My Lords, if there is a Division in the Chamber while we are sitting, the Committee will adjourn as soon as the Division Bells are rung and resume after 10 minutes.
197: After Clause 65, insert the following new Clause—
“Duty of the FCA with regard to interest rates for mortgage prisoners
After section 137FD of FSMA 2000 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) must make new fixed interest rate deals available to mortgage prisoners who—(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 must specify rates for a range of loan-to-valuation 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 no later than six months after this Act is passed.””Member’s explanatory statement
This 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.
My Lords, I declare an interest as co-chair of the APPG on Mortgage Prisoners. I thank the noble Viscount, Lord Trenchard, for adding his name to my Amendment 197, which is a probing amendment to allow debate on the issue of mortgage prisoners. There are getting on for 200,000 mortgage prisoners in the UK, who are trapped with their current lenders. For eight years or so they have paid very high standard variable rates, now of around 7%, 8% or even more.
Mortgage prisoners exist because the Government sold their mortgages to vulture funds, which have been increasing their standard variable interest rates and refusing to offer mortgage prisoners new deals or access to fixed rates. The harm being caused to these mortgage prisoners is the direct responsibility of the Government; when the time came for the mortgages of Northern Rock and Bradford & Bingley customers to be sold back to the private sector, the Government could have pursued an approach that ensured that these customers were protected. They could have sold them to active lenders or secured a cast-iron commitment from purchasers to offer these customers new deals.
The risk to these customers was clearly identified. In January 2016, the noble Lord, Lord McFall, wrote to the Treasury, UK Asset Resolution and the FCA to highlight that many of those affected by the sales were mortgage prisoners who would be unable to switch lender. He warned:
“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. I am concerned that some customers affected by these mortgage sales … will not be offered reasonable fixed mortgage rates.”
UKAR responded that, in returning these mortgages to the private sector,
“the option to be offered new deals, extra lending and fixed rates should become available”.
My Lords, I am delighted to support Amendment 197, moved by the noble Lord, Lord Sharkey, and to which I have added my name. I served on the former Services Sub-Committee of the former European Union Committee with the noble Lord and have been impressed by his accurate understanding of, and thoughtful approach to, this and other financial issues.
The noble Lord explained the reasons for his amendment with his customary clear logic. I will not take up the Committee’s time by repeating them. I particularly endorse the introduction of a cap of 2% over the standard variable rate for mortgage prisoners. UK Finance has identified 195,000 borrowers from inactive lenders, of whom 47,000 have been identified as mortgage prisoners.
I welcome the FCA’s recent review of this problem and its review of the effectiveness of its regulatory interventions to remove barriers to switching. Recently, only a small number of borrowers have been able to switch from an inactive lender to a new deal with an active lender. I share the FCA’s hope that more mortgage prisoners will be able to switch their mortgage and I hope that the Minister will support this amendment.
My Lords, I rise briefly to offer Green support for this amendment and to agree entirely with everything that has been said thus far. I feel a sense of déjà vu all over again. I was just looking back at the comments I made in 2021, when, it is worth noting for the record, this issue of mortgage prisoners went to ping-pong: the House of Lords passed an amendment, and it went back and forth between the two Houses. Back then, we were talking about people suffering under high rates of 4% or 5%, and some were suffering with the vulture funds of 9%. As we have heard set out clearly, the situation has not improved but has got much worse, and we also have a cost of living crisis.
The noble Lord, Lord Sharkey, noted that Martin Lewis is now involved in this, with his crucial supporting research. What a state our country is in when everyone can feel a great sense of relief and hope because someone who is, after all, only a private individual has stepped in where Parliament has failed. Surely this is the stage where Parliament—or the Government—can step up and rescue people trapped in often terrible situations through no fault of their own.
