REGULATION OF MORTGAGES
a discussion document by H M Treasury
20th July 1999
This paper explains how mortgages are protected now and explores
the changes which could take place once the Financial Services and
Markets Bill (FSMB), now before Parliament, comes into force.
2. The Treasury invites readers' input on this subject as part of
the open public debate which this paper launches. It will be useful
if responses cover the issues in the box on page 10. Other relevant
input will also be welcome.
3. Anyone involved in mortgage lending or with experience of mortgage
borrowing can consider replying. Where relevant, it would be helpful
if replies could explain if the author represents others, such as
a trade body or consumer group, and if so the numbers of people or
firms involved. Please note that replies may be made public unless
confidentiality is sought.
Please reply by 22 October to:
Mrs Janet Robbins
Home Financial Services Team
H M Treasury
Telephone 0171 270 5294
Fax 0171 270 4694
5. This paper is available on the Treasury's public internet site,
http://www.hm-treasury.gov.uk. For hard copies, please use
the contact details above.
Decisions so far
6. In April 1998, the then Economic Secretary to the Treasury, Mrs
Helen Liddell, announced that the FSMB would contain power to give
the Financial Services Authority (FSA) responsibility for regulating
advice on and marketing of mortgages. (Para 25 sets out the present
situation. Para 26 suggests what FSA regulation might mean). Mrs Liddell
promised a review in 1999 to help decide whether to activate the power,
and if so how and when. This paper launches that review and is intended
to help inform people contributing to it.
7. The FSMB includes two relevant powers:
8. In turn Schedule 2 sets out in general indicative terms the scope
of the investments and activities which orders under clauses 19 and
20 could cover. It includes, at paragraph 16, loans secured on land.
If ministers decide that FSA should regulate advice on and marketing
of mortgages, the order(s) concerned would need to contain appropriate
definitions. These order(s) could only be submitted to Parliament for
approval once the Bill is in force.
- clause 19 regulates promotion of financial products;
- clause 20 permits the Treasury to make regulated activities orders
defining the scope of business subject to regulation by FSA.
9. In July 1999, Patricia Hewitt, the present Economic Secretary to
the Treasury, invited input to the review promised by Helen Liddell.
Ministers will then decide, by end 1999, whether FSA should regulate
marketing of mortgages.
10. Alternatively, if ministers decide not to proceed with regulation
of mortgages for now, the FSMB powers in relation to mortgages will
be held in reserve. In that case, the Treasury will keep the issue under
review. Fresh order(s) to revise the scope of FSA's responsibilities
could be presented to Parliament if ministers' policy on mortgage regulation
were to change later.
11. The Government is committed to basing decisions on regulatory initiatives
on regulatory impact assessments. (A similar discipline applies to FSA's
own proposals for regulatory action or change.) In the case of the current
decision on whether to regulate mortgage business, the Treasury will
need to weigh the likely benefits for customers of imposing mortgage
regulation against the likely costs to lenders and intermediaries -
costs which will of course be passed on to customers eventually. At
the Treasury's request, FSA is providing advice on this key issue.
What is a mortgage?
12. The FSMB would permit regulation of marketing of all loans secured
on land. This is deliberately a wide definition, to allow flexibility
in developing policy. While it would be possible to use the power
to regulate commercial as well as retail mortgage business, the main
focus of policy interest is loans secured on people's homes.
13. Any order(s) to give FSA power to regulate advice on and marketing
of mortgages need not cover the whole range of mortgages. FSA's responsibilities
could be limited to certain mortgages, for example only mortgages
to retail customers (a group which would need to be defined); or only
certain classes of mortgages (eg equity release schemes or foreign
14. Taking out a mortgage loan to buy a property can easily be the
biggest financial transaction a consumer ever does. And mortgages
are commonplace: there were 10.8m in force at the end of 1998, and
some 1.5m mortgage loans for almost £90bn were made in the course
of the year. So if there were evidence that mortgage sales were seriously
harming borrowers there could be a powerful case for regulating advice
on and marketing of mortgages.
15. Evidence on this crucial point is patchy. Mortgages are now at
their cheapest for over 30 years. And on at least one measure, the
volume of complaints is not especially high. For instance, the Office
of Fair Trading (OFT) reports complaints to trading standards departments
to September 1998 at about 0.1% of mortgage lending, a level down
almost a tenth year on year.
16. On the other hand some recent snapshot surveys using mystery shopping
have revealed more worrying treatment of customers. In addition there
are from time to time criticisms of other features of mortgage lending
practices, for instance:
17. Readers are invited to make available any evidence they may have
of how lenders may treat borrowers unfairly or unreasonably within the
present arrangements. It would be particularly interesting to have information
about how vulnerable borrowers such as some first time borrowers may
- mortgages where borrowers are locked in, eg to the lender's variable
rate for a period after an initial period of favourable interest
rates, with a financial penalty payable if the mortgage is repaid
or refinanced during the lock in period;
- mortgage packages where favourable mortgage terms are available
only with associated products such as insurance, whose prices may
be less attractive;
- variable rate mortgages whose rates track movements in bank base
rates in a biassed way.
