Interest only - Don’t make us decide!
The UK FSA recently revealed that the Mortgage Market Review (MMR) will not apply an outright ban to interest only mortgages:
This seems a bit niche, I hear you say. So what ?
Well to some extent, you’d be right. But it does also re-raise the question of responsibility – something I last blogged about in March. This time however, as opposed to being a tug of war between the firm and the customer, the Regulator is chucked into the mix too. And it ends up with the bigger picture of ‘what is the point of regulation and how should it work ?’
It’s undeniably an age of acronyms, particularly in Financial Services in the UK. As well as the high profile schism of the FSA into the PRA and the FCA, the RDR (Retail Distribution Review) is looming large. Sneaking in alongside these is the MMR.
The MMR is driven by the FSA. I’m not going to numb you with the details. It’s all on the FSA website: http://www.fsa.gov.uk/pubs/discussion/dp09_03.pdf
The long and short of it is there are potentially big shifts on the way. One of the key areas under scrutiny is interest only mortgages (where you only repay the interest on the loan and at the end of the agreed term have to repay the whole amount borrowed – the ‘capital’).
Why interest only mortgages ?
Aha. Here is the responsibility aspect.
Let’s say I want a £100k mortgage. I don’t want to pay back much a month (as I can’t really afford to). In fact, if I went for a capital repayment mortgage and got the affordability properly assessed by a decent mortgage advisor, I’d probably be lucky to borrow £50k.
So I say I’ll definitely start making payments into an ‘unspecified savings vehicle’ and fully understand that at the end of the term I’ll be liable for the capital amount. Heh heh, yeah, whatever. I’ll worry about that later. Just let me buy my house please.
This might sound bad, but it was until recently more than possible.
So is it my fault ?
This is the bit I find interesting. Should I take this mortgage ? Even if I know that there is no ‘unspecified savings vehicle’ ? If it blows up in my face, is it my fault ? Or should MegaGlobalFlexiLoans4you.com not have let me have it ? That means it’s their fault, right ? They let me.
Flip the coin. If I am MegaGlobalFlexiLoans4you.com, I also want to know if I’m culpable. Should I have sold the loan ? What does my Regulator think ?
The FTAdviser article says that the Regulator will not be using the new regulations to either ban interest only loans or be prescriptive about the types of repayment vehicles which are acceptable.
It also suggests that some lenders wanted interest only loans banned, whereas some didn’t want this sort of prescription by a Regulator. So when the FSA said ‘OK then lenders, you decide’, using terms like ‘informed judgements’ and ‘very carefully’, lenders got a bit twitchy again. So what EXACTLY does the FSA want them to do here ?
If you’re not sure, you can get it wrong. And wrong means trouble…
Rules vs Principles (vs Responsibility)
The debate of rules vs principles is a common one in the compliance arena. But when you drag responsibility into it, the already muddied waters become even cloudier – as a firm, the Regulator won’t explicitly tell me up front what I can or can’t do. But they’ll decide afterwards whether we were right or wrong.
Here’s where rules, principles and responsibility meet. I guess what I’m saying is that if I want a mortgage, I should be honest about what I can afford to borrow and whether / when I can repay it. Issues such as terms, cost, repayment type will all fall into place.
If I’m a lender, I should act with integrity, check the borrower’s information and only lend what the borrower can realistically afford to borrow.
The Regulator can then review this process periodically and feel very pleased with the whole process, knowing that everyone is simply doing what they ought to be doing.
And the Compliance Departments… well, there’d be no need for those. Doh !