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The economic landscape continues to place mortgage customers under significant pressure. Following discussions between the Financial Conduct Authority (FCA) and some of the largest mortgage lenders in the UK, the Mortgage Charter was signed to address measures aimed at helping customers who may be struggling to meet their mortgage repayments amid the cost-of-living crisis.

The FCA subsequently endorsed the commitments set out in the Mortgage Charter by incorporating new rules into the Mortgages and Home Finance: Conduct of Business sourcebook (MCOB) chapter of its rules and guidance handbook. The changes, while brief, represent an important option available to lenders when dealing with customers facing financial difficulties.

What are the changes?

Mortgage lenders can now offer the following to mortgage customers without needing to undertake an affordability assessment:

reduce a customer’s capital repayments for a period of up to 6 months (MCOB 11.6.3(3)(a)); and

either fully or partly reverse an extension of the term of the mortgage within 6 months of extending the term (MCOB 11.6.3(3)(b)).

While there was nothing necessarily prohibiting lenders from taking these steps previously, doing so would have required the lender to undertake an affordability assessment on the customer. Customers failing that affordability assessment would potentially not have had these options available to them.

It is worth noting that these are merely options available to mortgage lenders, they are not mandatory. No lender is required to provide them to customers. Every case of a customer in financial difficulty will invariably require specific, tailored approaches. But these new rules from the Financial Conduct Authority will no doubt be a welcome dose of flexibility. They also potentially help provide another avenue for lenders to demonstrate their approach to compliance with the Consumer Duty.

The new rules came into force on the 30 June 2023.

What practical measures should lenders take?

• Each of the new measures may only be applied once per mortgage contract. Lenders should therefore ensure they have appropriate systems and controls to monitor when these options are applied to a customer’s mortgage.
• Extensions of terms into retirement will likely still be caught by affordability rules.
• A lender may reduce capital repayments to zero (effectively turning the repayments into interest-only albeit on a basis up no more than 6 months).
• Lenders applying one (or both) of these options will still need to comply with the disclosure rules under MCOB 7.6.28.
• The added dimension of Consumer Duty (from 31 July 2023) will mean consideration needs to be given to the customer understanding outcome, in particular whether the customer has been provided with sufficient and comprehensible information to allow them to make an informed decision about the impact of choosing one (or both) of these options.

 

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