UK FCA final mortgage support guidance for firms assisting borrowers during cost of living crisis

The FCA has published its finalised guidance (FG23/2) for firms supporting their existing mortgage borrowers impacted by the rising cost of living. The FCA reiterates that the guidance clarifies the effect of its existing rules and principles and is not intended to set new expectations or requirements of firms. The feedback statement accompanying the finalised guidance provides some further clarification of points arising from stakeholders’ input to the consultation on the draft guidance, including interaction with the new Consumer Duty. Firms with mortgage businesses should take note that more change is ahead; the FCA makes several references to its planned consultation on its Tailored Support Guidance for mortgages that was originally developed in response to the COVID-19 pandemic

As set out in our previous Engage article ‘UK FCA consults on mortgage support guidance as cost of living starts to bite borrowers’, in December 2022 the government, major mortgage lenders and the UK FCA agreed a range of measures that firms can use to support their existing mortgage customers to manage their monthly payments. This included new FCA guidance with a particular emphasis on firms being able to offer forbearance or contract variations at scale and speed, including through automated processes and digital channels.

The FCA has now published the finalised support guidance (FG23/2), along with a research note on mortgage borrowers and macroeconomic developments which estimates that by the end of June 2024 there could be 356,000 mortgage borrowers facing payment difficulties.

The guidance should be read alongside the Mortgage Conduct of Business Sourcebook (MCOB), its Tailored Support Guidance (TSG), its Guidance for firms on the fair treatment of vulnerable customers and its June 2022 Dear CEO letter.

What’s changed from the draft support guidance?

According to the feedback statement in Annex 1 to FG23/2, the FCA has only made what it describes as ‘3 small amendments’ to the guidance as originally consulted on:

1. Availability of contract variations: The section “Customers not requiring forbearance – but wanting to reduce their monthly payments (contract variations)” and the sub-section “Providing forbearance” have been amended to clarify that not all firms will be able to offer contract variations, whether or not the variation is for forbearance purposes.
2. Switching to interest-only: The sub-section “Contract variations for the purposes of forbearance” has been amended to more clearly set out the FCA’s view of when a switch to interest-only can be considered temporary and to avoid suggesting that the repayment basis is the only relevant question when considering whether a switch to interest-only would be appropriate.
3. Interest rate switches: The reference to rate switches in the guidance has been amended to make it clearer that any decision by a firm to restrict access to rate switches only to borrowers who are up to date with payments is not derived from the FCA’s rules but instead reflects the industry voluntary switching agreement.

What other clarifications does the feedback statement provide?

Some other points of interest from the feedback statement include:

When forbearance applies

• The FCA does not expect firms to ask a borrower for evidence that they will otherwise miss payments before offering forbearance. It is not necessary, appropriate, or practical to define ‘forbearance’ or borrowers who may, or may not, be in financial difficulty (or who face payment difficulty) due to the rising cost of living or where support will be temporary or appropriate. To do so could have unintended consequences where similar terms are used for other regulatory purposes. Firms should approach such terms in light of their ordinary meaning and the purpose of the forbearance provisions.
• Respondents asked for clarification on how the guidance will interact with the Consumer Duty. The FCA states that firms have flexibility to consider what information they may need to demonstrate that the agreed forbearance is appropriate and in accordance with a customer’s best interests. Firms will need to determine, given their business model and customer base, what further actions they may need to take to demonstrate good customer outcomes under the Consumer Duty.

Proactively communicating with borrowers at risk of missing payments

• Although the FCA’s rules do not require mortgage firms to proactively identify and contact borrowers at risk of payment shortfall, it has already encouraged firms to think about what they can do to meet its expectations to support customers who need help. There is reference to the November 2022 key findings from its Borrowers in Financial Difficulty (BiFD) work (see our related Engage article) and to the expectations set out in its finalised guidance on the fair treatment of vulnerable customers (FG21/1). Firms should make it clear to borrowers how they can seek support if they are in payment difficulty. The FCA points out that where firms are aware that a borrower needs support, including where a borrower contacts them asking for forbearance, they should not wait until the borrower misses payments before considering what support it is appropriate to offer.

Providing forbearance using automation at scale

• The FCA explains that by automating support for customers for whom it is appropriate, it may be possible for firms to preserve the more limited availability of their expert case handlers for those customers who need most support. The guidance is permissive so where firms do not want to, or cannot, automate or digitise the process to provide appropriate forbearance, they do not need to do so.
• With reference again to its BiFD findings, the FCA agrees with feedback from consumer representatives that those borrowers with serious medical conditions, as well as those with other characteristics of vulnerability such as unemployment, are more likely to need more tailored support that clearly takes account of their specific short-term and longer-term needs and circumstances.
• Firms do have scope to automate support for a group of customers with similar needs and circumstances and offer them a range of options. However, the guidance confirms that they should have controls in place to avoid agreeing inappropriate forbearance arrangements with customers, including those who have more complex needs.
• Similarly, when offering support firms should, wherever possible, offer to engage with customers in different ways, i.e. not just digitally, because some customers may not have access to online channels or may find digital interactions difficult.

