Mortgage Prisoners Inquiry Bill [HL]
(1 day, 15 hours ago)
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Lord Sharkey (LD)
My Lords, mortgage prisoners are people who are stuck with their existing lenders and cannot access a better deal such as a fixed rate. As a result, mortgage prisoners continue to pay interest rates on their mortgages at around four percentage points over normal market rates, costing them hundreds of thousands of pounds extra per year. According to the mortgage prisoners action group, there are around 195,000 mortgage prisoners; by narrowing significantly the definition of a mortgage prisoner, the FCA, completely implausibly, comes up with a much smaller number.
This Bill proposes an independent inquiry into the 17 years of harm that has been caused to mortgage prisoners. For the past 25 years, the UK mortgage market has been dominated by short-term deals. Customers access a preferential rate for two years or five years and then move on to a higher standard variable rate. Those with active lenders can quickly and easily move to another short-term deal with their existing lender or switch to a different lender.
After the financial crisis, the FCA tightened the mortgage affordability rules. This was the correct response, but it created thousands of mortgage prisoners. If they tried to switch to a lower rate with a different lender, even if they were up to date with their payments, they would be told that they did not pass the new test and could not afford to pay a lower monthly rate. I emphasise that they were told that they could not now afford to pay a monthly amount that was significantly smaller than the one they were in fact paying.
Mortgage prisoners ended up stuck on a high standard variable rate, which is now between 8% and 9%, around four percentage points above what customers who could access fixed rates from active lenders were paying. This created two problems for mortgage prisoners. They are paying high rates, and so are more likely to struggle to make their payments, and they have no way of gaining certainty over their mortgage payments for the next two or five years.
The largest group of mortgage prisoners are former Northern Rock customers. After nationalisation in 2007, they were placed in a government-owned company run by UK Asset Resolution. When returning these mortgages to the private sector, the Conservative Government could have sold these mortgages to active lenders who would offer them a fair deal. However, the Conservative Government did not do that. They sold the mortgages on to non-active lenders and vulture funds, with the consequences which we now see. It is not as though the Government had not been warned about the problem. The risk to the customers was clearly identified.
In January 2016, the noble Lord, Lord McFall, wrote to the Treasury, UKAR and the FCA, highlighting that:
“Many of … those affected by these sales, will be mortgage prisoners and will be unable to switch lenders”.
He told the Government that the customers affected by these sales should be protected, offered a fair deal and given access to fixed rates. He warned that:
“Given the prospect of rising interest rates it is important that all mortgage customers are given the opportunity to achieve certainty over their payments by accessing a fixed rate”.
He told the Government that he was
“concerned that some customers affected by these mortgages sales … will not be offered reasonable fixed mortgage rates”.
UKAR responded that returning these mortgages to the private sector will mean that there will be
“the option to be offered new deals, extra lending and fixed rates should become available”.
However, this requirement was not written into the contract when mortgages were sold to vulture fund Cerberus. The BBC has reported that UKAR now claims to have been misled by Cerberus. A UKAR spokesman told the BBC’s “Panorama” that Cerberus had the ability to lend to the former Northern Rock customers and that UKAR believed that Cerberus intended to do so. It said:
“The reply to Lord McFall sent on behalf of the UKAR board of directors was based on information presented to UKAR and the board had no reason to disbelieve this at that time”.
However, the UKAR board did not put these terms into the contract of sale. The mortgage customers were left unprotected by UKAR’s incompetence, naivety and neglect.
Consumer champion Martin Lewis lays responsibility for the treatment of mortgage prisoners with the Government. He said that the Government
“have sold these loans to professional debt buyers who do not offer mortgages and left these people in these types of mortgages, which have been too expensive, crippled their finances and destroyed their wellbeing”.
It was at best very naive of the Government and UK Asset Resolution to think that a vague aspiration from a vulture fund such as Cerberus was sufficient.
Everyone must now acknowledge that the Conservative Government failed to protect these mortgage prisoners. They could have sold them to active lenders, but they chose instead to sell them to unregulated vulture funds. We need to understand why the Conservative Government made these decisions and why they ignored the risks, and we need to understand the ultimate impact on mortgage prisoners. The inquiry proposed by this Bill would examine the circumstances around the sale and the role of the Treasury and UKAR.
