Financial Services Bill

Lord Stevenson of Balmacara Excerpts

Committee stage
Wednesday 10th March 2021 Grand Committee

Moved by

[Lord Stevenson of Balmacara]

99: After Clause 40, insert the following new Clause—
“Standard Variable Rates: cap on charges for mortgage prisoners
In section 137A of the Financial Services and Markets Act 2000 (the FCA’s general rules), at end insert—“(7) The FCA must make rules by virtue of subsection (1) in relation to introducing a cap on the interest rates charged to mortgage prisoners in relation to regulated mortgage contracts, with a view to securing an appropriate degree of protection for consumers.(8) In subsection (7) “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 type 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.(9) The rules made by the FCA under subsection (7) 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. (10) In subsection (9) “Standard Variable Rate” means the variable rate of interest charged under the regulated mortgage contract after the end of any initial introductory deal.(11) The FCA must ensure any rules that it is required to make as a result of the amendment made by subsection (7) are made not later than 31 July 2021.””Member’s explanatory statement
This new Clause would require the FCA to introduce a cap on the Standard Variable Rates charged to consumers who cannot switch to a different lender because of their characteristics and who have a regulated mortgage contract with either an inactive lender or an unregulated entity.

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

My Lords, financial regulation has to ensure that consumers are well protected. It is with this principle in mind that I move the amendment in my name. I thank the noble Lords, Lord Sharkey and Lord Holmes of Richmond, for their support. We have also had an aperitif, in the sense that Amendment 127 in the name of the noble Lord has already been debated in an earlier group, although its main focus is aligned with the amendments in this group and I look forward to his comments.

The recent report of the UK Mortgage Prisoners group referred to by the noble Lord, Lord Holmes of Richmond, when he spoke on the earlier group of amendments, is graphic and shocking. It makes the case that the Government need to come forward promptly with a fair deal for the 250,000 or so mortgage prisoners who have been stuck for some 10 years paying higher interest rates than they needed to. The All-Party Parliamentary Group on Mortgage Prisoners has kept this issue alive, having been contacted by hundreds of mortgage prisoners who describe the worry and stress that comes from being trapped as they are. This is a shameful episode.

I am grateful to the Economic Secretary to the Treasury for meeting my noble friend Lord Tunnicliffe, myself and others last month. The Economic Secretary told us that he has a keen interest in settling this matter. He explained that there are difficulties including moral hazard, which means that it is not easy to sort. However, while the issue continues, considerable injustice is occurring. The Government may well be right to say that the SVRs currently paid by mortgage prisoners are only a little higher on average than the SVRs of other lenders but, particularly during the pandemic, small differences matter. In any case, the assertion that the Government make that the differences are rather minor does not ring true in the light of the report from the all-party group. Its case studies, which include nurses, teachers, members of the Armed Forces and small business people, suggest that, for all those who are trapped and struggling with the consequences of the Government’s decisions when money is tight and margins matter, these things need to be sorted.

Surely the true comparison is that if mortgage prisoners were with an active lender and of course up to date with their payments, they would have access to a range of products to transfer to, which would give them a lower fixed rate for their mortgages. In the other place when this issue was discussed, the savings available were said to be in the order of £5,000 a year. That is not an inconsiderable sum. Why are these people being singled out for this penalty?

The problem also seems to be the inability to access the best market-matching deals, compounded by the fact that the prison effect is reinforced by the inability to prevent mortgages being sold off to so-called vulture funds, which are often unregulated. This matter has been left unresolved for far too long. The inability to seek out new deals and to limit costs is causing stress, and in some cases has caused families to lose their homes. As the Government have been involved throughout this process, is it too much to ask them to explain what the plan is, and what the timetable for resolving the incarceration of these prisoners will be?

