Amendment 21

Financial Services Bill - Report (2nd Day) – in the House of Lords at 8:15 pm on 14th April 2021.

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Votes in this debate

Lord Sharkey:

Moved by Lord Sharkey

21: After Clause 40, insert the following new Clause—“Interest rates for mortgage prisoners(1) The Financial Services and Markets Act 2000 is amended as follows.(2) After section 137FD insert—“137FE FCA general rules: interest rate for mortgage prisoners(1) The FCA must make general rules requiring authorised persons involved in regulated mortgage lending and regulated mortgage administration to introduce a cap on the Standard Variable Rates charged to mortgage prisoners and to ensure that mortgage prisoners can access new fixed interest rate deals at an interest rate equal to or lower than an interest rate specified by the FCA.(2) In subsection (1)— “mortgage prisoner” means a consumer who cannot switch to a different lender because of their characteristics and has a regulated mortgage contract with one of the following types of firms—(a) inactive lenders, or firms authorised for mortgage lending that are no longer lending; and(b) unregulated entities, or firms not authorised for mortgage lending and which contract with a regulated firm to undertake the regulated activity of mortgage administration;“new fixed interest rate deals” means the ability for the consumer to fix the rate of interest payable on a regulated mortgage contract for periods of 2 years and 5 years;“Standard Variable Rate” means the reversion rate which is a variable rate of interest charged under the regulated mortgage contract after the end of any initial introductory deal.(3) The general rules made under subsection (1) must set the level of the cap on the Standard Variable Rate at a level no more than 2 percentage points above the Bank of England base rate.(4) The general rules made under subsection (1) should make new fixed interest rate deals available to mortgage prisoners who meet the following criteria—(a) are up to date with payments or have aggregate arrears of no more than one monthly payment in the past 12 months,(b) have a remaining term of 2 years or more,(c) have an outstanding loan amount of at least £10,000, and(d) have not received consent to let the property.(5) When specifying the interest rates for new fixed interest rate deals required by subsection (1) the FCA should specify rates for a range of Loan-To-Valuation (LTV) ratios taking into account the average 2-year and 5-year fixed rates available to existing customers of active lenders through product transfers.(6) The FCA must ensure any rules that it is required to make as a result of subsection (1) are made not later than 31 July 2021.””Member’s explanatory statementThis new Clause would require the FCA to introduce a cap on the Standard Variable Rates charged to mortgage prisoners and, under specified circumstances, ensure their access to fixed rate interest deals.

Photo of Lord Sharkey Lord Sharkey Liberal Democrat

My Lords, Amendments 21 and 37B are in my name and those of the noble Lord, Lord Stevenson of Balmacara, and my noble friend Lady Kramer, and I am very grateful for their support. I declare an interest as co-chair of the APPG on Mortgage Prisoners. The plight of these mortgage prisoners was discussed extensively—

Photo of Baroness Penn Baroness Penn Baroness in Waiting (HM Household) (Whip)

My Lords, due to the technical issues that the noble Lord, Lord Sharkey, is having, I suggest that we adjourn for five minutes until a convenient moment after 8.28 pm.

Sitting suspended.

Photo of Lord Sharkey Lord Sharkey Liberal Democrat 8:28 pm, 14th April 2021

I was saying that we have made no progress in Committee on the mortgage prisoners problem, and the situation seems frozen. On the one hand, there are 250,000 mortgage prisoners, subject to real, undeserved and unwarranted financial pressure, which is likely to increase when Covid concessions lapse or are withdrawn. On the other hand, the Government and the FCA seem intent on minimizing the problem and are engaged in what seem to me to be futile and unproductive arguments with the mortgage prisoners over exact figures.

The alleged 0.4% premium paid by mortgage prisoners above the average SVR illustrates the point. We do not only believe the figure to be wrong for the reasons that I set out in Committee, which were not refuted by government; we also believe that such discussions are very largely a distraction and lead nowhere. SVRs are not the norm in mortgage lending but are the literally inescapable norm for most mortgage prisoners. Only around 10% of customers with active lenders pay these high SVRs, and more than 75% of those who do switch to new and much lower fixed rate deals within six months of moving to an SVR. Mortgage prisoners have been stuck with usurious SVRs for over 10 years.

