As they move into their second year as the Financial Conduct Authority, the FCA have recently published their Business Plan for 2014-2015 and their second annual Risk Outlook.
Business Plan – 2014/2015
The strategic objective of the FCA is to ensure that the relevant UK markets function well through three operational objectives:-
- To secure an appropriate degree of protection for consumers
- To protect and enhance the integrity of the UK financial system
- To promote effective competition in the interests of consumers
As part of this, the FCA intend to implement their Mortgage Market Review (MMR) the majority of which will come into effect on 26 April 2014. They will also:-
Review the arrears management processes of high-cost short-term credit firms and how customers are treated when they are in financial difficulty.
- Review areas such as how firms are implementing the FCA’s new affordability rules and how they give advice to customers. They will also look at how firms may be finding ways to avoid the rules.
- Look at the development of hybrid equity release products as a potential solution to the interest-only maturity issue.
- Look at a sample of smaller firms to determine if customers are being treated fairly in line with the guidance published in August 2013.
A copy of the FCA’s business plan can be found here.
The FCA’s Risk Outlook publication sets out their current thinking on the main drivers of risks to their objectives and signals the areas the FCA will focus on going forward.
In the secured lending environment, the FCA appear to be particularly concerned with the following:-
- The impact which likely increases in interest rates will have
- Use of mortgage intermediaries
Interest rate rises
It is the FCA’s view that firms’ approach towards forbearance to date has been supported by low interest rate and improved funding conditions and as interest rates start to rise, some forbearance strategies may no longer be suitable or viable and lenders may start to take a more direct approach to mortgage distress and repossession.
The FCA are also of the view that:-
- Higher rates may confirm whether consumers in forbearance have any long-term prospects to recover from financial distress and this could lead to higher repossessions.
- Firms must ensure they take proactive steps to identify borrowers susceptive to higher rates and have strategies in place that treat consumers fairly in these circumstances.
- The transition into a period of higher interest rates could lead to price volatility, particularly as market expectations adjust to a new period of higher rates.
- In addition, after a long period of low interest rates, it will be an adjustment for consumers to manage their balance sheets in a new period of staggered rate rises.
According to the FCA, as firms prepare for the implementation of MMR, and particularly the move to an advised market, there has been an increase in reliance on the use of intermediaries as a distribution channel and increased use of packagers by some firms. The FCA say that this is changing the shape of the market and the potential risks, particularly those arising for firms using intermediaries and packagers to comply with MMR requirements for affordable lending decisions.
The FCA do not want firms to lose sight of the importance of continuing to lend responsibly, particularly in a rising market and when using new distribution channels such as intermediaries. The FCA have seen a number of better lending practices in the market today, ahead of the MMR coming into effect and it is important that those standards do not slip. Firms using third parties must ensure there is effective due diligence and oversight.
The FCA have identified 7 areas of focus which they believe are of considerable importance in posing risks to their objectives. In the secured lending arena, the FCA are concerned about rapid and substantial house price growth giving rise to conduct issues. As such, the risks the FCA will monitor include:-
- Weakening underwriting standards
- Impact on affordability of interest rate rises
- Mis-treatment of consumers exiting from forbearance
- Treatment of customers in negative equity
- Prudential pressure due to falling prices and household distress
- Withdrawal from products
A copy of the FCA’s Risk Outlook can be found here.