My Lords, like the noble Baroness, Lady Bennett of Manor Castle, I recall our debates on this subject in 2021. Indeed, I think the amendment that the noble Lord, Lord Sharkey, has tabled is word for word the amendment he tabled on Report during the passage of what became the Financial Services Act 2021. It will not surprise the noble Lord that familiarity with it has not made me any warmer to the amendment.
As the noble Lord, Lord Sharkey, reminded us, mortgage prisoners derive from lending practices before the financial crisis. These mortgage borrowers were much more likely to have got a mortgage without proof of income or with an impaired credit history. They still have relatively high loan-to-value ratios, and they often have unsecured debt as well. Many of them have interest-only mortgages, with no repayment plan. Put simply, they typically have higher-risk characteristics than borrowers with active lenders.
The noble Lord, Lord Sharkey, has correctly excluded 50,000 or so of the population of mortgage prisoners from his amendment, because they are in arrears or within the last 12 months of their mortgage term, but I think he intends the remaining 143,000 to benefit from the largesse provided by this amendment. This is notwithstanding that the FCA estimates that 66,000 of them could, in fact, switch to active lenders because the active lenders in the market have changed their risk appetite, with the encouragement of the FCA, and they would now be able to remortgage. I do not believe that it is right to legislate to give preferential financial terms to those who choose not to take advantage of the opportunities available to them in the market.
The FCA’s last review found that around 30,000 of the remaining 47,000 would be unlikely to benefit from switching, because if they did find a deal it would cost them more than the interest rates that they are currently paying. High-risk borrowers do not get the best rates in the market, however much they might wish to. Amendment 197 would give these borrowers a rate that did not reflect the market for them, and I do not believe that it is fair to give them a special advantage by legislating for them.
My Lords, I take issue with my noble friend, as I have spent most of my political life involved in housing. We have a situation in the country, which is relevant to this amendment, of huge pressure on local authorities to help families who are homeless. The numbers are going up every month at the moment, and this amendment would at least ensure provision for a small section of society—possibly younger people or single-parent families—who find themselves in a situation that is nothing to do with their own original arrangement with the mortgage lender. It is entirely appropriate for our society to say that there is a means of helping them in a transitory manner to get them settled.
The most worrying aspect is in proposed new paragraph (b), which the noble Lord highlighted. This is not a new problem but a growing one, with unregulated entities on the fringe of the mortgage market. Any of us who has done any work in this area knows that it is quite a difficult area to control, but the FCA has not got a handle on it yet and it needs to.
I am not going to say any more, but I very much hope that my noble friend on the Front Bench will take this issue away, think about it and recognise that, if we do not take action, the local authorities where these people live will have even more pressure on them to find a home for the relevant family.
My Lords, I rise to say a word in support of my noble friend Lord Sharkey. There are some more generalised and wider issues around this problem. We have the situation quite often—in fact, it is perhaps the norm nowadays—that whoever extends credit, whether for a mortgage or another thing, is not necessarily the same organisation that ends up holding it later on. It may be securitised, sliced, diced and sold on, or it may be sold on to a vulture fund because they are in trouble. The same sort of thing has happened with student loans, which have essentially been sold to vulture companies.
This raises the issue of what the Government’s terms are when they are doing the selling. I fully understand that they say they have to get the best value for the taxpayer, or whatever it is, but you cannot have value for the taxpayer at the cost of usury on a minority, and that is the situation that has arisen. It could impact on some with student loans, if the pressure to pay is different from how it was when the loans were elsewhere.
I have two questions. First, what are the Government going to do along the lines outlined by my noble friend to assist mortgage prisoners? More generally, what are they going to do when looking at mortgage terms that allow it to be sold on to anybody without any safeguards and other types of selling on, whether in distress or otherwise, that likewise essentially dispense with any kind of consumer credit or similar kinds of protections?
I am sure the Minister will recall that when we were talking about bounce-back loans and we had to dispense with some consumer credit protections, I warned that we might get bad behaviour as a consequence. This is part of the same picture and why we have such protections there in the first place, yet nowadays they are being seriously circumvented.