In its recent report, UK Mortgage Prisoners says that it has put the record straight on what it calls a “Government made scandal”. It is for the Government to defend themselves on that charge. UK Mortgage Prisoners complains that the Government have “effectively ignored the issue” and that, where the FCA has intervened, it has done so in a limited and ineffective manner. Its asks seem very simple: an immediate cap on SVRs for closed mortgages; introducing a tailored mortgage product for those affected; giving credit to prisoners who have for a decade or more made overpayments; stopping penalty charges for any excess arrears; and adjusting credit ratings going forward. Those are five simple steps for 250,000 people whose lives have quite simply been blighted.

[Lord Sharkey (LD) [V]]

My Lords, I declare an interest as co-chair of the APPG on Mortgage Prisoners. Mortgage prisoners exist almost entirely because the Treasury made a terrible mistake when it sold the first tranche of former Northern Rock and B&B mortgages to an unregulated American vulture fund called Cerberus. Cerberus is the name of the multi-headed dog that in Greek mythology sits at the entrance to the gates of hell. That is not an inappropriate name, in view of what happened next.

Three things are needed to rescue mortgage prisoners. The first is to reduce immediately to comparable market rates the SVRs that they pay. The second is to make sure that transfers to much less expensive fixed-rate deals are properly available to them. The third is to make sure that new classes of mortgage prisoners cannot be created in the future.

Amendment 99, moved by the noble Lord, Lord Stevenson, to which I have added my name, deals with the first of those things. My Amendments 116 and 117 deal with the second and third. Amendment 99, as he has so clearly and forcefully explained, would protect the thousands of mortgage prisoners stuck paying high standard variable rates. It would introduce a cap on the standard variable rates paid by customers of inactive lenders and unregulated entities. That would provide immediate relief for thousands of mortgage prisoners, and could give space for longer-term solutions to be found. It would help mortgage prisoners who took out loans with a fully FCA-regulated high-street bank which were then sold on to vulture funds.

Money-saving expert and consumer champion Martin Lewis supports this proposal, and on Monday he released a statement saying:

“While the government chose to bail out the banks in the financial crisis, it has never bailed out the banks’ customers who were victims of that collapse. Mortgage prisoners have been left paying obscene interest rates for over a decade through no fault of their own. They have been completely trapped in their mortgages and unable to escape the financial misery it causes … Coupled with the devastating impact of the pandemic on people’s finances, urgent action is needed to prevent the situation from becoming catastrophic. The independent LSE report I funded has a cogent argument as to why an SVR cap isn’t a balanced long-term solution. 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. This would provide immediate emergency relief for 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.”


The Government will no doubt say that some mortgage prisoners are already paying rates lower than 3.5%, so rates do not need to be capped. But those sold on by the Government to vulture funds like Cerberus are paying high rates. In the package sold by the Government containing more than 66,000 mortgage loans, 52% were paying rates between 4.5% and 5%, and 37% were paying rates of over 5%, when the mortgages were securitised.

The Government could have set strict conditions when selling the mortgages on the interest rates which could be charged. But when they sold £16 billion of mortgages to Tulip and Cerberus, they imposed only a 12-month restriction on increases to the standard variable rate. These have long since expired and the chief executive of Tulip Mortgages told the Treasury Select Committee that the firm now had

“complete discretion to set the interest rate policy.”

On the sale to Heliodor, the Government claimed that the organisation which bought the loans would be required to set their standard variable rates by reference to the SVR charged by a

“basket of 15 active lenders”.

But when you read the details of the securitisation agreements for the mortgage loans sold, you will find that, actually, the Government have required the SVR to be set only at the level of the third highest of the 15 active lenders. This is absolutely critical, as the third highest SVR is actually 4.49%. The lowest SVR among those 15 active lenders is 3.35%, and the average SVR weighted by market share is 3.72%.

The latest and final sale of the Treasury-held mortgages was announced in February. The book was sold to Davidson Kempner Partners and Citibank, with funding by PIMCO. The Government said that the SVR was going to be charged by reference, again, to a basket of 15 active lenders, but there are no details about how this will work in practice. If it reflects the practice in earlier sales, it will not actually provide any protection to customers. The Government will also say that the FCA has changed the affordability test to enable mortgage prisoners to switch to a different lender. But the progress has been very slow, with only a very small number of lenders willing to use these new flexibilities.

