Twelve weeks on from MMR: what happens next?
Published: 16 July 2014 | Author: Bernard Clarke
Subtle, but not dramatic – that was our verdict on the impact of the mortgage market review (MMR) when we published our lending data for May, the first month in which the figures reflected activity following the introduction of the new rules on 26 April. That description also neatly encapsulated the views of a range of different types of lenders at our recent conference, Life After MMR: What Next?
The conference presented an opportunity for lenders, of varying sizes and types, to give their initial reactions to the implementation of the MMR. It was also a chance for the industry to reflect on some significant regulatory milestones ahead. Not least among these will be the introduction in less than two years of the European mortgage credit directive. This involves not only a tight timetable, but the implementation of measures that do not sit comfortably alongside the MMR requirements.
On the MMR, however, the conference gave the industry a chance to reflect on the impact of the new rules in their first few weeks. Some of the main observations were that:
- there have been few reports so far of excluded customers, and little evidence of any significant disruption of business;
- there has been little political criticism of the impact of MMR, or of how it has been implemented by lenders; and
- there have been reports in the media of unexpected questions for borrowers, and that mortgage interviews are taking a little longer than before (CML chairman Stephen Noakes estimated in the last issue of CML News & Views that interview times had increased by around 20 minutes) – but customers are so far taking the changes in their stride.
The forthcoming thematic review
Despite having achieved successful implementation of MMR, the industry faces a number of challenges in the months ahead:
- With the FCA planning a thematic review of MMR in the third quarter of this year, lenders will need to present clear and detailed evidence of the effects of the new rules. The CML will have a major role in drawing together the views and experiences of lenders, particularly on any unintended consequences and where the new rules may need a tweak.
- Lenders will also need to reflect on how borrowers react to the rules over time. Some customers have become used to switching routinely from one product to another – and this may have helped to reinforce the highly competitive nature of the UK mortgage market. But will borrower irritation and frustration grow if this process becomes slower and more difficult than in the past? And might such an outcome be one of the unintended consequences of regulatory reform?
- Lenders may also want to comment on how well the rules work in the internet age. Increasingly, consumers want to undertake all kinds of financial transactions electronically. But have the new rules anticipated the way that the internet is used by consumers, and does the distinction between advised and execution-only sales encourage use of the internet in the way the regulator intended?
- The industry must also anticipate scrutiny of buy-to-let lending, not least from the Bank of England as it continues to review the use of its powers to intervene in housing and mortgage markets. It will therefore be important for the lending industry to keep under internal review developments in the buy-to-let sector.
- Lenders will also want to monitor the extent to which the MMR could trigger other potential changes in consumer behaviour. Will there be an increase, for example, in unsecured lending – even if it is more expensive – because it is an easier option for some customers? If that does occur, it could be another example of regulation affecting consumer behaviour in unintended ways.
A common theme among lenders at the conference was that, while implementation had broadly gone according to plan, there had inevitably been some disruption to business as new systems were introduced and staff adjusted to new procedures. Some commentators have speculated that business volumes at this stage could be around 5% lower as a result of the transformation to the new rules.
However, even though we have data on lending in the first month since the introduction of the MMR, it is impossible to say much more than our initial view that the effects have been subtle, but not dramatic. Implementation was, in effect, the culmination of a five-year process of regulatory reform. We will need to examine the data over several months to discern more clearly any market effects, and determine whether these may be permanent or temporary.
What might the review deliver?
In undertaking its thematic review, we would urge the FCA to focus on outcomes delivered by the MMR. There are some encouraging signs that the FCA agrees that this would be the right approach. We believe that that would deliver a better outcome from the review process itself than a box-ticking exercise focusing on whether the last detail of every rule is being applied.
We do not believe, however, that the end of this year would be the right time to embark on a much more comprehensive review of the regulatory process.
Both the forthcoming FCA review, and the impact of the MMR, are crucial issues for lenders. However, it would be disjointed if the industry were not also to consider the potential impact of macro-prudential regulatory intervention.
In recent months, the Bank of England’s financial policy committee (FPC) has become more explicit about the tools at its disposal, should it see the need to intervene in housing and mortgage markets. Last month, it then moved to apply some of these tools, requiring lenders to stress test affordability for borrowers against an assumed Bank rate 3% higher than at origination, and to limit mortgages at 4.5 times income or above to no more than 15% of new lending.
We agree with the way in which – and the degree to which – the FPC has intervened. The 3% stress test is broadly in tune with the way in which mainstream lenders operate, but should help deter outlying firms from diluting lending standards.
Clearly, the FPC will be a force which will help shape the regulatory environment for lenders for the foreseeable future. The committee has a wide remit but, as far as the housing market is concerned, it is in the difficult position of being required to address risks that could emerge against a backdrop of relative weakness in large sections of the market – and a recovering, but still fragile, wider economy.
The position is made more complicated because the housing market has been seen as an engine for economic growth, while concerns remain about over-indebtedness. Those concerns are not confined to the housing market, but debt-servicing costs could bear down on the wider economy, particularly as the Bank seeks to engineer a move in interest rates back towards historical norms.
The industry will have to accept the committee’s goals as non-negotiable, and that any amendment will be by fine-tuning, not wholesale revision. But as it pursues a more explicit macro-prudential regulatory role, it is clearly keen to do in a way that is effective, timely and minimises unnecessary market disruption. Could it achieve that objective even more effectively by calling for more evidence from industry, and by being more consultative?
Lenders report – and the initial data suggest – that implementation of MMR has been broadly successful. The new rules are the culmination of a five-year process of regulatory reform but, despite the scale and cost of the task for firms, there is little sign of significant market disruption.
There are, however, major regulatory challenges ahead for lenders. The European credit directive must be implemented in the spring of 2016 but does not sit smoothly alongside MMR requirements. The FPC has intervened in what the industry believes to be an appropriate and proportionate manner, and will continue to affect the operating environment for the foreseeable future. Meanwhile, the FCA will begin its thematic review of the MMR later this year.
The FCA has been very keen to engage with the industry, and we believe that this engagement has left both the regulator and firms in a better position. The FCA continues to cite the measures taken to help interest-only borrowers as a good example of working well with the industry.
We hope to build on that work in helping the FCA deliver the right outcome from its MMR review. In the coming months, the market effects of the new rules will become clearer, and the CML will undertake a major consultation with members to gauge how the MMR is working in practice. We are confident that this exercise will provide strong evidence to help modify the rules where this is justified, address unintended consequences – and deliver a better outcome for consumers.