FCA supervision and policy also contributed to the harm caused to mortgage prisoners by trapping them within their existing lender but failing to intervene to ensure that they were treated fairly. In 2019, after years of inaction, the FCA finally introduced a modified affordability test, which enabled lenders to use a more proportionate affordability assessment when offering new mortgages to mortgage prisoners, but this did not work. The FCA found that
“Lenders have had a limited appetite”
for helping mortgage prisoners to switch, using the modified affordability test. In fact, only 200 mortgage prisoners were able to use this escape route.
There is also no evidence that the introduction of the consumer duty has had any benefits for mortgage prisoners. The FCA says that it has done all that it can with its existing powers, but it has not helped. For example, it allowed TSB to penalise the mortgage prisoners in its Whistletree brand by offering them higher rates than those offered to other TSB customers. I have contacted the Serious Fraud Office asking for an investigation into the actions of part of the Co-operative Banking Group: when it increased the SVR, it appears to have misled customers about an increase in the funding costs of their mortgage.
I now turn to the question of the regulatory perimeter. In 2009, the previous Labour Government proposed expanding the regulatory perimeter to include the new activity of managing a mortgage. They had identified the risk of mortgages being sold to unregulated firms such as hedge funds and private equity firms, and that this had the potential to cause detriment to borrowers. Andrew Bailey, now Governor of the Bank of England, told the Treasury Committee in 2020 that there was a population of mortgage prisoners who would not benefit from the FCA’s proposals and that expanding the FCA’s regulatory perimeter was the only way that the regulator could conclusively address the question of mortgage prisoners. He was right. However, after Mr Bailey left the FCA, the regulator had a change of heart and claimed that there was no need to expand the perimeter. The Conservative Government also rejected the proposal of the APPG on Mortgage Prisoners to expand the perimeter.
An inquiry is urgently needed, as the situation of mortgage prisoners gets worse every month. After the failed mini-Budget and the rise of interest rates, mortgage prisoners are now paying rates of between 8% and 9%. The campaign group UK Mortgage Prisoners has told me that firms such as Landmark, Rooftop and Heliodor have been quick to seek repossession orders.
Data from the FCA suggests that you are around 10 times more likely to be repossessed if you are a mortgage prisoner. This campaign group has dealt with many harrowing cases of suicide, or attempted suicide, mortgage prisoners struggling to eat or heat their homes, the children of mortgage prisoners suffering and mortgage prisoners with cancer enduring miserable final years while they wait for help. The inquiry will review and assess the level of harm caused to mortgage prisoners. No fault should be attached to mortgage prisoners themselves. They took out a mortgage with a fully regulated high street bank and found their mortgages transferred to inactive lenders and unregulated entities, which did not have to treat them fairly.
The LSE report on the situation is 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 inquiry will have the power to propose solutions to help current mortgage prisoners and prevent future generations of them being created. The LSE report, which was funded generously by Martin Lewis, put forward a number of solutions, including greater access to advice and government loans and guarantees along the lines of the Help to Buy scheme. The APPG on Mortgage Prisoners also put forward solutions, such as capping SVRs and an entitlement for all mortgage prisoners to access fixed rates, as well as changes to the FCA guidance concerning interest-only mortgages.
The Labour Party voted for this cap in your Lordships’ House and the Bill was amended accordingly. The amendment was removed by the Tories in the Commons. Despite having numerous meetings with several Ministers and Economic Secretaries over the 16 months leading up to the election, the Conservative Government did not provide Martin Lewis with a full response to his LSE report or the other solutions put forward by the APPG.
The excellent Library briefing for this debate notes that Martin Lewis wrote to the Chancellor in July
“asking for the new government to respond to the LSE reports”.
It quotes him as saying that
“the ‘financial, mental and physical toll on those trapped’ as mortgage prisoners had led to ‘repossessions, hardship and, terribly, suicide’. At the time of writing”—
six months on—
“the government has not publicly responded to the letter”.