Solving the mortgage prisoner problem certainly requires reducing this usurious SVR, but it also requires giving the mortgage prisoners access to normal fixed-rate mortgage deals. I regret to say that there has been no real progress in either of these areas. In all the discussions about the problem, I have never heard the Government admit responsibility for causing it in the first place. I have heard repeated assertions that the Government are trying to find a solution. I have heard John Glen, the Economic Secretary to the Treasury, say that he remains open to considering practical solutions, and I know that the Chancellor told Martin Lewis that he would keep working on the issue and was committed to finding a workable solution.

However, I have heard no admission from the Government that they caused the problem in the first place—and no admission of moral responsibility for devising a proper, just and timely solution. Certainly, nothing so far proposed or actioned has delivered effective relief to the 250,000 prisoners. I again make the point that these people are not the authors of their own misfortunes: the Government are.

The mortgage prisoners are all victims of the Treasury’s incompetence or its greed, or both. The LSE report makes this perfectly clear when it says:

“The borrowers themselves were not to blame.”

Martin Lewis has said:

“Mortgage prisoners have been left paying obscene interest rates for over a decade, through no fault of their own.”

The fact is that current discussions with Government and the FCA appear to be going nowhere and the latest FCA/Treasury move to loosen affordability tests has not resulted in significant take-up.

The mortgage prisoner report of last month—[Connection lost.]

Photo of Baroness Penn Baroness Penn Baroness in Waiting (HM Household) (Whip) 8:30 pm, 14th April 2021

My Lords, once more we will need a brief adjournment due to technical issues. I beg to move that we adjourn until 8.30 pm. Or do we have the noble Lord?

Photo of Lord Sharkey Lord Sharkey Liberal Democrat

Thank you. I think I was talking about Amendment 21 being prescriptive; it sets out exactly what must be done and by whom.

It has two sections. The first reduces the currently usurious SVR paid by mortgage prisoners by capping it at two percentage points above the bank rate. This is what, in the end, Martin Lewis thought was necessary. He said:

“Yet in lieu of anything else, I believe for those on closed-book mortgages it is a good stopgap while other detailed solutions are worked up, and I’m very happy the All-Party Parliamentary Group on mortgage prisoners is pushing it.”

He also said:

“This would provide immediate emergency relief to those most at risk of financial ruin … No one should underestimate the threat to wellbeing and even lives if this doesn’t happen, and happen soon.”

This is all necessary, but not sufficient. SVRs are not the normal basis for mortgages, as I have already mentioned. What is needed is access to fixed-rate mortgages, as provided by normal active lenders to 90% of mortgagees. The second part of Amendment 21 sets out how that is to be done.

This is, of course, all very prescriptive, and we understand the Government’s reluctance to write such details into the Bill. That is why we have also tabled Amendment 37B. This amendment takes a simpler and non-prescriptive approach. It places the obligation to fix the problem squarely on those who caused it—the Treasury. It is explicitly fuelled by the overwhelming and undeniable moral responsibility that the Treasury has for the terrible situation in which mortgage prisoners have long found themselves. The amendment sets out what must be achieved to relieve mortgage prisoners, by whom and by when, but it does not say how. It leaves that entirely for the Government to work out.

Amendments 21 and 37B give the Government a clear choice. Amendment 21 prescribes a detailed method of solution; Amendment 37B says what the Government must achieve but leaves the mechanism to them. The Government caused the mortgage prisoner problem, which has caused and continues to cause much suffering to many families. I hope that the Government will recognise their moral responsibility and adopt Amendment 21 or Amendment 37B.

This has all gone on much too long, and it has caused, and continues to cause, far too much misery and desperation. If the Minister is not able to adopt either amendment, or give equivalent assurances, I will test the opinion of the House. I beg to move Amendment 21.

Photo of Lord Stevenson of Balmacara Lord Stevenson of Balmacara Labour

My Lords, I speak in support of the amendments just proposed by the noble Lord, Lord Sharkey, which I have signed. One’s heart goes out to him—it must be very difficult to make a speech of this complexity and passion with all these breaks. Despite the technical difficulties, however, he has made the case for action very well, and as co-chair of the all-party parliamentary group on these issues he is very well briefed on the situation faced by these fellow citizens of ours, and the extra costs that they face. It is indeed a very difficult situation, and one hears a lot of despair when one talks to these people.