18. In principle a mortgage is a long term commitment, often for 25
years. In practice most mortgages last for shorter periods. The average
is usually about seven years, depending on activity in the property
market and with a wide variation around the average.
19. These days people often remortgage their loans without moving home.
With some variation, about a quarter to a third of retail mortgage business
is remortgages. Because it is often easy to remortgage, many borrowers
find that it does not cost much to disengage from a loan which has turned
out not to suit them. Indeed the new lender sometimes subsidises the
cost of refinancing. Of course not all borrowers can break free from
a mortgage easily or cheaply.
20. Even where borrowers can refinance, it would often be better if
they could have more confidence of getting a suitable mortgage from
the start of the loan. The policy issue to be addressed is whether regulation
of advice on and marketing of mortgages is an appropriate way of improving
mortgage lending practice. Para 26 sketches out in general terms what
this could mean.
21. One reason for considering regulating mortgages is the huge choice
of mortgage types and terms now available on the market. This can make
comparisons difficult and create scope for misleading potential borrowers,
whose main concern is often the purchase of a property. Moreover, lenders
are often at an advantage over borrowers who may have limited knowledge
of the choices available and limited grasp of the implications of particular
kinds of loans.
22.Another feature of the mortgage market is the use of introductions
from a range of intermediaries, including for instance firms such as
estate agents which are not financial services specialists. Perhaps
about half of mortgages are sold in this way. It is possible that some
borrowers who find their mortgages this way do not shop around as much
as they might for other services.
23. There is a concurrent review of competition in banking services,
potentially including mortgages. This is led by Don Cruickshank, with
a remit to report to the Chancellor by end 1999. The timing of this
review is coincidental. Its conclusions should inform Treasury ministers'
decisions on whether marketing of mortgages should be regulated.
24. There are also plans to make the home buying process easier, faster
and more certain. The Department of the Environment, Transport and the
Regions (DETR) has asked mortgage lenders to help home buyers by adopting
targets for dealing with mortgage applications quickly and efficiently.
In deciding whether mortgage business should be regulated, it will clearly
be important to consider how to avoid conflicting with these objectives.
25. Mortgage business is already subject to a range of requirements
and restrictions designed (sometimes, among other things) to protect
borrowers. Some protections are more direct than others. If there
were a regulatory regime for mortgages it should if possible avoid
unnecessary overlaps with existing arrangements. For instance, it
might be more satisfactory for any new arrangements to (partly) replace
some current requirements.
- The banking and building society Ombudsmen
have responsibility for resolving complaints if firms' own disputes
procedures have not satisfied customers. The two schemes are slightly
different, but both are intended to resolve specific complaints
and disputes quickly and without formality. In time the statutory
Financial Services Ombudsman Scheme under the FSMB will succeed
both schemes, and under it the Ombudsman's decisions will be binding
- The Consumer Credit Act 1974 (CCA)
regulates all credit agreements, though its main impact is on loans
of up to £25,000 because of a partial exemption for mortgages.
In practice the CCA affects most mortgage lending only in certain
- advertisement regulations, including how annual percentage
rates (APRs) are disclosed;
- the requirement for warnings on the lines your home is
at risk if you do not keep up repayments on a mortgage or other
loan secured on it;
- charges by credit brokers: limited to £5 if an introduction
does not proceed to completion within 6 months;
- prohibitions on extortionate credit.
- Under the Financial Services Act 1986, FSA regulates
marketing of, and advice on, investments used as mortgage repayment
vehicles. Many investments may be so used. The most common are endowment
policies, ISAs (formerly PEPs), and personal pensions. About 38%
of current sales of mortgages are involved, of which 34% are linked
to endowments. These arrangements will continue after the passage
of the FSMB.
- In common with other consumer contracts, all retail mortgages
are subject to the Unfair Terms in Consumer Contracts Regulations
1994. This is a potentially powerful measure which largely bears
on the terms of mortgages after the loan has been made,
eg lenders' ability to charge penalties on customers. These Regulations
make unfair terms unenforceable, and so can in practice prevent
lenders offering mortgages which unfairly disadvantage consumers.
At the moment the Director General of Fair Trading (DGFT) enforces
these Regulations. There are plans to permit others (including local
authorities and FSA) to take similar action.