I hope the Minister will tell us when the Government will respond substantively to the LSE report.
We need an inquiry so we can allocate responsibility and examine mistakes within government and regulators that caused the very bad situation for thousands of mortgage prisoners. We need an inquiry to identify and correct the failures of the regulators and correct any miscarriages of justice which have occurred. Most of all, we need an inquiry to develop and implement solutions to help the current generation of mortgage prisoners stay in their homes and stop them being exploited by vulture funds. I beg to move.
The Earl of Lytton (CB)
My Lords, I apologise to the noble Lord, Lord Sharkey, and to the House for being a few seconds late, due to a power failure on the rail network. I welcome the opportunity to participate on his Bill and I thank the noble Lord for his persistence.
Seemingly, the FCA’s response to him does not recognise his definition of mortgage prisoner. In my view, that is mere semantics, serving only to avoid addressing the problem. The key issue is whether the Government’s policies lead to circumstances that prejudice home owners as mortgagors. I support the noble Lord because it is clear that the interrelated nature of our financial and property sector is not being considered in the round. Whatever the reasons—out of scope, not a priority or too difficult—I share his view that this simply is not good enough.
The largest number of people trapped by the mortgage situation are leaseholders caught up in the building safety crisis, about which I have spoken a number of times before. Hundreds of thousands of them cannot sell or move on. Seemingly, the FCA does not recognise their existence as mortgage prisoner category. At its root, this is a combination of deregulation without effective oversight, lax enforcement without any meaningful sanctions and a propensity among developers and constructors to take the least onerous approach in a race to the bottom on quality and cost cutting, using untested construction techniques and inappropriate materials and failing to meet even the construction standards of 60 years ago.
I refer to the cases of two correspondents who have come to me recently with their accounts. The first narrowly avoided becoming a mortgage prisoner only because he was able to find an additional £10,000 to cover the tougher valuation terms of a new mortgage lender. The existing lender had proposed 70% higher monthly interest payments and a £10,000 higher arrangement fee simply for a renewal. The building is constructed using Panablok, a system for buildings up to 10 metres high, using a structural panel with a thin cementitious outer layer over a combustible inner core—a material described by some experts as “solid petroleum” such is the fuel load it presents in the event of fire. Fire risk assessments identified significant damage to parts of these panels, meaning that portions of the protective skin are missing. The system of dry lining finishes internally, which is integral to its basic fire compliance in the first place and poses an almost inevitable risk of damaging the brittle encasement layer of the panel. Accordingly, the rating of the building is significantly and adversely affected.
Under PAS 9980, I am told that it is deemed disproportionately expensive to replace the panels with a non-combustible alternative, even though a building of that height should never have been constructed with that system in the first place, because it is much higher than the 10 metres for approved use. Even worse is that the panels have a service life of about 60 years. Latent hazards and inappropriate use apart, this is a remarkably limited lifespan for a structural element in a modern residential building. Yet, this underpinned the sale of flats on 250-year leases—four times the likely economic building life. He asks me if this amounts to mis-selling. I ask the Minister the same question. High ongoing insurance costs, and the virtual impossibility of changing a mortgagee or averting any future and potentially catastrophic change in mortgagee approach to risk, seem permanent features. For other less well-funded leaseholders, it is much more serious. This is a trap which makes their home their prison.
I am afraid the second case is a sadder tale altogether. It concerns a Mr Crawford Wilson—who has allowed me to refer to him by name—who came to see me last year. He told me that in 2008, he bought an investment flat in Chelmsford built by Barratt, with a mortgage for 10 years via Mortgage Express. That provider failed in the wake of the financial crisis and was scooped up by UKAR. At the end of the mortgage term in 2018, the mortgage could not be renewed with any provider, despite his ability to make repayments, mainly because the building was found to have cladding and compartmentation issues and was thus caught up in the post-Grenfell building safety crisis. Pleas to the Levelling Up Secretary went unheeded. Repossession proceedings ensued and were effected in 2021. Hyalite, the firm to which UKAR transferred the relevant loans, eventually sold the flat in 2024 without an EWS1 certificate—which would normally be necessary for such a sale to proceed—for a forced-sale sum 43% lower than the price originally paid in 2008. Mr Wilson is now being pursued for bankruptcy for a large shortfall, a sum substantially enhanced by the generous costs of administering the debt.