I am sure that when he responds the Minister will, as the noble Lord, Lord Sharkey, hinted, dwell at length on the numbers of this group in various categories. There is of course a debate on how the prisoners can be split up—I think that the only thing that we agree on is that the total is probably about 250,000. As with the noble Lord, Lord Sharkey, however, my argument is not about the numbers. Simply put, it is clear that a significant number of people, through no fault of their own, cannot exercise the choices about their mortgage that the rest of us can. While some would argue that this is the direct fault of the Government, I think that someone needs to take responsibility for providing a fair outcome for those who are in a position to take advantage of it.

As the noble Lord, Lord Sharkey, says, this group of amendments offers two options: one that focuses on what the FCA might do within the parameters set by the Bill and another—37B, a late amendment that we drafted for Report—that suggests that the Treasury might wish to take powers to act in the way that is most suitable for it. Both have merits, in their ways. As the noble Lord, Lord Sharkey, said, they have detailed implications that need to be followed through carefully. My preference would be for Amendment 37B, for the very good reasons set out by the noble Lord, Lord Sharkey. If, as he said he might, the noble Lord decides to test the opinion of the House, we will support him.

Photo of Baroness Noakes Baroness Noakes Conservative

My Lords, the amendments in this group are misconceived, for a number of reasons that I shall explain. I have much sympathy with the plight of mortgage prisoners, who find themselves in a difficult position as a result of taking on debt when market conditions and regulation allowed mortgage lending in ways that are not generally possible now. We have to remember that many of the borrowers we are talking about would not qualify for a mortgage in today’s environment, either because of the type of mortgage that they have or their own financial circumstances. This is not to blame them, but it is a relevant fact.

Mortgage prisoners are not the only groups who are facing financial problems. Covid-19 has brought financial stress for many individuals and families, and indeed the problems of mortgage prisoners may have increased during the pandemic. Any solutions for mortgage prisoners need to be put in the context of all who are facing debt problems, and we must be careful that solutions for one category of financial distress are fair and proportionate.

Covid-19 has also caused delays in the implementation of the FCA’s initial solution, which relaxed the regulatory affordability rules. We do not, therefore, know how effective those will be in solving the problems of mortgage prisoners, and we should be wary of leaping to further solutions until existing remedies have had time to take effect.

Although a number of statistics have been cited by the supporters of the amendments, hard data on the mortgage prisoner population are not readily available. This was underlined in last year’s report by the London School of Economics, and the FCA has never claimed to have a perfect picture. Although the report by the group UK Mortgage Prisoners purports to offer a definitive analysis, its membership is only a fraction of the number potentially within the mortgage prisoner net, so its report should be treated with appropriate caution. It is hard to make policy in this environment.

The amendments include a cap on standard variable rates—SVRs—for all mortgage prisoners with inactive or unregulated lenders, plus two approaches for making new fixed-rate deals available to those who are basically good payers. The proposal to cap SVRs responds to a fairly vociferous demand from lobby groups. Amendment 21 would cap SVR rates at 2 percentage points above base rate. The result would be a rate broadly aligned with the competitive rates available in the active mortgage market, but those rates are available only to low loan-to-value ratios, and to borrowers with the most robust financial profiles. The market rates for riskier high LTVs are probably twice that level, even if the personal financial profile of the borrower is resilient. In addition, there is not an unlimited supply of fixed-rate deals. Many lenders simply do not offer fixed-rate deals on high LTV loans, especially when combined with weaker personal financial profiles.

The amendment says that mortgage prisoners with inactive or unregulated lenders should have rates that are available only to other mortgage borrowers who have completely different loan and borrower characteristics, and it would apply to them even if they did have opportunities to switch mortgages, which the FCA estimates is roughly half the total population. It is unsurprising that the LSE did not recommend this, and noted that it could create market harm. The FCA’s own analysis, comparing the rates paid by mortgage prisoners who are stuck on SVRs and cannot switch, indicates that the real problem is only about 40 basis points, if the correct comparator is used. I do not accept the assertion of the noble Lord, Lord Sharkey, that that is an incorrect calculation. Those 40 basis points are no proper foundation for market intervention.

As the noble Lord, Lord Sharkey, explained, the proposals for the availability of fixed-rate mortgages for good payers in Amendments 21 and 37B take slightly different approaches. Amendment 21 says that FCA rules should

“make new fixed interest rate deals available to mortgage prisoners”,

while under Amendment 37B the Treasury must provide for them to be offered fixed-rate mortgages. Neither amendment says how this can be achieved.