My Lords, I do not come to this debate with a predetermined position but to listen and take a view after we have looked at the circumstances and listened to the Minister’s response. I would value a copy of the report that the noble Lord, Lord Sharkey, spoke about. I have a lot of sympathy for these individuals and note that their problems are undoubtedly exacerbated by—I do not know how to describe it—the Truss impact on loan rates in the UK, which must fall particularly heavily on those individuals. I await the Minister’s response.
My Lords, I thank the noble Lord, Lord Sharkey, for tabling this amendment, and all noble Lords for their contributions.
The Government have a great deal of sympathy for borrowers who are unable to switch their mortgage, and the Treasury has already worked extensively with regulators and industry to act where possible to support borrowers. For example, we have worked with the FCA to implement changes to its mortgage lending rules, removing the regulatory barrier that prevented some customers, who otherwise may have been able to switch, accessing new products.
However, we do not believe there are further practical and proportionate universal options than those already taken to reduce the rates paid by these consumers. Extensive work has been done to look into this issue, partly as a result of prior interest from this House, which has emphasised the complex and varied circumstances that consumers are in. Specifically, following commitments made during the passage of the Financial Services Act 2021, the Government worked with the FCA to conduct a report into mortgage prisoners, which was completed and laid before Parliament in November 2021. This report found that the vast majority of those with the 195,000 mortgages held by inactive firms are not mortgage prisoners, as they are already paying competitive rates for their circumstances or they would be able to switch if they took action to do so—if, of course, they met the risk appetite of active lenders, a point raised by my noble friend Lady Noakes. Others had different factors that might prevent them being able to switch, such as being close to the end of their mortgage term or having an account in arrears. The report found that only 47,000 were truly mortgage prisoners—that is, customers who are up to date with their mortgage payments and unable to switch to a new mortgage deal, but who could potentially benefit from lower rates if they were able to switch.
While I understand the difficulty that many of these customers are facing, capping the standard variable rates charged on mortgages with inactive lenders to help this limited group of customers would have significant implications for the wider mortgage market which cannot be ignored. Any action we take must also be fair to other borrowers in the active market, particularly those with similar characteristics and paying similar rates, who may be unable to access fixed-rate deals.
I thank all noble Lords who spoke in this brief debate. There was a sense of déjà vu in all this. I recognise the arguments of the noble Baroness, Lady Noakes, because it is not so long since we heard them last time. It would be indelicate of me to remind the Committee that, having heard all those arguments last time around, and mine, we voted fairly massively in favour of the amendment in front of us again today.
As I said in my opening remarks, at the moment this is not about the amendment as it is down on the page. This is a probing amendment to make sure that the initiative of Martin Lewis, the LSE and the APPG is taken seriously by the Government. I am grateful for the Minister’s promise—if that is what it was—to arrange a meeting with the APPG and other interested parties. It would be wrong if, after all this work and effort, we were simply to get a note from the Treasury passed under the door saying, “No, it doesn’t work”. We want an interactive process to discuss the proposals that Martin Lewis and the APPG are putting forward. I do not think the Minister talked about timing, but we need to do that urgently and before Report.
4:15 pm
One reason we need to do it before Report is that it is entirely possible to bring back the amendment on Report, to continue discussion about its merits or demerits, and maybe to think about pressing it to a vote. I remind the Minister and noble Lords that, as the Minister said, the LSE said in its first study that it did not think that capping SVR was the right idea, to be loudly contradicted by the person who paid for it, Martin Lewis, who said that, under the circumstances, this was the humane, proper and responsible thing to do, despite the many flaws that others might have pointed out. I am sure we can rehearse those discussions on Report if necessary.
In the meantime, I stress that getting the meeting together as early as possible is of enormous importance. Having said all that, I beg leave to withdraw the amendment.
Amendment 197 withdrawn.