- The Mortgage Code is a set of voluntary standards
adopted by all members of the Council of Mortgage Lenders (CML),
covering 98% of the mortgage market. The code is primarily aimed
at providing information about mortgages, with transparency about
the lending process. Lenders may provide one or more of three levels
of service, from information only ("execution only") to advice on
suitability. CML introduced the code in July 1997 for lenders and
in April 1998 for intermediaries and brokers, supported by a register
of accredited intermediaries (the MCRI). IRB (an independent review
body) and MCRI monitor compliance with the code, with free, independent
redress arrangements for complaints. MCRI has recently begun a limited
mystery shopping exercise designed to establish how well certain
features of the code are implemented in practice.
- Banks and building societies are prudentially
supervised to preserve their solvency. This aspect of FSA supervision
covers the full range of their business including mortgage lending.
Among other things it should reduce the risk that borrowers may
be faced with demands for immediate repayment should a lender be
in financial difficulty. This affects about 94% of mortgages - though
other lenders seem to be capturing a growing share of mortgages.
- Under the FSMB, FSA has a statutory public awareness objective
which gives it responsibility to promote public understanding of
the financial system. This includes, for instance, publishing generic
literature about a wide range of retail financial services. FSA
plans to publish authoritative league tables comparing the features
of different products. These could include more comparative information
about mortgages if FSA had responsibility for regulating their marketing.
- OFT's 1997 guidelines on non-status lending set
out what the DGFT considers reasonable practice for lenders dealing
with customers whose borrowing history has evidence of repayment
problems. This can include mortgage lenders. Any who disregard the
guidelines can face action under the CCA 1974.
Scope for further regulation
26. As drafted, the FSMB would permit the Treasury, subject to Parliamentary
approval, to give FSA responsibility to regulate and supervise marketing
of and advice on mortgages. This could include:
- authorisation for mortgage advisers (both firms
- advertising of mortgage products;
- advice on the choice of a mortgage, including
- disclosure about mortgage terms at the point
- (if FSA so decides) access to the ombudsman
for complaints about the quality of advice as well as maladministration;
- requiring authorised firms to provide remedies
for borrowers found to have been treated badly;
- access to compensation where insolvent advisers
have caused borrowers to lose, eg by taking out unsuitable mortgages.
27. This range of protections is very similar to those available
to investors in products subject to FSA regulation. The range does
not include explicit power for FSA directly to regulate the
content of mortgage products as such, eg as to how interest is charged,
or how lenders deal with arrears and repossessions. However, with
power to regulate advice on and marketing of mortgages, FSA could
issue general guidance about suitability of classes of mortgage products.
This could have the effect in practice of curtailing or eliminating
sales of certain specific kinds of mortgages.
28. If the Treasury were to give FSA power to regulate marketing
of and advice on mortgages, FSA would need to develop and consult
upon rules for mortgage lenders and intermediaries. Without undertaking
an analysis of the business - in particular the costs and benefits
of regulation - it is not possible to say now what these rules would
29. It may nevertheless be helpful to sketch out some possible approaches.
There would be a business case for adopting a similar approach to
the issues in para 26 for both mortgage business and retail investment
business (eg sales of personal pensions and unit trusts). This would
mean that advisers could apply a consistent set of standards and rules
to a wide range of financial advice to retail consumers. An alternative
approach might recognise some differences in order to meet the particular
requirements of the mortgage market in a proportionate way. For instance,
a distinctive method of disclosure for mortgages might be considered.
30. Among the issues FSA might need to consider in developing rules
for mortgage business would be polarisation. For investments the polarisation
rules require adviser firms either to offer only the products of one
provider; or to adopt an entirely independent approach and advise
on products from the whole market. The approach taken on this point
could have a significant effect on the development of the mortgage
market and the play of competitive forces within it. It would be for
FSA to make proposals, consult about them and prepare cost benefit
analysis if the decision were taken to go ahead with regulation of
Input now sought
31. In this review the Treasury seeks input on any aspect of the mortgage
lending process which may be relevant to the decision described in
para 9. Evidence about how consumers might be affected, analysis of
the market and recommendations for decisions would all be valuable.
32. Readers might like to consider commenting on the aspects of the
issues summarised in the box on page 10. Other relevant input is also
Home Financial Services H M Treasury
Issues for input to the review
The nature and extent of any damage consumers suffer in the
mortgage market now, including how and where it arises
special features about any part(s) of the market
special impact on any group(s) of consumers.
How the mortgage code has affected the mortgage market.
How the mortgage code might evolve.
How regulation of mortgage business might help consumers
and what it might seek to achieve.
Whether regulation of the mortgage market should cover
all mortgages, and if not what restrictions would be appropriate.
The effect of imposing regulation on lenders and consumers:
costs, market structure, working methodology (eg speed of processing
Whether any measures other than regulation might deal
with any damage suffered by mortgage borrowers eg improved disclosure
of mortgage terms, development of benchmark standards, league
The timing of action to deal with the perceived consumer
Any other issues relevant to the decision on whether
to regulate mortgage business.