I am indebted—as the noble Lord, Lord Sharkey, is—to the Library of your Lordships’ House, not only for the briefing on this Bill but for digging out the 2010 Budget Statement that included the following:
“The Government today announces its intention to integrate two of its wholly owned companies, NRAM and Bradford & Bingley plc, under a single holding company. The integrated business will be committed to providing excellent customer service”—
please note—
“leading arrears management and efficient operations. Both companies will remain as separate legal entities under the new holding company, each with its own balance sheet liabilities and government support arrangements. The Government believes this is the optimal solution to maximise value for the taxpayer and to create a solid platform for the orderly management of both companies’ mortgage books”.
There is absolutely nothing here about protecting innocent borrowers from foreseeable financial ruin. There seems to have been little understanding of the spreading contagion or assessed predictable outcomes for borrowers following the financial shock. Subsequently, the way government responded to the risks from the building safety crisis following the Grenfell fire arguably made things worse for far too many of them.
I put it to your Lordships that the case made by the noble Lord, Lord Sharkey, for a public inquiry to delve into the thinking and policies behind this whole area of mortgage lending is incontestable. Why is it that great departments of state appear to be unconcerned with the financial welfare of the citizen and apparently ignorant of the effects that their policies visit on society at large—and, for that matter, of the wider economic consequences for whole market sectors? In addition, what on any normal measure of their failure to understand, in terms of cross-departmental thinking, the consequences of other departments’ poor oversight? This does not meet the most basic functions of governance in mature and democratic nations, particularly in respect of protecting consumers and avoiding hazards. I am glad to note that this Government are committed to change from the past. Let us do this before the next disaster again leaves Ministers uselessly wringing their hands.
The Lord Bishop of Chelmsford
My Lords, I want to begin with a confession: I did not know much about the scandal of mortgage prisoners until just a few weeks ago. It surprised me how long this has been left unresolved. I felt compelled to speak to the plight of mortgage prisoners because, when a group of people are marginalised and suffer due to institutional failures, it is important that they are not forgotten and that the injustice is put right. So I thank the noble Lord, Lord Sharkey, for bringing this legislation forward, and I am grateful to everyone who is contributing today. We may well be a small group in this debate but it is no less significant because of that.
Mortgage prisoners are trapped in a set of circumstances that afflicts their lives. Excessive interest payments on their mortgage, financial stress for their families, powerlessness to change their circumstances and their lack of choice compared to most borrowers—all in the context of the cost of living crisis—leave many struggling to afford their homes. This is also a crisis not of their own making. It is reasonable to believe that home ownership would lead to further stability, yet many mortgage prisoners face a perilous fate, with their hopes shattered and lives turned upside down.
There is no legal definition of a mortgage prisoner. The FCA defines them as closed book borrowers who are unable to change to a new mortgage deal despite being in a position where they would benefit from switching if they met lenders’ risk appetite. This definition captures around 47,000 mortgage prisoners but thousands more are excluded because they are either in arrears, near the end of their mortgage term or already paying close to market rates. If we take this broader definition, there are possibly more than 200,000 mortgage prisoners still left in the UK, although the precise number cannot be estimated without the Treasury releasing the data.
The mortgage prisoner problem emerged from the financial crisis. For some, their misery has never ended, starting with the collapse and eventual bailout of Northern Rock and Bradford & Bingley. It was not meant to be this way. Northern Rock was an AAA lender and regarded as one of the largest and safest banks, with a fast-growing national presence that had roots firmly tied in the north-east. Once Northern Rock collapsed, the Government took over and later resold those mortgages back into the private sector, but without written assurances that customers would be able to access the remortgage market. A small proportion were bought by active mortgage lenders but most were sold to closed book lenders, such as Heliodor Mortgages—an entity that none of us could borrow from but which exists solely to serve former Northern Rock customers. To give a sense of how dissatisfied these customers are, every one of the 134 Trustpilot reviews of Heliodor is one star, the lowest possible rating.