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However, this requirement was not written into the contract when mortgages were sold to the vulture fund Cerberus, with the BBC reporting that UKAR is now claiming to have been misled by it.
Consumer champion Martin Lewis, about whose work I will have more to say in a moment, lays the responsibility for the treatment of mortgage prisoners with the Government. He said that they have
“sold these loans to professional debt buyers that don’t offer mortgages, and left these people with these types of mortgages that have been too expensive and crippled their finances and destroyed their wellbeing.”
The Government are directly responsible; they chose to sell the mortgages to vulture funds.
In 2021, the House of Lords passed an amendment that would have capped standard variable rates for mortgage prisoners. This would have provided immediate, practical help for the 200,000 mortgage prisoners and their families. When the Government rejected this amendment in the Commons in April 2021, the Minister claimed that
“the Government and FCA have undertaken significant work in this area to create additional options that make switching into the active market easier for some borrowers.”—[Official Report, Commons, 26/4/21; col. 85.]
The FCA published an update in November 2021; this review confirmed that its interventions have, so far, had only a tiny impact. Only 2,200 of the almost 200,000 mortgage prisoners have been able to switch, just over 1% of the total. It turned out that lenders had only a limited appetite to offer options to switch using the modified affordability test devised by the FCA.
The FCA and the Government show little understanding of how vulnerable many mortgage prisoners really are or what stress and financial hardship they have endured and continue to endure. They certainly have not done anything practical to help. All this misery and harm could have been prevented, but even now the Government still refuse to acknowledge their responsibility or provide any help. At the moment, they and the FCA propose no further action.
This is deeply unfair and more than slightly ironic. A recent LSE report found evidence that the Treasury has not only made back the cost of managing the sales of these mortgages but has made a £2.4 billion surplus. However, there has been one significant development. Last Wednesday, my co-chair of the APPG on Mortgage Prisoners, Seema Malhotra MP, and Martin Lewis, chaired a meeting in Parliament to examine and explain new research conducted by the LSE, generously funded by Martin Lewis. The Treasury and the FCA were in attendance. This research contains concrete and costed proposals for a solution to this long-standing and continuing injustice.
Martin Lewis told the meeting:
“This report lays out starkly that the state sold these borrowers into poverty, knowing it could cause them harm, and made billions doing it. The result has destroyed lives. People have been left in financial, physical and mental misery, exacerbated by the pandemic and cost of living crisis ripping through their already dire situations. When we put solutions to the Treasury in the past, it said it wanted to look at them, but couldn’t as they weren’t costed. Now, having fought tooth and nail to get some of the data needed from official institutions, it is costed.”
Therefore, there should be no more excuses. He went on:
“The Government has a moral and financial responsibility to mitigate some of the damage done. Mortgage prisoners are the forgotten victims of the financial crash. The banks were bailed out at the expense of these borrowers. I hope the Treasury lives up to its past promise to investigate at speed and uses this report as a springboard to find any and all solutions to free mortgage prisoners.”
The APPG has sent copies of the LSE report to the Treasury, the FCA and other interested parties.
Will the Minister and her Treasury colleagues meet the APPG and its supporters to discuss the solutions proposed in the LSE report? Can she arrange this meeting urgently—certainly well before Report? Thanks to the support, generosity and persistence of Martin Lewis, and the work of the LSE and the APPG, we now have a clear and costed plan finally to bring relief to the nearly 200,000 mortgage prisoners. There can be no excuse for further delay. If we cannot set a course to free these prisoners, we will want to return to the issue on Report. I beg to move.
The FCA has proposed some practical steps to assist the remaining population, but it does not propose anything like that which is contained in Amendment 197. That is not surprising because the LSE in its earlier, independent study—I have yet to see the study that the noble Lord, Lord Sharkey, referred to—concluded that market interventions were not justified and could cause markets harms.
