My Lords, the hybrid Grand Committee will now begin. Some Members are here in person, respecting social distancing, others are participating remotely, but all Members will be treated equally. I must ask Members in the Room to wear face coverings except when seated at their desks, to speak sitting down and to wipe down their desks, chairs and any other touch points before and after use. If the capacity of the Committee Room is exceeded, or other safety requirements are breached, I will immediately adjourn the Committee. If there is a Division in the House, the Committee will adjourn for five minutes.
I will call Members to speak in the order listed. During the debate on each group I will invite Members, including Members in the Grand Committee Room, to email the clerk if they wish to speak after the Minister, using the Grand Committee address. I will call Members to speak in order of request.
The groupings are binding. Leave should be given to withdraw amendments. When putting the question, I will collect voices in the Grand Committee Room only. I remind Members that Divisions cannot take place in Grand Committee. It takes unanimity to amend the Bill, so if a single voice says “Not Content” an amendment is negatived, and if a single voice says “Content” the clause stands part. If a Member taking part remotely wants their voice accounted for if the question is put, they must make this clear when speaking on a group.
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.
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.
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.”
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The APPG has heard from hundreds of mortgage prisoners, including nurses, members of the Armed Forces and small business owners, all describing the frustration of taking out a mortgage with a high-street bank and being sold on to vulture funds which do not have to treat them fairly or offer them new deals. By contrast, in the wider mortgage market there have been recent improvements in the deals available to those with active lenders.
In 2018, lender trade bodies facilitated a voluntary agreement to offer these borrowers an alternative deal where they meet certain criteria. This means that any borrower in the active market can access a new fixed-rate deal if they are not in arrears and have a minimum of two years and £10,000 left on their mortgage. However, 250,000 mortgage prisoners with inactive lenders or unregulated firms were excluded from this, meaning that they are stuck on standard variable rates. There is nothing these customers can do to gain control over what, for many, is the largest part of their monthly expenditure.
Mortgage prisoners are worried about rates rising, and that this will come on top of recent increases in their monthly mortgage payments if they took a payment holiday. The FCA has claimed that mortgage prisoners who cannot switch are paying SVR interest rates that are only 0.4% a year higher than other customers with active lenders, but this comparison is completely misleading. It ignores the fact that those with active lenders can access new deals. Only around 10% of customers at active lenders are paying the SVR, and most that are typically switch to a new deal very quickly. More than three-quarters of consumers with active lenders switch to a new deal within six months of moving on to an SVR. If you take two customers, both paying an SVR of over 4% and both with a loan-to-value ratio of 75%, the one with the active lender could access a new deal at 1.8%. The mortgage prisoner is stuck on the SVR, costing them hundreds or thousands of pounds extra every year. These financial strains are having a massive effect on mortgage prisoners and their families.
Amendment 116 would extend the benefit of being able to access fixed rates to mortgage prisoners. It would not distort the market, but it would help ensure universal fair treatment and access to fixed rates for mortgage prisoners. Only inactive lenders exploiting their helpless and captive customer base would be affected. This amendment, and a cap on SVRs, would change the lives of thousands of mortgage prisoners and their families. Again, I urge the Government to acknowledge the moral responsibility for the continuing harm their careless and profit-driven mortgage sales have generated. I urge the Minister to accept Amendment 116.
Amendment 117 would set new conditions for the transfer of a regulated mortgage contract. The Government have now sold all the nationalised mortgage books from Northern Rock and Bradford and Bingley, but the underlying problems illustrated by these sales remain. A lender can choose to sell a mortgage book at any time, and the pandemic may cause more mortgage books to come up for sale. The lender can sell you on to anyone. It does not have to sell you on to an active lender or a high-street bank; it can sell you on to an unregulated entity or a vulture fund. This amendment would require a lender to obtain your consent if it was to sell your mortgage to an inactive lender or unregulated entity. When asking for your consent, it would have to give you clear information about the interest rates and policies which you would be offered. You would need to give your consent only if you were being sold on to an inactive lender or unregulated entity. If your mortgage was being transferred to an active lender which committed to offer you the same deals and interest rates as its existing customers, consent would not be required.
The Government have claimed in the past that this would have a negative impact on financial stability. This is simply not the case. Under this amendment, the Bank of England and the PRA would still be able to use their powers under the special resolution regime to enable the transfer of mortgages from failing banks. They would not need the consent of customers when they used their resolution powers.
The Government have now also shown, at the very end of their sales of these mortgages, that they support applying covenants when mortgages are sold on. The latest sale of £4.9 billion of mortgages announced last week by the Government contained a requirement that the legal title of the mortgages must not be sold on to an unregulated firm. The Government have stipulated that these protections must be replicated in any future sale of the £4.9 billion of loans—meaning that they will apply to these customers until they have repaid their mortgages, no matter where the mortgages end up.
We welcome the Government’s inclusion of these requirements, although it is much too little and much too late. The Government should have applied this provision in their earlier sales of mortgages to unregulated firms such as Cerberus or Tulip Mortgages. Everyone needs the same protection from mortgages being sold to unregulated entities. This amendment would put the customer back in control. It would require consumers to give their consent before their mortgage was sold on to an inactive lender or an unregulated firm. It would extend to the full market the protections the Government have shown that they support.
The Economic Secretary to the Treasury has said that he is committed to helping borrowers with inactive lenders and that he “remains open” to “considering practical solutions”. The Chancellor told Martin Lewis after the Budget that he would keep working on the issue and was committed to finding a workable solution. Amendments 99, 116 and 117 are three practical solutions which we hope that he will consider. We very much hope that the Chancellor and the Economic Secretary will recognise their continuing moral obligation. We hope that they will support these three proposals and take action now to ensure that all mortgage prisoners are finally set free.
My Lords, Amendments 99 and 116 deal with the difficult area of mortgage prisoners. Both amendments seek to go beyond what has already been achieved for mortgage prisoners by the relaxation of affordability rules by the FCA.
I have much sympathy for mortgage prisoners, but we should not lose sight of the fact that these borrowers do not have sufficient financial credentials to qualify for new mortgage lending under current regulatory rules and hence cannot remortgage. They are a hangover from the period when lending criteria were much less strict than they are now and include interest-only borrowers who lack a credible way of repaying capital.
We should be wary of going beyond what the FCA has already done. In particular, making the FCA specify maximum interest rates is an unwarranted market intervention. The FCA is best placed to judge whether any further solutions can be found for these problem borrowers. We should not try to solve the problems of a relatively small number of people with blunderbuss legislation.
My main reason for speaking on this group is Amendment 117, which is fundamentally misconceived. My noble friend Lord True, when he spoke to the large group of amendments headed by Amendment 79 on our previous Committee day, talked about the importance of the securitisation market for mortgage providers. Securitisation ensures that lenders can carry on originating new debt by freeing up capital and liquidity. This is especially important in the mortgage market.
Amendment 117, which requires written consent for every mortgage sold, is not practical. It is likely to mean that lenders will be shut out of the securitisation market. Mortgages are not sold individually: they are parcelled up into books. Requiring consent will make this very much harder to do and will significantly add to the costs of the procedure. Anyone who has tried to get responses from individual account holders where there is no incentive for the account holder to respond will tell you that this is mission impossible.
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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.
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.”
Mortgage securitisation is a normal balance sheet financing strategy for both retail and commercial lenders. Making it more difficult or expensive for mortgages will have consequences for consumers, whether by restricting the availability of credit or increasing its cost, or both. I cannot support any of the amendments in this group.