Financial Services Bill

Debate between Baroness Noakes and Lord Stevenson of Balmacara

Report stage
Wednesday 14th April 2021 Lords Chamber

[Lord Stevenson of Balmacara (Lab) [V]]

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.

[Baroness Noakes (Con)]

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.