In the case of Amendment 21, it would be a startling new direction for regulation if the FCA could tell regulated lenders that they were obliged to offer particular deals to people who by definition are not their own customers. As for Amendment 37B, clearly the Treasury will not itself be providing loans, as it is not in the business of retail lending. The Treasury also has no power to tell banks or building societies to make any particular loans. If either of the amendments resulted in regulated mortgage providers being told that they had to lend to certain groups of non-customers, the impact on the financial services industry would be chilling.

It might be possible for the Treasury to procure that regulated lenders offered fixed-rate deals if the Treasury itself guaranteed all or part of the debt, as it does for some first-time buyers. But that is not what Amendment 37B says, and it would not be a plain reading of the proposed new clause to cover such an intervention.

As if telling lenders what products they should offer and to whom were not bad enough, both amendments go on to try to cap the price of these fixed-rate deals. Amendment 21 would do this at a rate to be fixed by the FCA, using LTV ratios and average rates available to customers of active lenders. This ignores the basic fact of life that mortgage prisoners who have not remortgaged are not like other borrowers, and do not satisfy the lending criteria of most mortgage lenders—whether that is because the LTVs are too high or because the other financial characteristics of those borrowers place them outside the risk appetite of active lenders. For some borrower circumstances there is no market rate at all, and it is not right to assume otherwise.

Amendment 37B is slightly more realistic and refers to terms being “no less favourable” than offered to mortgage borrowers who have “similar creditworthiness characteristics”. However, the issue is not just about creditworthiness; it is also about the nature of the mortgage itself. The mortgage prisoner population includes those on interest-only mortgages with no repayment plan. It also includes buy-to-let mortgages. When these characteristics are added to the higher LTVs and lower financial resilience that are often present in the mortgage prisoner population, it can add up to more risk than mortgage lenders would be comfortable with in today’s environment. There will likely be no comparable fixed-rate terms available for such mortgages, and this amendment cannot wish away that fact by assuming that only creditworthiness is relevant.

Regulatory rules require lenders to manage their own risks. The FCA has been careful in its pronouncements, to date, to respect the fact that lenders have to be responsible for their own credit risk assessments, how they price for risk and how they set their risk appetite. Anything else is on a slippery slope to moral hazard. How can the FCA regulate a lender’s credit risk policies if the FCA is itself overriding that lender’s credit risk appetite? How does it impact prudential regulation by the PRA? We simply should not go there.

Ministers have said clearly that they want to find a solution for mortgage prisoners. In fact they probably need multiple solutions because there are several problems at work within the mortgage prisoner population. Solutions that might seem right for one category of borrower may well have repercussions across other parts of the mortgage market or other retail lending markets. It would be incredibly foolish to legislate without a full understanding of these issues. I hope the proposers of the amendments will accept that we should leave it to the Treasury and the FCA to work out practical solutions to these problems.

Photo of Lord Holmes of Richmond Lord Holmes of Richmond Conservative 8:45 pm, 14th April 2021

My Lords, it is a pleasure to take part on this group of amendments. I declare my financial services interests and say just this: the borrowers are not to blame, but they bear the burden. Does my noble friend the Minister agree?

In agreeing to a large extent with my noble friend Lady Noakes, with regret I am not convinced that these are necessarily the amendments to resolve the issue. Can the Minister set out what action he believes the Treasury and FCA are taking in this area? There clearly is an issue even if we accept that the numbers may be disputed, or that there are different categories and specific circumstances. These are all important points to be considered, but they still leave issues to be addressed. Will the Minister set out anything he can about what actions the Treasury will take and what the approach of the FCA will be to address these points?

Photo of Baroness Bryan of Partick Baroness Bryan of Partick Labour

My Lords, it is a great honour to participate in this group of amendments, and particularly to support the noble Lord, Lord Sharkey, who has worked tirelessly to support mortgage prisoners. I feel I am in a similar place to my noble friend Lord Griffiths of Burry Port when he spoke in Committee. I will speak as someone inexperienced in high finance but who understands the importance of having a home—not as a financial asset or investment, but as somewhere safe and secure to live. To make this most basic need a pawn in the machinations of greed-driven financial transactions, as demonstrated by the financial crash of 2008, is an absolutely unacceptable face of capitalism.