The cap on the SVR proposed by this amendment would provide immediate relief to mortgage prisoners who have been overpaying for the past 13 years. It would protect all mortgage prisoners, including those who are unable to switch. It would give time for other solutions to help mortgage prisoners to be developed. The SVR cap would apply only to mortgages owned by inactive lenders and unregulated entities. It would have no impact on active lenders competing to attract customers.

The cap is supported by the campaign group UK Mortgage Prisoners, as the noble Lord, Lord Stevenson, said. Members of the group have stated that this amendment is the difference between feeding their children and themselves or continuing to rely on food banks. The Government created the problem of mortgage prisoners and it is their moral responsibility to rescue them from the significant detriment that many still face. I urge the Government to accept the amendment in the name of the noble Lord, Lord Stevenson.

I now turn to Amendment 116, which would extend access to fixed interest rates to all mortgage prisoners, enabling them to gain control and certainty over their monthly mortgage payments. When the time came for the nationalised Northern Rock and B&B mortgages to be sold by the Government back to the private sector, they could have pursued an approach which ensured that these customers were in fact protected. They could have sold them to active lenders or secured a commitment from purchasers to offer these new customers new deals.

The risk to these customers was identified. In January 2016, the noble Lord, Lord McFall, wrote to the Treasury, UK Asset Resolution and the FCA to say that the customers affected by these sales should be protected, offered a fair deal and given access to fixed rates. UKAR responded that, by returning these mortgages to the private sector,

“the option to be offered new deals, extra lending and fixed rates should become available”.

But this requirement was not written into the contract when mortgages were sold to funds such as Cerberus, with the BBC reporting that UKAR is now claiming to have been “misled” by Cerberus.

A UKAR spokesman told BBC “Panorama” that Cerberus had the ability to lend to the former Northern Rock customers and that UKAR believed that it intended to do so. They 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.”


At the very best, this is evidence of catastrophic incompetence. At worst, it is evidence that UKAR heartlessly pursued profit over care for mortgage customers.

Consumer champion Martin Lewis lays responsibility for the treatment of mortgage prisoners squarely 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.”

--- Later in debate ---

[The Minister of State, Cabinet Office (Lord True) (Con)]

My Lords, I acknowledge that the Government have a great deal of sympathy for borrowers who are unable to switch their mortgage, and we are committed to finding practical ways to help them. That is why we have been working closely with the FCA, and I will set out the action that it has taken.

In 2019, the FCA introduced a modified affordability assessment, which allows 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. As a result of this, inactive lenders have been contacting borrowers who have had difficulty with switching, setting out new options that may be available for them on the active market. I am pleased that a number of lenders, including Halifax, NatWest and Santander, have already come forward with options specifically for these borrowers.

More widely, we have taken steps to support those unable to make mortgage payments during the pandemic. Payment holidays have provided vital support for consumers, including those with inactive lenders, with over 2.75 million mortgage holidays granted since March 2020.

However, policy should be based on clear evidence. The FCA’s analysis found that customers with inactive lenders paid, on average, just 0.4% more than customers in the active market with similar characteristics. There has been comment in Committee on that figure. The FCA’s analysis also found that, of the 250,000 borrowers with inactive lenders, half were in a position to switch to a new mortgage even before any action from the Government. That illustrates one aspect of the diversity of this group.

On the 0.4%, I am aware that there are other estimates out there, including in a recent report, which has been referred to, published by the UK Mortgage Prisoners action group on 8 March, just a few days ago. Treasury officials have reviewed this analysis and noted that these figures seem to be based on surveys with small sample sizes. The comparisons are often inappropriate—for example, contrasting rates that many borrowers with active lenders would not even be offered. I hope that noble Lords will appreciate that this is a complex topic. We are, as I have said, committed to finding practical ways to help.