We all have sympathy for those stuck with debt that they struggle to afford, but the problem is not confined to mortgage prisoners, and it is just not fair to single out this group of problem borrowers for special treatment. It is also an extraordinary departure from regulatory norms. The FCA does not tell lenders to whom they must lend money; that is not how regulation works. Under this amendment, the FCA would be telling lenders what their risk appetite should be, which raises big issues of moral hazard and fails to deal with the prudential consequences in terms of capital, on which the PRA is the arbiter.
Furthermore, the FCA is required to set interest rate caps, but only by reference to LTVs. This ignores the other key driver of interest rates—namely, the credit risk of the borrower. Whatever rate the FCA comes up with, it will be the wrong answer for some borrowers, and it would be plainly unfair if the FCA set the rate assuming high credit quality, because that is very likely to be at odds with the facts. In addition, requiring the standard variable rates to be no more than two percentage points above base rate ignores any evidence about the correct uplift for the particular type of loan and borrower characteristics, which can produce outcomes that do not reflect objective market realities. I hope that the noble Lord, Lord Sharkey, does not pursue this amendment, as he did in the 2021 Bill; it really does not make sense.
A cap for mortgage prisoners would therefore create an arbitrary division between one set of consumers and another. Capping rates would also restrict lenders’ ability to vary rates in line with market conditions—a key part of responsible lending. This is a material risk, which, as Ministers set out during the passage of the Financial Services Act 2021, could have financial stability implications. Those concerns were also raised by the London School of Economics in its November 2020 report on mortgage prisoners, which argued against the introduction of a standard variable rate cap. In view of these risks and the proportionate steps that the Government and the FCA have already taken to support mortgage prisoners, it is clear that an SVR cap is not an appropriate solution.
However, borrowers who have switched have seen significant savings. The FCA’s review found that take-up was affected by consumer inertia and limited lender risk appetite. Some 140,000 letters were sent to borrowers about the rule change, which resulted in only 700 calls to brokers.
The noble Lord, Lord Sharkey, raised the new report from the London School of Economics and Martin Lewis. The Government will of course carefully consider the proposals put forward in this report. I note that it recommends free, comprehensive financial advice for all, but I would like to provide reassurance that the Government are committed to helping people in financial difficulty. We recognise the important role that debt advice providers play in assisting people, including mortgage prisoners, who are in problem debt, especially with the increasing cost of living pressures that were raised by the noble Baroness, Lady Bennett.
This is why the Government have continued to maintain record levels of debt advice funding for the Money and Pensions Service, bringing its budget for free-to-client debt advice in England to more than £90 million this financial year. Furthermore, the Government have made a number of interventions, as a result of the financial crisis, to protect the economy and ordinary savers and businesses from the negative impacts of economic and financial instability. These include the interventions in Northern Rock and Bradford & Bingley, with their loan and mortgage assets ultimately held in the government-owned company UK Asset Resolution. It is right that the Government seek to achieve value for money for taxpayers as we exit the interventions made as a result of the financial crisis. The proceeds from these sales are not hypothecated and go towards supporting wider public finances.
The noble Baroness, Lady Bowles, sought to draw out the wider case of the Government selling on. I can say only that UK Asset Resolution sales met or exceeded best practice for customer protections. Firms had to agree to robust protections before their bids were considered. Inactive firms have and use a range of forbearance options for borrowers in payment difficulty, and many borrowers with inactive firms pay competitive rates.
However, the Government are consistently committed to looking for practical and proportionate options where they will deliver genuine benefits for affected mortgage borrowers, and where interventions are fair to borrowers in the active market and to taxpayers. In light of the request, we will be happy to facilitate a meeting with Treasury officials before Report. We will co-ordinate with Members’ offices to agree a time and place suitable for everyone.
While it is important that we do not create false hope, the Government will carefully consider the proposals from the LSE/Martin Lewis report. In light of this, I ask the noble Lord to withdraw this amendment.