This situation has been exacerbated by the increase in interest rates over the past few years. As the Bank of England raised the base rate 15 times in two years, the standard variable interest rates paid by mortgage prisoners shot up. Other borrowers can avoid paying SVRs by switching to a fixed-rate mortgage or a tracker mortgage. The problem for prisoners is that they cannot switch and are at the mercy of the lender.
I was for obvious reasons particularly sorry to hear about the terrible case of the gentleman in Chelmsford to whom the noble Earl, Lord Lytton, referred—I think it was a Mr Wilson. I want additionally to read briefly some testimonies of mortgage prisoners, which Martin Lewis, who has already been mentioned, has gathered on his Money Saving Expert website. One said:
“Being a mortgage prisoner has been hell to me, you worry about losing your home, you can’t plan on starting a family and moving forward with your life”.
Another said:
“It cannot be fair or reasonable to transfer a mortgage to an inactive lender, hike up the”
standard variable rate
“and make it impossible ... to find another deal”.
Although the market is meant to deliver choice, it is broken if consumers are unable to switch because their mortgages have been sold to investment firms that are not authorised to make new contracts.
Mortgage prisoners deserve our attention. Many have suffered enormously already. Some are trapped in paying interest-only mortgages and with little equity left in their homes. In most cases, families cannot easily move elsewhere when they have young children or strong ties to their localities. Many are unable to cope with the high interest payments and are now in arrears, which narrows their options even further. This situation is a consequence of the way in which government sold the mortgages of collapsed lenders back into the private sector, as well as the failure to take proper responsibility since then; that is why I support the proposal in this Bill to set up a public inquiry to investigate the issue.
The LSE has advised that all closed book borrowers should be offered comprehensive advice. Other suggestions include equity loans on the model of Help to Buy and a government guarantee for active lenders to offer prisoners new mortgages. Clearly, this is a complex issue, but, if a public inquiry can lead to decisive action to set these mortgage prisoners free, it would draw a line under the scandal, which has been going on for far too long and amounts to a deep injustice.
Baroness Bennett of Manor Castle (GP)
My Lords, it is a pleasure to follow the right reverend Prelate the Bishop of Chelmsford, who really cut to the nub of this issue and the reason for this Bill. This is a case of extreme, long-term injustice in which people suffer through absolutely no fault of their own. The fault lies with the failure of the financial sector, the regulators and the Government to take action.
The speech from the noble Earl, Earl Lytton, was particularly powerful in illustrating the way in which failures in the financial sector interact with gross failures of regulation in the building sector. Some people are almost literally being crunched in the middle between those two situations.
I commend the noble Lord, Lord Sharkey, on bringing this Bill before us and being a dedicated, long-term campaigner on behalf of mortgage prisoners; he gave us a clear explanation of the issue, which I will not repeat. I acknowledge that I have acted as a modest supporter of the noble Lord since the passages of the Financial Services Act 2021 and the Financial Services and Markets Act 2023. In that modest supporting role, I went with him to the Treasury with some of the victims affected—the mortgage prisoners themselves. I have to note that, as we heard from the noble Lord, at that meeting, we heard the testimony of just how much this has destroyed some people’s lives; indeed, we have seen some tragic cases of suicide.
However, I am afraid that what also came through from that meeting was the sense that the Treasury really did not grasp the issue. That makes a powerful case for the Bill before us today and for a public inquiry in order to get the full understanding. We have the excellent LSE/Martin Lewis report but relying on academics or on someone who is, after all, just an ordinary member of the public to explain things is really not the right place to be in this great systems failure case.
The timing of this debate is interesting. We are talking about an extreme case of abuse of consumers in the all-too-often predatory financial sector. We are seeing scandals strike again and again, and innocent consumers are the victims. It is concerning that, just yesterday, we saw the unexpected resignation of the head of the UK Financial Ombudsman Service amid what has been described as a
“major review of the consumer redress system in the financial services sector”.
The Financial Times reports that she was
“under pressure to take a less consumer-friendly approach”.
