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Mortgages and the FCA (Financial Conduct Authority)

What does the FCA do?

The Financial Conduct Authority (FCA) is responsible for ensuring that financial markets work well and that consumers get a fair deal. Historically, mortgage control, legislation and auditing fell under the FSA (Financial Services Authority) but this was replaced by the FCA who are now responsible for regulating the mortgage industry amongst other financial disciplines in the UK.

This mortgage guide looks at the FCA and their role with mortgages. There are a number of quotes form the FCA within this guide as we feel that it is relevant for you to see and understand their wording for mortgage legislation.

THE FCA Summarise their strategic aims as below:

"We aim to make financial markets work well so that consumers get a fair deal"

This strategic financial aim includes the following goals:

  1. Protecting consumers by securing an appropriate degree of protection for consumers
  2. Enhancing market integrity by protecting and enhancing the integrity of the UK financial system
  3. Promoting effective competition in the interests of consumers.

The key point to remember here is that it is the FCA who dictates what mortgage lenders can and cannot do when providing you with a mortgage product. This includes:

  • The mortgage preparation phase (initial communication, guidance, advice and financial review)
  • The mortgage application phase (credit and affordability review, guidance and product / mortgage amount calculation)
  • Mortgage proposal phase (relevant appropriate product and communication, cooling off period)
  • Mortgage contract (relevant, legally binding and fair in legal terms).

How does the FCA protect Mortgage Borrowers?

The FCA provides a very good baseline for borrowers by ensuring that mortgage Lenders meet or exceed that defined mortgage legislation. The FCA stipulate that:

"Mortgage lenders must make sure you take out a mortgage you can afford. Find out what they are likely to check and the information you will have to provide."

The FCA introduced new rules in April 2014 which really changed the way mortgage lenders could set up and sell their mortgage products in the UK. Lets look at the key changes

New rules for mortgages from April 2014

In April 2014, FCA, the financial regulator, carried out an extensive review of the mortgage market, named as the Mortgage Market Review (MMR). After the review, the FCA announced more stringent rules for mortgage lenders. This legislation, whilst good for protecting those with a mortgage made it tougher to get a new mortgage or to change mortgage products when fixed rate deals etc. expired.

With the new rules, a mortgage lender will decide on the loan amount after taking into account three factors:

  • Income
  • Expenses
  • Stress test for any unexpected future events

Income

A mortgage lender must know the sources of income for the borrower. Lenders take the following income into account:

  • Basic income
  • Extra income such as commission, bonuses, income from a part-time job, etc.
  • Income from savings or pension

The mortgage lender will also need to know if you expect your income to go up or down and of any other financial changes that you are aware of that could influence your ability to repay your mortgage.

Expenses

Apart from income, mortgage lenders are required to perform an affordability assessment to understand how much a borrower can pay in monthly repayments. Lenders will look at your living expenses such as:

  • Bills for household expenses such as council tax, gas, electricity, broadband
  • Credit card outgoings
  • Insurance expenses

The lender will also ask how much you spend on clothes, holidays, and other leisure expenses. At times, lenders may validate the expenses from your recent bank statements.

Stress test

Along with assessing income and affordability, mortgage lenders are also required to carry out a 'stress test' on your repayment ability. A stress test will take into account any future events which may affect your repayment ability. Such events will include:

  • Potential increases in interest rates
  • A loss of job for either you or your partner
  • Changes in lifestyle such as the arrival of a baby

Questions for borrowers

As part of these tests, some questions the lenders may ask the borrowers are:

  • Whether you have ever taken a payday loan?
  • Are you into gambling?
  • Do you plan to have children in the future?
  • Whether you have any plans to become self-employed?

Based on these tests, the mortgage lender aims to get an accurate idea of the present and future repayment ability of the borrowers, and decide the loan amount accordingly. In addition, the mortgage lender can then demonstrate to the FCA, if audited, that they have completed the relevant due diligence checks to ensure that you, the borrower, have sufficient finances to cover the cost of repaying the mortgage.

You can read more about the FCA at their website: https://www.the-fca.org.uk

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