Every Government since 1979 have encouraged people to see home ownership as a sign of virtue. When the noble Lord, Lord Heseltine, was Secretary of State for the Environment, he said:

“Home ownership stimulates the attitudes of independence and self-reliance that are the bedrock of a free society.”

But for many people, the period of their mortgage is a rollercoaster ride of anxiety, always dependent on matters far outside their control. The day the mortgage is paid off must rank among the best days of people’s lives. Many mortgage prisoners fear they will never see that day.

The FCA reported in July 2020 that around a quarter of a million people have their mortgages held by inactive firms. The majority of these people were up to date with their payments and, in any other circumstances, would have been able to adjust their mortgages and repayment patterns to suit their individual needs. No one would choose to remain on the SVR for years on end, so to compare their entrapment on that rate to those who may be on it temporarily, while they seek an alternative, is disingenuous. These people have been denied that opportunity, not through any decision they made or any fault on their part, but because of the way the Government chose to sell off mortgage loan books. It was not just people’s mortgages that changed hands, it was people’s lives—they were being bought and sold.

This Bill was viewed with real optimism among some mortgage prisoners. They thought amendments relating to SVR would help transform their lives, but how often have they been here before? Last year, there was hope that the FCA’s more lenient affordability checks would help some escape, but very few succeeded. For many more, their lives were made even more difficult by the impact of Covid-19. The report from the LSE in November 2020 makes the point that the FCA has now reached the limit of its powers. This means that only the Government can help to free mortgage prisoners. Instead, while Parliament was considering amendments aimed at protecting mortgage prisoners, the auctions continued. All the warm words and expressions of concern from Ministers meant nothing. The Treasury’s sole concern was that these people must deliver value for money for the Government.

These amendments are considered and cautious. Their implementation would not undermine capitalism or fundamentally damage the whole system of mortgage delivery, but would give some safeguards to a specific group of mortgage prisoners who have struggled for more than 10 years as victims of the failure of the very system the Government are defending. If it is not to be these amendments, what help will the Minister offer? Unless there is a clear alternative, I hope we will be given the opportunity to vote on at least one of them. I would be very pleased to give my support.

Photo of Lord Lucas Lord Lucas Conservative

My Lords, it is clearly acknowledged that there is a problem. It is evident to me that this is exactly the sort of problem that the Government ought to sort out because, as my noble friend Lady Noakes said, we have no business landing this on the lending community. It is our responsibility. The Bill is an opportunity to make sure that something is done, and I very much hope that we take it.

Photo of Baroness Kramer Baroness Kramer Liberal Democrat Lords Spokesperson (Treasury and Economy)

My Lords, I think the case has been extremely well made. I usually really respect the opinions that the noble Baroness, Lady Noakes, puts forward, but it seems to me that she completely fails to understand the circumstances that led these people into being mortgage prisoners. They took out loans under credit checks and it was entirely appropriate, but the banks from whom they borrowed the money crashed in the 2008 financial crisis, largely through poor regulation, which lies at the Government’s door, not the door of those who took out mortgages. People with absolutely identical credit profiles who took out their mortgages with a bank which did not crash have had many opportunities to refinance, which is normal in the life of the mortgage. A standard, typical bank knows that it will vary the characteristics of its mortgage over the life if that option is sought by the mortgagee.

The group of people who took out their mortgages with banks that crashed in many cases found that those mortgages were stripped out as part of the asset rescue process that the Government went through, and the Government then sold those mortgages to completely inappropriate buyers under inappropriate terms in order to get the maximum return. I understand their motivation—maximum return for taxpayers—but they removed all of the normal relationships and embedded rights in those relationships that a mortgagee has when they take out a mortgage with a viable financial institution.

The noble Baroness treats many of those mortgage prisoners as people who are now of poor credit. These are people who have aged—we all do that. The mortgage that we take out at the age of 30 is not the same one that we would be able to take out at the age of 55, because we have got older and our career profile is different. Some of them have become ill, and therefore had reduced earning capacity. Any standard bank dealing with a mortgagee in those circumstances makes adjustments. Mortgage prisoners are not able to seek such adjustments and they have been left in dire circumstances.

The fault lay with the Government when they sold mortgages under inappropriate terms to inappropriate buyers to manage them. It treated them as though they were abstract assets, rather than a special category which has a lot of convention embedded in it, in order to maximise their sale. I very much hope that the Government will realise that they have a responsibility. They took those additional revenues, they took the benefit of selling off those mortgages under terms and conditions that they should never have permitted, and they now need to offset that by stepping forward and making sure that those mortgage prisoners can have the same access to flexibility that would have been theirs had they taken that loan out with a financial institution that did not collapse in 2007-08.