Amendment 99 seeks to cap standard variable rate mortgages for some customers. Data from the FCA suggest that the majority of borrowers with inactive lenders pay less than 3.5% interest. As I have already said, compared to those with similar lending characteristics, consumers with inactive lenders pay on average only 0.4% more than those with an active lender. This was also backed by the London School of Economics recent report on mortgage prisoners, noting that it does not recommend capping standard variable rates at a low rate. Capping mortgages with inactive lenders could have an impact on their financial stability, as it would restrict lenders’ ability to vary rates in line with market conditions. That would also be unfair to borrowers in the active lending sector, particularly those in arrears, who are paying a higher standard variable rate.

Amendment 116 seeks to provide new fixed interest rate deals for certain mortgage customers with inactive lenders. I have already set out the FCA’s work in introducing a modified affordability assessment and that a number of active lenders—household names—have come forward with offers. The FCA estimates that up to 55,000 borrowers could be eligible to benefit from the new modified affordability assessments. The Government will continue to monitor the situation and hope to see even more options available over the coming months. Enabling people to switch into the active market is the best way to help consumers secure new deals, and that is what we have been doing.

Amendment 117 would require active lenders to seek a borrower’s permission before transferring their regulated mortgage contract to an inactive lender. There are already a number of protections in place for borrowers, meaning that their mortgage cannot be sold on to an unregulated servicer and their terms and conditions cannot change as a result of the sale, so the benefit of explicitly seeking permission from the borrower is unlikely to help them any further.

It is required that all loans within the UK must be administered by a regulated entity, meaning that all customers will be able to benefit from consumer protections —for example, access to the FOS. The terms and conditions of a loan do not change upon sale, meaning that consumers will be treated in line with their original agreement even if their loan was sold to an unregulated entity.

As my noble friend Lady Noakes pointed out, the amendment would also risk disrupting the residential mortgage-backed securities market as it may prevent the effective securitisation of mortgages, where beneficial ownership of a portfolio of mortgages is transferred to a special purpose vehicle. Securitisation is a common way for active lenders to fund themselves, and disrupting the securitisation market would likely have a negative impact on the availability and cost of mortgage credit in the United Kingdom. For those reasons, I ask that the amendment be withdrawn.

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

My Lords, I thank those who have contributed to this debate for the various points they have raised. The noble Lord, Lord Griffiths, has it right: this is a complex and detailed issue and it delves down way beyond most people’s experience of how markets of this type operate. In those circumstances, we have a difficult choice as a Committee on how one might want to take this forward.

On the one hand, my noble friend Lord Griffiths is right that the end of the story is what is happening on the ground to people who have ended up in this situation through no fault of their own but as a result of government action. The Government therefore have to explain to the people of this country why, having created this problem, they do not feel that they have more than just a moral responsibility to see it resolved. On the other hand, I take absolutely the Minister’s point that, it being a complex issue and the Government having seen some action already happening, they remain committed to what he called finding a practical plan forward; I hold on to that. However, the complexity and the fact that this affects a relatively small number of people—although 250,000 people is not a small number in my terms—do not mean that we should simply allow the market to find the right balance between the commercial pressures of offering loans and the ability to service those loans and make a profit out of them from those who have limited resource. There is no doubt at all that, having said all that, there is obviously a pandemic issue as well.

Where does that leave us? I take hope from the fact that the Minister said that there is work on the way to try to take this forward. I recognise that it is a complex issue—indeed, I said so in my opening remarks. However, he must accept that the arguments made by myself but made in much more detail and with a much wider range of evidence by the noble Lord, Lord Sharkey, supported by the noble Lord, Lord Holmes of Richmond, suggest that this is more than just a complicated problem which needs to be bottomed out by working with the market. We need convincing that there is work going on that will result in a workable solution of benefit to those affected by this within a reasonable timescale, otherwise we will come back on Report with a better-drafted amendment—perhaps covering some of the points made by the noble Baroness, Lady Noakes, but not all of them—in a way that makes it clear that the Government cannot continue to let this settle itself. It has to be taken forward in policy terms otherwise too much damage will be caused. In the meantime, I beg leave to withdraw the amendment.

