FCA consults on proposals to streamline the mortgage rules

The FCA has announced it is consulting on steps to streamline the mortgage advice process, in an effort to further support sustainable home ownership. The proposals include allowing for more straightforward engagement with mortgage providers, reducing mortgage terms to lower the total cost of borrowing, and facilitating easier remortgaging with new lenders. We consider below whether the changes are appropriate and what impact they may have on firms and their professional indemnity insurers.

The FCA proposes removing the requirement for consumers to positively elect to proceed with an execution only sale where they have rejected advice. This proposed change comes as part of the proposal to remove the interaction trigger for execution-only customers. The FCA say the removal of the trigger is to allow firms more freedom to interact with consumers during a sale of contract variation. Even if this proposal were to be implemented, would firms still be exposed to claims for failing to advise where the interaction with the customer becomes extensive? Firms may be unsure as to when to draw the line.

Further, in the face of increasing mortgage terms and the risks posed by a borrowers financial instability throughout their life, the FCA has proposed rules to simplify the process for reducing mortgage terms. The  requirement for affordability assessments when reducing the term of a mortgage would be removed, although firms would still be required to meet their obligations under the Consumer Duty. This move is unsurprising given that over 75,000 consumers extended their mortgage terms following the introduction of the Mortgage Charter in June 2023, while only 799 used the option to reverse the extension. Whether it will expose firms to more claims remains to be seen – what happens when a mortgage term is reduced, and the consumer can no longer afford the repayments, for example. Will the adviser face a claim for failing to establish that the client should not have reduced their mortgage term?

The regulator reports that of the 1.6m borrowers who remortgaged in 2024, 83% stayed with their existing lender. Acknowledging the financial and administrative barriers to transferring mortgage providers, the FCA considers further reductions to the affordability requirements set out in the Modified Affordability Assessment (MAA), implemented in 2019, is the way to see positive change. The new rules would see the MAA only require the proposed mortgage to be more affordable than:

1. The customer’s current mortgage.
2. A new mortgage product that is available to the customer from their current lender.

The FCA also turned their focus to Interest Only Mortgages (IOMs) and their long standing concerns over legacy IOMs maturing with no effective repayment method in place. Based on the regulator’s 2023 review of their 2013 non-handbook guidance, the regulator considers firms have developed practices in line with the guidance and in some cases have exceeded it. In addition it appears that consumers have surpassed the regulator’s expectations with only 820,000 of the projected 1.3m IOMs remaining outstanding at the end of 2024.

In recognition of these developments and in anticipation of IOM maturities peaking in 2031 (77,000) and 2032 (80,500), the FCA wish to retire their 2013 guidance on the basis that it has fulfilled it’s original purpose. Firms will still be required to meet the standards under the Consumer Duty and the Mortgage Conduct of Business (MCOB), which the regulator considers will stand in place of the 4 key criteria originally set out in the 2013 guidance.

The FCA will review the suitability of the proposed changes by supervising firms and reviewing regulatory submissions, including data on customer complaints.Those in the industry are encouraged to respond to the consultation before it closes on 4 June 2025. The FCA has also announced that it will launch a public discussion on the future of mortgage markets in June 2025.

Comment

The proposed changes may be a welcome relief to firms and consumers, seeking to simplify the sometimes complex process of getting a mortgage/re-mortgaging. However, some firms may find the removal of prescribed guidance, leaving only the principal based Consumer Duty, a concern. Though we anticipate many in the industry will appreciate the FCA’s recognition of their procedures, particularly with IOMs, where they experienced a slew of poorly conceived claims not that many years ago.

The intention to simplify rules around mortgage advice muddies the water and may lead to problems for advisers further down the line. Some of the specific proposals will inevitably cause problems. Of particular note is the proposal to remove the interaction trigger, essentially removing the prescribed trigger for a firm to advise, even where the customer wanted an execution-only service. This could lead to claims from customers who were initially execution-only, but later claim that their further interactions with the firm were so significant that the firm should have advised. We anticipate the final proposals will be different to those published as part of the consultation and will review what kind of impact the final proposals will have on advisors/their PI Insurers.

Related article: FCA issues portfolio letters to CMCs and mortgage intermediaries