Photo of Lord Tunnicliffe Lord Tunnicliffe Opposition Deputy Chief Whip (Lords), Shadow Spokesperson (Defence), Shadow Spokesperson (Treasury), Shadow Minister (Transport)

My Lords, this is an emotive issue for a lot of people. Although we recognise that the Government have taken steps to help a proportion of so-called mortgage prisoners to access alternative products, so far, we have not been satisfied with either public or private assurances received on this matter. We are familiar with the Government’s view of the importance of market freedoms and the need to keep interventions to a minimum. However, despite the initiatives that we will hear about from the Minister shortly, the fact is that the market is failing a substantial number of people.

This situation has left many mortgage customers essentially trapped in their current properties, even if those properties no longer meet their needs. Mortgage prisoners have faced years of financial difficulties as well as the anxiety and potential for ill health that comes with that. It is therefore only right that the Government take this opportunity to act.

Luckily, the proposals before us provide the Treasury with a route out of this situation. Amendment 21 would introduce requirements on the FCA to place a cap on the standard variable rate charged to mortgage prisoners and to take supplementary steps to improve their access to alternative deals. Amendment 37B aims to achieve a broadly similar goal through different means, giving the Treasury greater flexibility to take this matter forward.

The Minister will, no doubt, tell us that these amendments go too far. We disagree. I hope that Amendment 37B is something that the Government could live with. If the Treasury is not happy with the precise wording, will the Minister at least commit to tabling an alternative proposal at Third Reading next week? We have pressed repeatedly for concerted action to deal with this issue and provide hope to thousands of mortgage prisoners. We favour Amendment 37B over Amendment 21, but that is the lead amendment and will be the first to be called. I very much hope that the Minister will accept the need to make progress but, if not, we will support the noble Lord, Lord Sharkey, if he pushes one of his amendments to a vote.

Photo of Lord True Lord True Minister of State (Cabinet Office) 9:00 pm, 14th April 2021

My Lords, I thank those who have spoken. I have to say to many of them that, with great respect, I will disagree that these amendments are appropriate or effective. I must make absolutely clear that there is no prospect of the Government changing their position between now and Third Reading.

I want to start by emphasising, however, that the Government take this issue extremely seriously. I believed that that was understood in the private conversations that I felt privileged to have with Peers from all around the House and that the earnestness of Ministers in this area was understood and respected. I hope that that is the case, even if we disagree today.

We have a great deal of sympathy for mortgage borrowers who are unable to switch to new deals, which is why we and the FCA have carried out so much work and analysis in this area. The FCA has determined that there are around 250,000 people whose mortgages are currently held by inactive firms. That figure has been used by the noble Lord, Lord Sharkey, and others. The noble Lord, Lord Stevenson of Balmacara, said that I might detail different categories of people within that number and implied that that would not change the position. However, as my noble friend Lady Noakes observed, Parliament must surely legislate on the basis of actual numbers and evidence of the reality of the problem overall. While that figure is the total number of customers whose mortgages are held by inactive firms, not all those people are “prisoners”. Half of them, 125,000 mortgage holders, could switch to an active lender if they chose to. They could do so right now, without any action or intervention from government at all.

The Government have sought to make it as straightforward as possible for customers with inactive firms to switch. Whenever we have sold loans back to the private sector, we have included protections to ensure that customers’ ability to remortgage is unaffected. For example, the customer protections in previous sales of Bradford & Bingley and NRAM loans have included restrictions on the ability of lenders to impose financial barriers to remortgaging such as early repayment charges.

This means that there are around 125,000 borrowers with inactive firms who cannot switch, and the Government fully accept that that remains a significant number. Within that number, every household is a household of people. However, around 70,000 of those borrowers are currently in arrears. The Government do not underestimate how stressful it can be to be in arrears, but it is important to note that borrowers in arrears with inactive firms are in a similar situation to borrowers in arrears with active lenders. In both cases, it is not possible to move to a new fixed rate deal and it is not possible to switch lender. Customers in arrears with either inactive firms or active lenders have the same protection under the FCA’s conduct rules, whereby firms are required to make all reasonable efforts to explore arrangements to resolve the situation.

