With six months to go to MMR, how are lenders faring?
Published: 23 October 2013 | Author: Bernard Clarke
There are now almost exactly six months to go until 26 April 2014 – the day on which the final rules emerging from the mortgage market review (MMR) are due to come into effect. Today, we look how firms are progressing towards this crucial date. What do they still have left to do before next spring? And are they on track to meet the Financial Conduct Authority's (FCA) deadline?
Lender preparations are already well under way, with the FCA saying that two-thirds of firms are on track and that there is still enough time for everyone to meet the deadline. Lenders are currently immersed in preparations to adapt internal systems and processes to ensure they will be able to comply fully with the FCA’s requirements. But implementing the new rules is a major undertaking for the industry, involving significant costs and other resources.
A crucial period for lenders and borrowers…
The next six months is likely to be a particularly challenging period for lenders as they finalise their preparations for the introduction of the MMR, while adjusting to the effects of a series of other major policy and regulatory initiatives affecting the mortgage market.
During the first part of the 18-month MMR implementation period, for example, firms participating in the Help to Buy initiative have also been working to introduce both the equity loan and mortgage guarantee elements of the scheme. And, with the European Parliament expected finally to approve the proposed directive on credit agreements relating to residential property (CARRP) before the end of this year, lenders will also need to implement a series of changes to meet European regulatory requirements. Finally, firms are also planning for the introduction of new reporting requirements, under which they will have to submit a great deal more information about their lending activity to the FCA.
Implementing such a comprehensive series of major, inter-related and overlapping reforms increases the scale of the challenge for firms – and the risk of unintended consequences with the potential to disrupt the market.
…and the CML
With change being driven by such a range of internal and external forces – extending from the UK government (and devolved administrations) to national and European regulators – the CML is uniquely placed to assess the wider effects on the mortgage industry, and on firms and consumers. We will be monitoring closely the impact of the introduction of the MMR and other initiatives – and their cumulative effects – and voicing concerns on behalf of lenders about any unintended consequences.
What have we been doing to help?
For many months now, we have been working closely with members to help ensure they are ready for next year’s launch of the MMR. In particular, we have been:
- Promoting discussions between lenders and intermediaries to ensure that changes to relationships that may be required under the rules are established in good time, enabling a smooth transition to the new regime.
- Providing a forum for lenders to discuss issues emerging as they work to implement the new rules. That enables us to take up directly with the FCA any issues that are causing concern for firms and address any confusion there may be about what the policy is intended to deliver.
- Lobbying hard for appropriate transitional arrangements, with the aim of making sure that the market continues to work smoothly for both lenders and consumers in the run up to – and immediate aftermath of – the introduction of the new rules.
Impact on the market
With six months to go until the introduction of the new rules, it is still too early to predict exactly how they will affect the market. There are some likely changes, however, that we can anticipate.
One is a move to a market in which most borrowers take out a mortgage only on the basis of advice provided as part of the sales process. Consumers will need to understand that there will be new rules and procedures for providing them with advice, and that this will affect the way in which mortgages are sold. And these changes will affect not just the sale of new mortgages, but variations to existing contracts as well.
The new rules do allow firms in limited circumstances to offer an execution-only option and advance mortgages to customers without giving advice. At the same time, the FCA has made it clear that lenders will not be compelled to lend on an execution-only basis. One likely outcome is that some firms may opt for advised sales only, and the proportion of mortgages advanced without advice may be much lower in the future.
The anticipated reduction in the number of mortgages sold without advice may lead to changes in the way mortgages are distributed and in the balance between loans lenders advance directly to customers and those that are distributed through brokers. But the extent to which this balance may change may not be clear until after next April.
Lenders do not have to wait until next April to make some of the changes and many firms are already anticipating rules that will require a more prescriptive approach to assessing the affordability of the mortgage for the customer. Rules requiring scrutiny of a borrower’s income and expenditure will be more specific, with, for example, formal requirements to “stress test” affordability against increases in interest rates.
Where are we now?
As might be expected, different firms are at different stages of readiness, but the FCA is broadly happy with the progress the industry is making. It has been helping firms prepare by hosting a series of road shows across the country, for lenders and brokers. These road shows have been both well attended and well received by the industry.
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Earlier this year, the regulator’s MMR implementation team asked around 5,400 firms to complete an online survey to help assess how ready they were for the new rules. More than two-thirds (68%) responded. To shed further light on the survey’s findings, the FCA also visited six small, niche lenders and carried out desk-based reviews of the largest lenders and intermediaries to assess their plans in more detail.
The FCA said it was "very pleased" to find that two-thirds of firms were on track, and that the rest could get where they needed to by drawing up an action plan now. All firms responding to the survey believed that they would implement the MMR on time and were planning for most of the changes needed. And the FSA is now offering further help for those firms that need it.
The FCA’s findings
In its assessment of how firms were preparing for the MMR, the FCA recognised that the size and complexity of lenders meant that they had more to do than intermediaries. Lenders were well advanced with their planning for implementing affordability assessments, but those firms planning to advance mortgages on an execution-only basis were behind with their preparations.
Only a handful of lenders – mostly niche firms – had asked for more information from the FCA. Most of the inquiries were about mortgage distribution, rules on the disclosure of information to customers, prudential requirements, equity release and dealing with payment shortfalls. Intermediaries also asked about disclosure requirements, as well as execution-only lending and the extent to which they would have to provide evidence that they had offered a suitable mortgage to the customer.
The biggest risk to implementation stated by firms had been in understanding the rules, with the FCA saying that its communication plan has been designed to help fill gaps in comprehension. A high percentage of non-banking lenders said they needed help in understanding new prudential rules, and the regulator said it was planning to comment further – and soon – on its approach to this area.
The FCA said it had been re-assured by the largest lenders that they had suitable implementation plans in place. They had more complex systems changes to make, the regulator said, so it was positive that planning was well under way. But it urged that changes to information technology systems should be carefully monitored to avoid over-running.
The FCA said it would continue to engage with firms to identify risks that could result in the unsuccessful implementation of the MMR. The regulator is using its "readiness tracking results" to design the next phase of communications, and has embarked on a fresh round of regional half-day workshops for firms, focusing specifically on areas where plans for implementation may not be so advanced. The FCA said:
"The workshops have been designed to be interactive with exercises and scenarios to bring the mortgage sales process to life. This will provide firms with the opportunity to understand what we expect of them, to ask us any questions they may still have in relation to their MMR planning and also to share ideas with their peers."
The regulator is also planning further support in the form of fact sheets and possibly a webcast. Some of its communications will seek "to address some myths and preconceptions that firms may have about some of the reforms." Its implementation team will also be offering face-to-face meetings next February, providing individual firms with the opportunity to raise their own specific concerns and questions.
As far as consumers are concerned, the FCA and the Money Advice Service will run a targeted communications strategy timed to ensure they understand how the changes will affect them.
Although there are now only six months to go until the MMR rules become a reality, lenders are on course to fulfil their requirements. But the changes are not only time-consuming and costly – they are also being implemented alongside a range of other policy and regulatory initiatives, with the potential for unintended consequences and market disruption. The CML will therefore work with members, the FCA and intermediaries to minimise the risks.
Over the next six months and beyond, we will continue to liaise with all concerned to monitor progress. The CML is a unique position to focus on the cumulative effects of separate policy and regulatory initiatives, and to see the bigger picture. We will express any concerns on behalf of lenders, while working for a smooth transition to the new regime.