market volatility. It noted that in recent years lending decisions were more likely to be based on affordability models, rather than loan-to-value or loan-to-income ratios. Although its report was primarily analytical, the IPPR said, it was also "signposting a possible direction of travel," including greater deposit requirements for buy-to-let investors and caps on loan-to-value and loan-to-income ratios.
In our view, the key point about UK mortgage and housing markets is that they remain dysfunctional, and are not effectively meeting the needs of consumers. What is really needed is a sufficient flow of mortgage lending to allow those who can fulfil their financial commitments to move home in response to their changing circumstances if they want to, and for first-time buyers to realise their reasonable aspirations to become home-owners. This cannot be achieved if rules become overly prescriptive.
Making sure that mortgages are affordable for individual consumers is the key objective, but this will not be best achieved by applying inflexible caps on loan-to-value or loan-to-income ratios that do not allow for the differing circumstances of individual borrowers. We agree about the need to promote a stable (and sustainable) UK housing market. But we do not believe we should attempt to do this by rationing credit, in a way that ignores the needs of individual consumers.
The CML and consumers
Responding to Shelter’s survey, we said that we were surprised that the charity seemed unaware that lenders do, in fact, support reform. We agree with the principles of affordability tests, verifying income and stress testing individual borrowing commitments against higher interest rates. And we agree with Shelter that the government should listen to consumers, as well as lenders and others, on reform of the mortgage market.
It is because we believe that it is essential for reform to reflect the interests of consumers that we funded extensive independent research on their attitudes, needs and behaviour as part of our comprehensive response last year to the FSA on the MMR.
The research included both quantitative surveys and qualitative focus groups looking at the needs, behaviour and aspirations of different types of consumer. It concluded that consumers’ views were complex and varied, with a balance between support for tighter regulation and a reluctance to unnecessarily exclude customers for whom mortgage borrowing would be sustainable.
Although we are a lender representative body, we believe we also have a long history of promoting the interests of consumers. Recognising the existence of a potentially damaging gap in consumer protection, we drove the industry initiative to introduce the Mortgage Code as long ago as 1997.
The Code, which we drafted, remained in place successfully for more than seven years. It was superseded by statutory regulation in 2004 – with us leading the calls for the introduction of statutory rules to reinforce protection for consumers across the whole market.
We agree with the Financial Services Consumer Panel’s conclusion that consumers would be best served by a well-functioning mortgage market allowing them to shop around for affordable loans that meet their individual needs.
The panel goes on to say that:
"The total cost of a mortgage should be easily comparable across the market, with lenders competing for consumers’ business on price and level of customer service.
"Intermediaries and lenders should be complying with FSA rules and principles, with those falling short being named, thus offering firms treating their customers fairly a business advantage. And finally for any customers experiencing financial difficulty, firms should be treating them positively and sympathetically, with a solution to manage the mortgage arrears being developed on an individual basis.”
We endorse this approach. It imposes important responsibilities on firms, and aims to strike the right balance between the potentially competing needs of adequately protecting consumers while allowing them access to credit to fulfil their individual aspirations in a sustainable manner. We are willing to work with all groups and individuals in support of these goals for regulatory reform.