Around 55,000 customers are up to date with their payments but are also unable to switch. These consumers are constrained from switching because they do not meet the risk appetite of lenders in the active market. This is not to blame or accuse people in this position—of course, the Government do not do that, and I repudiate any such implication—but it is a simple point of fact that these borrowers have risk characteristics meaning they are unable switch to the active market. However, FCA analysis has found that, despite this, on average the 55,000 borrowers with inactive firms who have characteristics that would make it difficult for them to switch but are up to date with payments are paying around 0.4 percentage points more than similar borrowers with active lenders who are now on a reversion rate, which will normally be their lender’s standard variable rate.

There has been considerable scrutiny of this figure, and the noble Lord, Lord Sharkey, simply claimed it was wrong, so I will take a moment to explain the analysis that underpins it. The FCA used its regulatory data returns, information from the third-party administrators who service these mortgages, and credit reference agencies to compare the interest rates paid by borrowers with inactive lenders to borrowers with similar characteristics in the active market. As my noble friend Lady Noakes stated, consumers with these kinds of risk characteristics would not be able to easily access new fixed rate deals in the active market. It is not the case that borrowers with similar high credit risk characteristics can access the lowest rates in the active market. Where they can access new fixed rate deals with active lenders, these will tend to be specialist lenders who will charge much higher rates than the major lenders.

My noble friend Lord Holmes of Richmond reasonably asked what the Government are seeking to do. Importantly, the Government, working with the FCA, have created additional options for some of these 55,000 borrowers who are with inactive firms but are not in arrears. This involves a new process, for which I believe time should be allowed, that permits active mortgage lenders to waive the normal affordability checks for borrowers with inactive lenders who meet certain criteria, for example not being in arrears and not wishing to borrow more. This is called the modified affordability assessment.

Inactive firms have been contacting borrowers who have been struggling to switch, setting out that new options may be available for them in the active market. I am pleased to tell the House that a number of lenders, including major lenders like Halifax, NatWest and Santander, have also come forward with options specifically for these borrowers. I encourage all borrowers with inactive firms to consider whether they may be able to take advantage of this new switching process. While this may not be a silver bullet for all borrowers with inactive firms, it represents a significant change for borrowers with inactive firms who may previously not have been able to switch.

The Government have taken other action in the period of Covid to help and support borrowers. In October, the FCA confirmed additional options to support borrowers, including guidance to allow borrowers who are up to date with their payments with a recently matured or soon-to-mature interest-only or part and part mortgage to delay repaying the capital on their mortgage while continuing to make interest payments. This guidance is in place until October 2021. The FCA also confirmed, as I have explained, that it is making intra-group switching easier for borrowers with an inactive firm; that is, the same lending group as an active lender. Furthermore, in September the Money and Pensions Service launched online information and a dedicated phone service for borrowers.

We have also considered the regulation of customers with inactive firms. It is important to be clear that all borrowers with regulated mortgages must always have their mortgages administered by a regulated firm—this is the case for both inactive firms and active lenders. Some inactive firms, such as Landmark Mortgages and Heliodor Mortgages, are also regulated by the FCA already.

As the Economic Secretary to the Treasury and we have explained, the Government are always open-minded about whether further regulation would deliver greater protection, but we are yet to see evidence to suggest that there are borrowers who are currently being harmed by the current regulatory regime in relation to borrowers in the active market, and who would therefore be helped by extending the FCA’s remit.

Amendments 21 and 37B seek to provide additional protections for borrowers with inactive firms through direct price intervention by the FCA and the Treasury. Amendment 21 seeks to cap standard variable interest rates for borrowers with inactive firms. My noble friend Lady Noakes spoke powerfully on the implications of this policy. As I have discussed, borrowers with similar characteristics in the active market are unlikely to be able to secure new fixed-rate deals in the active market. As my noble friend argued, a cap for borrowers in the inactive market would be deeply unfair to higher-risk borrowers or those in arrears with active lenders, who would continue to pay normal reversion rates, which would be higher than the cap proposed.

Capping SVRs on mortgages with inactive firms would also have an impact on their financial stability because it would restrict lenders’ ability to vary rates in line with the market conditions. I know that some in the House found my noble friend’s speech uncongenial, but this is a fact. This concern was supported by the London School of Economics’ recent report on mortgage prisoners, which stated:

“Capping SVRs at a level close to the best rate for new loans could create harm in other parts of the market, and we do not recommend it.”