We are told that industry executives complained that she was too much on the side of consumers. The head of the consumer group Fairer Finance is quoted in the Financial Times as saying:
“It may well be that she is quitting in protest at the direction of travel … perhaps the strongest signal yet that the Treasury is serious about watering down consumer protections”.
The context of the Bill provides a real opportunity for the Minister and the Government to signal that that is indeed not the case. Accepting the Bill would be one way of sending that signal. We are, of course, in
“the fraud capital of the world”.
as the head of UK Finance said. Surely, the Government should be more concerned about the fate of consumers, given what we have heard today.
I have one final thought. An article in the Express newspaper on 22 January cited the FCA’s figure of 47,000 mortgage prisoners. The story reported that:
“The Economic Secretary to the Treasury has promised to look into these latest proposals”,
those proposals being those of the LSE and Martin Lewis. The signal here to mortgage prisoners from at least one media source is that are going to see progress; they will see genuine reaction from the Government. I can only offer my hope that we will hear something positive today for all the people who read that story and had, after so many years of suffering, a little dash of hope.
Lord Altrincham (Con)
My Lords, I begin by recognising the work of the noble Lord, Lord Sharkey, in bringing forward the Bill, and bringing this issue to this House on multiple occasions on behalf of thousands of families who are affected by this issue. I also commend his efforts in his role as co-chair of the APPG on Mortgage Prisoners.
I declare my recent interest as a director of the Co-operative Bank, which has been mentioned, and indirect involvement in the events of 2008 and 2009 that saw the creation of UK Asset Resolution, which in turn sold on the mortgage books that concern the Bill. The Government were able to sell on the mortgage books because UK domestic mortgages were, for the most part, very secure. So many issues flowed from the financial crisis that there can be confusion as to the source of the solvency and liquidity problems, but for the large part, domestic mortgages were well managed, with low defaults, and that includes Northern Rock, which we just heard about.
Mortgage prisoners are individuals and families unable to secure better mortgage deals due to various factors, often through no fault of their own. Indeed, many endure financial hardship and live in fear of rising interest rates. This problem arose from a mixture of poor credit quality, pricing and inertia. Typically, mortgage prisoners are unable to switch mortgages to a better deal even if they are up to date with their payments. Most mortgage prisoners have a mortgage in a closed book of an inactive firm.
These mortgage borrowers were much more likely to have got a mortgage without proof of income or with an impaired credit history. They still, even today, have relatively high loan-to-value ratios after many years of house price inflation. They often have unsecured debt as well. Many have interest-only mortgages with no repayment plan. Ultimately, they tend to have to have higher risk characteristics than borrowers with active lenders.
The problem of mortgage prisoners is well documented. Mortgage prisoners are primarily a legacy issue stemming from the 2008 financial crisis and subsequent regulatory changes. Some lenders were forced to deleverage and they sold mortgages to third parties. They were under regulatory obligation to do so. Additionally, a significant number of mortgage prisoners are tied to inactive or unregulated lenders. These lenders do not offer new mortgage products, thereby leaving borrowers with few options to escape high rates even if they have a strong payment history.
The FCA implemented stricter affordability rules under the mortgage market review of 2014. Those changes were designed to prevent reckless lending and ensure that borrowers could afford their mortgages. Although the reforms were necessary to stabilise the market and were widely thought to be an appropriate regulatory response, it is understood that they may have may have inadvertently trapped some home owners into high interest deals.
I fully acknowledge the challenges these families face and share their frustration at this very long-running situation but I do not believe that an inquiry into the events surrounding the creation of mortgage prisoners, their consequences and any other relevant matters is necessary. That does not mean that inquiries are not important in exceptional circumstances. However, in this instance, an inquiry risks delaying meaningful progress, misallocating resources and offering little in the way of new insights.
Some progress has been made. The FCA has relaxed affordability checks for mortgage prisoners, allowing lenders to assess applicants based on their payment history rather than rigid affordability criteria. Under the previous Government, in 2019, the FCA introduced modified mortgage assessment criteria in an effort to allow certain groups of mortgage holders to switch to better deals. Inactive lenders and unregulated firms had to inform their mortgage holders of the possibility of moving elsewhere.
