Jun 19 – The big trapped borrower debate

The issue of the trapped borrower or mortgage prisoner has been on the AMI agenda since the MMR was finalised in 2012.  We could be criticised for not getting enough traction on the issue until late 2018, but we were assured that the Mortgages Market Study was looking at this from our early discussions with the team in 2016, following MMR implementation in 2014.  However, as we were working on data gathering and analysis with the FCA team and they moved towards reporting it was becoming clear that their appetite might not match the nature of the issue.

At a fringe event at the Tory party conference last year Martin Lewis hosted a debate supported by AMI Board member Andrew Montlake and attended by John Glen, Economic Secretary to the treasury and Nicky Morgan, Chair of the Treasury Select Committee.  The arguments promoted at the event captured both of them and they have been passionate advocates for action ever since.  We also now have an All Parties Parliamentary Group on Mortgage Prisoners and they have recently placed a call for evidence on the issues, solutions and shortcomings in approaches.

Following the initial market study report from the FCA we anticipated that the discussed potential changes to the affordability rules might allow the industry to fashion some solutions.  What we thought would be relaxations to the affordability rules to assist trapped borrowers has however translated into much wider changes.  These mean that all lenders will have to have a very serious look at how they wish to transact all their remortgage business in the future.  Will they advise the FCA that they have decided to disapply some or all of the affordability rules set out in MCOB?

These changes however risk putting a solution for the trapped into further delay.  Instead of perhaps 8 lenders and a handful of broker firms working in a small project, sponsored by the FCA, with the administrators to find solutions for those who can be helped, we are now into lengthier processes to change policy in lenders.  This will necessarily take much longer as all lenders will need to look at how they engineer their entire processes rather than hot-housing a project to convert a limed number of cases which have merit.  By making the rule changes a whole of market solution the FCA has risked failing to solve the prisoner issue by over-engineering their rules once more.

It still remains a mystery as to how the FCA have managed to policy U-turn from their long-held position that such reduced affordability tests were not possible given the requirements of the Mortgage Credit Directive.  Despite AMI’s repeated calls that they had interpreted this wrongly back in 2015, they now must have a different legal opinion.  The risk for firms is that the FCA is still wrong and that challenge in the courts could see firms fall foul of European Law, which FCA might not interpreted correctly.

In the study the mortgage market was considered to be working well for the vast majority.  On balance much better than most other markets.  The trapped borrower is the one and probably only area which really merits attention as UK Asset Resolution has now repaid the government, but the price of that has been leaving hundreds of thousands of consumers with asset managers who do not offer cheaper loans.  Those who pay every month and are not in arrears deserve better, but these FCA plans as drafted risk a further extended period of them paying more than they perhaps should.

Robert Sinclair
June 2019