The mortgage sector looks set for another busy year, with regulatory change likely to present a number of opportunities for lenders in 2020, particularly in relation to product innovation, but also create several headwinds. 

Highlighted below are some of the key legal and regulatory topics that we consider will be high on the agenda for mortgage lenders, administrators and intermediaries in 2020.

Digital transformation

On Friday 31 January 2020 the Financial Conduct Authority (FCA) published its policy statement (PS20/01) on mortgage advice and selling standards. The changes outlined in the policy statement are part of a package of remedies arising from the FCA’s Mortgages Market Study.

The FCA’s rules and guidance are designed to make it easier for firms to present options to consumers without giving regulated mortgage advice. They are also designed to help make execution-only channels easier to use.

So what does this mean for digital transformation in the mortgage market?

2020 looks set to be a year of further transformation in the mortgage market as lenders respond to the expectation of today’s mortgage customer for an always available, on-demand and painless mortgage application journey.

These changes support further digital transformation in the mortgage market by:

• clarifying that electronic tools showing a consumer which mortgages they may be eligible for may not be giving advice;
• being clearer about whether or not customer interaction triggers advice, by linking this to whether or not the interaction will result in the customer receiving generic or personalised information about the mortgage product. The policy statement also clarifies that issuing an ESIS or illustration will not itself trigger the need for a firm to give advice;
• giving firms greater flexibility regarding their execution-only sales policy. Although firms will still need a policy, the FCA has now removed the prescriptive detail about the content of execution-only policies, so these should be reviewed against the high-level rules in the Senior Management Arrangements, Systems and Controls sourcebook rather than the prescriptive rules that previously applied in MCOB (Mortgage Conduct of Business rules);
• allowing execution-only disclosure to be given by audio or video (providing a copy is retained for three years). This is another example of FCA’s current focus on encouraging innovation in customer communications.

The changes are likely to be a significant boost for lenders developing (or considering developing) digital mortgage origination journeys and intermediaries developing digital mortgage comparison tools.

We expect to see greater investment by lenders in marketing their execution-only sales channels and making these sales channels more accessible to customers.

We are also likely to see lenders and intermediaries developing new tools to help consumers search for mortgages as the traditional structure of the value chain for mortgages evolves.

What other developments should we expect in the digital mortgage market?

Use of open banking data continues to be a theme for lenders developing digital mortgage origination journeys. Although use across the industry to-date has been relatively small scale, expect its use to accelerate during 2020.

The FCA recently launched a call for input on the opportunities and potential of an open finance model, which would see the principles of open banking extended to a greater field of channels and products.

As part of this work, the FCA is particularly keen to hear about barriers to innovation in the mortgage market caused by the current regulatory framework, so expect further regulatory change to facilitate innovation in the market.

It is still to be seen whether 2020 is the year that significant steps are taken towards adoption of blockchain technology in the mortgage industry. On the face of it, given the mortgage chain is often highly fragmented and involves various parties at different stages of the process, a mortgage origination and execution journey looks an ideal use case for blockchain technology.

Unfortunately there are various hurdles to be overcome before there is likely to be meaningful adoption of the technology across the industry.

LIBOR transition

A discussion of the legal and regulatory outlook for the mortgage industry in 2020 would not be complete without considering the impact of LIBOR transition. It is estimated that there are currently around 200,000 LIBOR-linked residential and buy-to-let mortgages in the UK.

LIBOR is deeply embedded in business practices in the mortgage market, particularly in the specialist lending sector, and understandably there is a great deal of uncertainty to be addressed before many mortgage lenders will feel confident in their LIBOR transition programmes.

There are three key messages being delivered by regulators:

• waiting for development of an alternative term rate is not an acceptable reason for firms to delay taking action;
• working on the assumption that LIBOR will still exist in some useable form post end-2021 is not a viable strategy;
• customer communication will be critical throughout the LIBOR transition.

There are significant contractual, risk, operational and conduct management challenges associated with the end of LIBOR.

Aside from addressing the complexities associated with the transition of legacy contracts away from LIBOR, one of the key areas that lenders will need to focus on is how to communicate the changes to customers. The FCA expects firms to engage with customers both generally on the implications and timing of the LIBOR transition, and by planning for and rolling-out a client specific communication strategy.

However, mortgage lenders need to strike the right balance between early engagement with customers and having sufficient clarity themselves about LIBOR-transition plans to deliver the key messages clearly and in a way that is appropriately targeted to the knowledge and experience of the intended audience.

It is likely that the FCA will continue to engage with firms and increase its oversight of transition plans as we approach end-2021. Although industry initiatives are underway and market consensus is building (particularly in trying to reach agreement on fair replacement rates), what is clear is that the FCA does not expect mortgage lenders to wait for any further guidance, but to be developing and implementing their LIBOR transition strategies now.

Green finance

Following the government’s announcement in July 2019 of its launch of a £5 million fund to help the financial sector develop green home finance products and investor pressure for banks and lenders to play a larger role in the fight against climate change, there has been an increased interest from lenders in the potential to develop new green finance products.

Although there is currently no single definition of a ‘green mortgage’ in the market, there are several possible structures that could emerge, including:

• products offering benefits on energy efficient homes (for example, lower interest rates or other favourable terms);
• products combining a mortgage and a linked home improvement loan (to be used to improve the energy efficiency of a borrower’s home);
• products involving a shared equity credit agreement (used to help boost the size of a borrower’s deposit) where the amount that can be borrowed under the shared equity credit agreement is increased on homes with smaller energy bills.

Product development to date in this market has been slow, in part we understand due to limited data on the market opportunity. However, with investors and regulators heightening their calls for banks to take account of the risks posed by climate change across their lending portfolios, we are likely to see this shift high up lenders’ agenda during 2020.

Even without pressure from investors and regulators, the increasing demand for green products from consumers represents a real market opportunity.

Breathing space

The ‘breathing space’ scheme will introduce a new 60-day statutory pause on the accrual of interest, fees and charges on personal debts, and some business debts of small sole traders, incurred up to the date the individual enters the scheme. Almost all creditor collections, recovery and enforcement action will also be paused.

However, breathing space will not take effect as a payment holiday. Individuals will still be responsible for meeting ongoing liabilities (including mortgage and hire purchase payments) throughout the breathing space period.

If the regulations are published in the form expected, they are likely to be complex and a detailed analysis will need to be carried out between the requirements of the breathing space scheme and current mortgage regulation. The practical implications of ensuring compliance in the administration of a loan and the systems changes required by lenders are likely to be significant.

In addition to the systems implications, the scheme will have a significant impact on the way which lenders engage with their customers in default and pursue outstanding debts.

The new regulations have just been published with an implementation date set in the first quarter of 2021. Lenders and administrators will need to start their implementation programme as soon as possible to meet the expected deadline.

The FCA’s expectations of non-bank lenders

In January 2020 the FCA wrote to the board of directors of firms that fall into its non-bank lenders’ portfolio. It set out its view of the key risks non-bank lenders pose to their consumers or the markets in which operate and outlined their expectations, including how firms should be managing these key risks.

In this letter the FCA has highlighted the following key areas of focus:

• ensuring sufficient oversight of customer journeys;
• LIBOR linked mortgages;
• treatment of customers in arrears;
• firms’ identification and treatment of vulnerable customers;
• inappropriate application of insurance;
• use and oversight of third party administrators.

The FCA is expected to begin engaging with a number of firms in this portfolio during 2020 to discuss their business models, strategy and culture.