We have emphasised the role of the FCA in resolving this issue and have publicly acknowledged the challenges faced by mortgage prisoners. There were ongoing discussions about how to how to support borrowers trapped with inactive or unregulated lenders. We explored options to transfer these mortgages to active lenders or create mechanisms that allowed borrowers to access competitive rates. While there is more work to be done, the mechanisms for addressing the problem are already in place. Launching an inquiry risks diverting attention and resources away from those practical efforts.
The noble Lord, Lord Sharkey, has in the past proposed a price cap, and that could still be a way forward, perhaps by asking the banks to agree a price for a higher rate borrower and then allow the price to be a cap on any transfer—ideally, of course, at a competitive lower price. The FCA could, again, ask companies to write to mortgage holders with good credit history to jog them into applying for a standard mortgage, because there is inertia in this problem as well.
To conclude, an inquiry may seem constructive, yet it is a lengthy process and can often take months, if not longer, to complete, and requires significant resources. We do not want to risk delaying progress. Targeted interventions can provide relief to those affected without requiring an inquiry. By focusing on practical measures, we can ensure that resources are used efficiently and effectively. The previous Government understood the difficulties faced by borrowers who are not able to switch to a new mortgage deal. We continue to work with the FCA and the sector on this issue and carefully consider practical and proportionate solutions put forward. We hope that the present Government will do the same.
The Financial Secretary to the Treasury (Lord Livermore) (Lab)
My Lords, it is a pleasure to speak in this debate. I begin by congratulating the noble Lord, Lord Sharkey, on his Bill and on his opening speech today. I thank him for bringing this issue to the attention of your Lordships’ House, not only through this Bill but through his campaigning over recent years.
The Government recognise the seriousness of the issue raised by this Bill—the challenge facing borrowers who have been unable to switch to a new mortgage deal despite keeping up to date with their repayments. While they constitute a small proportion of mortgage borrowers, for those affected the impact has been all too real, and I commend the noble Lord, Lord Sharkey, for his work to highlight their situation.
The Bill has one central provision; to establish a public inquiry into the events surrounding the creation of the group of borrowers commonly referred to as “mortgage prisoners”. The Bill also contains terms of reference for that inquiry. I will seek to address three key points. First, the origins of this issue, and why the Government’s assessment is that the right processes were followed in relation to this group following the financial crisis. Secondly, the case for a public inquiry and why the Government do not believe that it represents the right approach. Thirdly, support to those affected and the action the Government are now taking.
The vast majority of the borrowers we are discussing today took out mortgages under less stringent lending conditions prior to the financial crisis. Many of these mortgages were held with either Northern Rock or Bradford & Bingley, which were subsequently nationalised by the Government to protect financial stability. In 2010, they were transferred to a public body known as UK Asset Resolution, which was unable to offer new deals to borrowers because of state aid rules. Between 2014 and 2021, UK Asset Resolution sold these mortgages back to the private sector. Many were sold to so-called inactive lenders that did not offer new mortgage deals, leaving some borrowers paying costlier standard variable rate tariffs. Those borrowers were, and in some cases still are, unable to switch to another lender because they do not meet modern lending criteria. The terms of reference for the inquiry proposed by the Bill seek to investigate the process by which these mortgages were sold back to the private sector.
The Government recognise the challenges faced by these borrowers and the very real impact this process has had on them. However, our assessment is that the correct protections were put in place at the time and that all relevant Financial Conduct Authority rules were followed.
Specifically, bidders were prevented from changing a customer’s existing terms and conditions. Rules ensured that all mortgages were either administered by a Financial Conduct Authority regulated entity or made in accordance with Financial Conduct Authority regulations. Further protections were included with each subsequent sale, some of which followed recommendations from Parliament.
All types of lenders, including “active” lenders who offered new loans, were invited to take part in this process, but interest from active lenders was very limited and no viable bids were put forward in any of the sales. This likely reflects the fact that most of the loans involved were outside of most active lenders’ risk appetite following the financial crisis. The Government have studied this issue carefully but we remain of the view that no further action should have been taken at the time to encourage only active lenders to take part, particularly given the importance of delivering value for money to the taxpayer.