Taking account of wider indebtedness

• The FCA confirms that it considers the expectations in paragraph 5.24 of its TSG, that firms take account of wider borrower indebtedness and other priority debts (eg energy bills), to be relevant to borrowers struggling due to the rising cost of living.

Contract variations for the purposes of forbearance

• There is clarification that where a firm is extending a customer’s mortgage term into retirement or temporarily accepting payment of interest-only for forbearance purposes, firms should take a proportionate approach depending on the customer’s circumstances and the nature and extent of the change being contemplated.

Implications of forbearance arrangements

• Neither MCOB 13 nor the TSG require firms to provide personalised information in writing to explain the implications of forbearance, but firms should consider what is appropriate in individual cases. Firms may also want to consider what may be needed to inform customer understanding and support good consumer outcomes aligned with the new Consumer Duty.

Credit file reporting

Alignment with prudential expectations that firms monitor for heightened risk of loss

• The FCA confirms that the support guidance does not change the considerations flagged in its 2011 finalised guidance on forbearance and impairment provisions (FG11/15) and does not require firms to ask all customers seeking a variation of terms if they are in payment difficulty. The guidance does not have any impact on a firm’s prudential approach and does not set any additional or new expectations that firms treat all requests for contract variations outside of forbearance arrangements as indicating a heightened risk of loss.

Capitalisation

• While MCOB provides that firms must not automatically capitalise a payment shortfall where the impact would be material and should not agree to capitalisation except where no other option is realistically available to assist the customer, the FCA recognises that capitalisation can be appropriate where the root cause of payment difficulty is temporary and short-term (eg it played a larger role during the exceptional circumstances of the COVID-19 pandemic).
• The FCA will consider consulting on whether it should amend the existing guidance on capitalisation in MCOB 13 as part of its plan to consult on the future of the TSG which may include proposing changes to its Handbook. This will enable the FCA to consider the factors relevant to determining whether it might be appropriate for a firm to agree to capitalise a shortfall in individual cases.

Temporary variations to interest-only

• Some consumer representatives suggested that the FCA should respond to the recent sharp rise in interest rates and the rising cost of living as if this were an emergency. They proposed allowing firms to agree temporary switches to interest-only of up to two years with no affordability assessment. The FCA rejects this idea, stating that – unlike the pandemic – the effect of the rising cost of living and increased mortgage costs is more likely to impact different customers at different times and in different ways such that a tailored approach that takes account of individual circumstances is appropriate. Mandating that firms should allow all borrowers to defer capital payments for 2 years without considering their likely ability to meet future payments would bring significant risks. In its view, interest-only concessions risk only delaying and increasing any payment shock, and should only be used when it is appropriate to a customer’s particular circumstances.

The role of advice

• One firm was concerned that the absence of an advice requirement for a borrower extending their term up to retirement could lead to poor outcomes incompatible with the FCA’s expectations under the Consumer Duty. The FCA provides reassurance that enabling a customer to enter into or vary a mortgage without advice is not incompatible with either of a firm’s requirement to ensure they are acting fairly and in accordance with a customer’s best interests under Principle 6 and MCOB 2.5A or the Consumer Duty. But firms will still need to ensure borrowers have the necessary information to make an informed decision about their options and their implications, including by explaining the implications of agreed forbearance in accordance with the support guidance as well as disclosing the implications of a contract variation in accordance with MCOB 7.

Next steps

While the guidance is not temporary, the FCA states that it is subject to change if it makes changes to its underlying rules and principles. Any other changes would be subject to consultation.

There is also a reminder that the new Consumer Duty comes into force on a phased basis from 31 July 2023. The FCA points out that firms will need to consider what impact the Duty might have on the range and nature of customer support measures offered. For more on the Consumer Duty, take a look at our Consumer Duty hub.

The FCA wants firms to focus on improving the quality of services offered so it will continue to test the way firms support borrowers in financial difficulty. It will continue to review how firms are delivering against its expectations and check they are treating customers fairly. It will do this by collecting and reviewing data from firms on the outcomes for consumers. It will identify firms who have a higher concentration of customers who may be at risk of financial difficulty over the coming months, as well as firms whose outcomes, when compared to their peers, suggest that they may not be delivering the support that the FCA expects. It will take ‘robust action’ where it finds firms who are delivering poor customer outcomes.

As mentioned above and included in the latest edition of the Financial Services Regulatory Initiatives Grid, the FCA is planning to consult on the future of its TSG in H1 2023.​ This may include proposing changes to its Handbook. For more on initiatives included in the Grid, take a look at our Engage article ‘UK Financial Services Regulatory Initiatives Forum publishes sixth edition of Grid’.