Both Amendments 21 and 37B would also require inactive firms and unregulated entities to offer new fixed-rate deals. On Amendment 21, it is not clear how the FCA should take account of the range of features and characteristics that inform interest rates in the active market—for example, product fees or borrower characteristics. Amendment 37B seeks to require the Treasury to implement regulations that provide fixed-rate deals to customers with inactive firms that are in line with deals available to borrowers in the active market with broadly similar creditworthiness characteristics.

As I have noted already, FCA analysis has made clear that borrowers with inactive firms who are up to date with their payments but unable to switch on average pay just 0.4 percentage points more than customers in the active market with similar characteristics who are now on the reversion rate. Therefore, it is not clear that this amendment would lead to materially lower rates for most consumers with inactive firms.

Being with an inactive firm does not stop a consumer from applying for mortgages in the active market. Consumers in the inactive and active market applying for new credit are assessed in the same way. Consumers in the inactive market are already able to access mortgage products available to consumers in the active market with broadly similar creditworthy characteristics.

Finally, both Amendments 21 and 37B would require firms that do not currently have the expertise, systems or regulatory permissions necessary to offer new mortgage products to do so.

I reiterate that the Government do not underestimate the stress that being unable to switch your mortgage can cause. I also reiterate that the Economic Secretary has stated the Government’s concern and interest in seeking ongoing solutions to this problem. However, in making policy we must be guided by the evidence, which demonstrates that consumers with inactive firms are not in fact significantly disadvantaged versus their peers in the active market, and we must be fair to those borrowers—to all borrowers—in any steps we take. In view of this and the proportionate range of interventions that the FCA has already taken, some of which I set out in the earlier part of my speech, I ask that the amendment be withdrawn.

Photo of Lord Sharkey Lord Sharkey Liberal Democrat 9:15 pm, 14th April 2021

I thank everybody who has taken part in this extensive debate. I particularly thank the noble Baroness, Lady Bryan, for her powerful contribution and her clear understanding of the problems that mortgage prisoners suffer, and have suffered for so very long.

I was sorry to hear the Minister again talk about the 0.4 percentage points and assert that it was a meaningful figure. At this point in the debate and at this time of the night, all I can do is say that we disagree fundamentally with his analysis. We think it is completely wrong and we think we have the evidence to show it is.

In some ways, more important than all that is that the tenor of the debate, or the tenor of the contributions made by the Minister and the noble Baroness, Lady Noakes, was notable for the fact that they do not assume any kind of responsibility on the part of the Government for the situation these people find themselves in. There is no hint of moral responsibility and no sense that, really, it is up to government to find the solution. As it happens, the noble Baroness, Lady Noakes, finished her speech, I think, by recommending that we leave all this to the FCA and the Treasury to find a solution. The fact is that we have left it to the Treasury and the FCA to find a solution, and they have not found a solution at all.

Nothing in the Minister’s speech suggests that a solution is on the horizon. He talked about the loosening of the affordability checks, but I repeat what I said in my speech: so far, the loosening of those affordability checks has helped 40 households. He had the opportunity to try to correct that figure; he did not take it. It is 40 households so far. This is not the solution, and nothing else is proposed by the FCA or the Treasury to solve the problem that still exists.

I conclude by saying that it is the Government who have caused this problem; it is the Treasury. There is a moral responsibility. People’s lives are ruined, have been ruined and will be ruined if this situation continues. It may be that the proposals we have put forward are not perfect—although I certainly dispute that they amount to significant market distortion, if any—but, nevertheless, they would bring relief to these people. There are a lot of them, they are in bad shape and their lives are difficult, and it is no fault of their own. I would like to test the opinion of the House.

Ayes 273, Noes 235.

Division number 2 Financial Services Bill - Report (2nd Day) — Amendment 21

Aye: 273 Members of the House of Lords

No: 235 Members of the House of Lords

Ayes: A-Z by last name

Nos: A-Z by last name

Division conducted remotely on Amendment 21

Amendment 21 agreed.

Amendments 22 and 23 not moved.

Photo of Baroness Fookes Baroness Fookes Deputy Chairman of Committees, Deputy Speaker (Lords) 9:30 pm, 14th April 2021

My Lords, we now come to the group beginning with Amendment 24. Anyone wishing to press this or anything else in this group to a Division must make that clear in the debate.