The Bill before your Lordships’ House proposes a statutory public inquiry to explore these issues in greater depth. The noble Lord, Lord Sharkey, has spoken powerfully about the situation faced by affected borrowers and his desire to fully understand the process which resulted in their inability to obtain a new mortgage deal. The Government understand and respect this argument. However, we believe the scrutiny provided to date has produced the necessary information in relation to these events. This includes the two reports published by the National Audit Office covering various aspects of the sales process and, separately, a Public Accounts Committee report into one of the biggest asset sales. The previous Government also provided relevant disclosures to Parliament on the completion of each sale.
The Government agree with all those who wish to see these issues fully and transparently investigated. We will continue to work with regulators and industry to ensure that the issues and specific proposals raised by the report mentioned by the noble Lord, Lord Sharkey, are properly considered. However, given the volume of information already in the public domain, we do not believe a further inquiry would provide any significantly new information or additional support to those affected.
Finally, on the support currently available to borrowers, there are protections in place for vulnerable mortgage borrowers. Financial Conduct Authority rules require firms to engage individually with their customers to provide tailored support. Lenders have been allowed to waive certain regulatory requirements when assessing whether a new mortgage deal is affordable for borrowers who are up to date with their repayments. This applies to the cohort of borrowers we have been focusing on. Mortgage lenders, including inactive firms, are also now subject to the consumer duty, which ensures that firms prioritise fair treatment and good outcomes for their customers.
I fully understand that some noble Lords wish us to go further. I assure them that we will continue to consider this issue closely by listening to those borrowers affected and engaging with regulators, the industry and other key stakeholders, including the noble Lord, Lord Sharkey, about the processes currently in place.
The Government recognise the impact felt by this group of mortgage borrowers. Their concerns have been ably highlighted by the noble Lord in this debate, as well as by other noble Lords from across the House. The Government will continue to listen carefully to their concerns and consult with others who have an interest in this issue, not least those households directly affected.
However, we are unable to support the Bill before your Lordships’ House today. Our assessment is that the correct process was followed when these mortgages were sold back to the private sector in the years after the financial crisis. We believe that the necessary information has now been put in the public domain, both as evidence submitted to Parliament by the previous Government and through other external analyses, including from the National Audit Office. Most importantly for the households affected, we are confident that significant protections are in place to protect vulnerable mortgage borrowers.
Although I appreciate this will not satisfy the noble Lord’s demands, I hope he will continue to work with the Government, as he has done throughout his campaign on this issue.
Baroness Bennett of Manor Castle (GP)
The noble Lord did not refer to my questions about the UK Financial Ombudsman Service. I understand that this is a new situation. Perhaps he could write to me about that.
Lord Sharkey (LD)
My Lords, I thank everybody who has spoken so very powerfully about the plight of the mortgage prisoners. It is important to make one point about the mortgage prisoners: they are like everybody else in every other respect. They are not a delinquent or feckless part of society. They are not reckless. What befell them could have happened to a holder of a mortgage from any company that suffered the kind of damage that Northern Rock did during the crisis. No special characteristics of the mortgage prisoners somehow make them worthy of less attention or of getting worse deals.
I also note that the noble Lord, Lord Altrincham, did not entirely rule out a cap on SVRs. That is encouraging and perhaps the precursor to a longer situation.
I also acknowledge the Minister’s invitation to remain involved with discussions about the plight of mortgage prisoners. This is an ongoing, terrible situation, and I do not think anybody disagrees with that. Before I get to the real question that arises from this, I should ask again when we can expect a reply to Martin Lewis’s letter to the Chancellor. I am prepared to give way if the noble Lord will tell me immediately.
Lord Livermore (Lab)
As I tried to indicate in my remarks, we will continue to engage and look at that report, but I cannot guarantee a reply on any particular timescale.
Lord Sharkey (LD)
I close by reminding everybody that this is a current situation. Lots of people are suffering very badly indeed because of it, and it is not getting any better. So I close with Lenin’s favourite question: what is to be done? I beg to move.