Amendment 99 withdrawn.

--- Later in debate ---

[Viscount Trenchard (Con)]

My Lords, I declare again my interests as stated in the register in respect of financial services companies. I am delighted to support Amendments 103 and 104 in the name of my noble friend Lady Neville-Rolfe. My noble friend is a champion of impact assessments and she speaks from experience. The impact of many financial services regulations on smaller firms has been very damaging. I mention just two examples. The unbundling provisions contained within the MiFID II directive, requiring asset management companies to pay separately for research, have been disastrous in their effect on smaller companies with interesting strategies, which have either been forced out of business or forced into mergers where their innovative strategies have not been taken forward. The effects have been less choice for customers and less coverage as a result of the significant reduction in the number of securities analysts, particularly those covering smaller and growth companies.

The effects were predictable, but ESMA ploughed ahead and the FCA acquiesced. It is small comfort now that ESMA itself realises that the unbundling provisions were a mistake, and may move to make changes, but much damage has been done. An impact assessment, such as recommended by my noble friend, would have avoided this.

I also mention the alternative investment fund managers directive. When I worked in Brussels as director-general of the European Fund and Asset Management Association —EFAMA—my French and German colleagues said that they did not think that the EU should move to regulate alternative funds; that was London’s market, and largely London’s alone. Furthermore, it was of interest only to professional investors, who did not need protection from investment risks. They thought that it would be wrong for the EU to try to regulate it. However, three years later, Michel Barnier, as Commissioner for the Internal Market, moved to introduce the AIFMD. Again we were overruled and reluctantly went along with it. An impact assessment might have encouraged the FSA to fight harder against it than it did.

For the reasons so well explained by my noble friend, I support her amendments and look forward to hearing the Minister’s reply.

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

My Lords, I am pleased to be part of this debate, which is narrow in some senses but has the capacity to reach quite widely. It is narrow in the sense that it has been framed through Amendments 103 and 104, which I broadly support, about the need to try and get more of an impact assessment model into the way in which we review the changes that may come through as a result of the return to the UK of powers previously exercised at EU level. It also raises much wider issues, which I will come to before I end my short contribution to this debate.

I am sure that the case made by the noble Baroness, Lady Neville-Rolfe, is about good government. Better regulation was always part of the argument she used when she was a Minister. I well remember the discussions we had across the Dispatch Box about intellectual property, in both primary and subsequently secondary legislation. The material on this was much enhanced by the good work done by her civil servants in bringing forward some of the issues raised and trying to give them a quantitative—not just qualitative—feel when the debates were organised. A lot of the work that they do on better regulation does not get properly recognised, and this is a good opportunity to pay tribute to it. As an example, I particularly enjoyed the annual work that I was often asked to do in relation to the setting of the national minimum wage, now the national living wage. It was always accompanied by a formidable document, created mainly I think by the Low Pay Commission but endorsed by civil servants. It went into every conceivable aspect of the way in which the setting of a minimum threshold for wages would, or could, affect the labour market, with particular reference to women and other low-paid groups in society. It was always a red-letter day in my diary when I saw that coming up; I knew that I was going to be given a very meaty topic to research, read up on and debate. I enjoyed the debates that we had on that.

While I say yes to the thrust of what is being said here, and recognise the benefits that will come from good impact assessments, properly debated, particularly in relation to the regulatory framework in the Bill, I wonder whether there is a slight irony here. The substance of what the noble Baroness is saying in her amendment is that better scrutiny of proposals brought forward for legislation—and, of course, for secondary legislation —would happen if there were better impact assessments. I say in passing, and in reverse order, that a secondary instrument is very much a creature of the primary legislation that has preceded it. It is not uncommon to find in SI impact assessments binary choices, usually not very helpful in detailed essence. The proposition set up in the impact assessment is often, “What would happen if this legislation did not go through?” and then “What will happen when it does go through?” In other words, if there is a change in regulations, you impact; no change and you impact the change. You do not get a range of options.