FCA and Industry Working Group on interest-only mortgages: terms of reference

Background

We first took action in 2013 to enable better outcomes for interest-only (IO) borrowers when their mortgages mature. 

Our research[1] in 2013 identified three peak periods for IO maturities: 2017/18; 2027/28 and 2032. In response, we introduced finalised guidance[2] on dealing fairly with IO mortgage customers who risk being unable to repay their loan. 

In 2018 we undertook a Thematic Review[3] on the fair treatment of IO mortgage customers. It found that all the lenders in the review had made progress with their strategies for the treatment of IO mortgage borrowers but there remained large numbers of IO borrowers whose repayment plans were unknown. 

Our latest market research[4] shows that the overall picture for recent IO maturities appears better than previous projections, with the overall number of IO mortgages reducing at a faster rate and many borrowers able to repay their loans at maturity or shortly afterwards. But concerns remain about the preparedness of some borrowers for the next phase of maturities, the options they will have if they cannot repay the capital at maturity, and the impact this could have on them. The research confirmed a significant peak of maturities in 2031 and 2032.

Purpose of the FCA and Industry Working Group

The primary purpose of the FCA-Industry Working Group on IO Mortgages[5] is to support and inform the FCA’s review of its existing IO guidance, FG13/7[2]. 

The Group will ensure an open dialogue between the FCA and industry participants, to:

• consider current and future developments in the IO market
• consumer demands, needs and behaviours
• share good practice, and
• how firms could meet the higher standards of the Consumer Duty[6].

The Working Group's discussions are expected to assist our ability to ensure firms are providing appropriate support for interest-only borrowers who may otherwise be at risk of not being able to repay. Following the final meeting and once the guidance review has concluded, we will set out any applicable next steps.  

The group will not have any decision-making powers.

The FCA-Industry Working Group provides lender perspectives only. Separately, we will be collecting consumer views by engaging with representative groups and other interested stakeholders.

Problem statement

As at the end of 2022 there were fewer than 1 million IO mortgages (or part and part), with maturity of these peaking in 2031 (92,000) and 2032 (95,000). 

Most IO borrowers will be able to repay the capital owed in full at maturity either using savings, investments, pensions, sale of property or changing to a different type of mortgage. Where taking out a different type of mortgage, such as a lifetime mortgage or retirement interest-only mortgage, as a means of paying off the IO mortgage it is important to ensure this is sustainable and affordable.  

However, borrowers currently projected to be unable to repay in full need support. Our consumer research indicates that some IO borrowers may be over-estimating their ability to repay. The research found 82% were confident about repaying, yet 36% expected to have a shortfall. 

Borrowers without an effective repayment plan and unable to repay at maturity put their current housing arrangements at risk. 

Work to be undertaken

The IWG will:

• map the current guidance as it is currently applied, including options and support offered to borrowers who are not able to repay at maturity
• consider how borrower contact strategies have evolved over time, and outcomes achieved
• review current follow-on mortgage products and solutions, and consider where further innovation could be beneficial   
• review existing FCA guidance in light of, amongst other things, FCA research findings, firms’ experiences with IO borrowers and the Consumer Duty[7] coming into force

Membership

• Financial Conduct Authority (Chair and Secretariat)
• Santander UK
• Lloyds Banking Group
• Barclays
• Nationwide Building Society
• Topaz
• Landmark
• Skipton
• Coventry Building Society
• Kensington
• Accord
• The Family Building Society
• Pepper UK

Ways of working

• The ToR and a summary of each meeting will be published on the FCA website
• Meetings to be held approximately every 4 – 6 weeks 
• Meetings to be hybrid - FCA facilitating in person and MS Teams attendance
• Meetings to be held under Chatham House rules. Discussions within the meetings will not be attributable to individuals or the organisations they represent.
• Agendas to be sent to group members at least 1 week before the next meeting
• Draft minutes, including any actions, to be shared with all members within 1 week of the meeting
• Additional external stakeholders may be invited to join for specific agenda items, if agreed with Working Group members in advance. Any external stakeholders will be made aware of the expectations regarding competition law and confidentiality. 

Competition law and other relevant law

• Members of the IWG are expected to comply with and to ensure they understand their responsibilities under all applicable competition laws, including UK competition law. 
• To the extent any member is unclear of these responsibilities, they should consult the legal and/or compliance teams at their respective institution for further guidance. Particular care will need to be exercised in order to ensure that members familiarise themselves with the concept of competitively sensitive information, and do not unilaterally disclose or exchange it under any circumstance. 
• The disclosure of commercially sensitive information may amount to a breach of competition law and could lead to prosecution not only of the firm disclosing the information but of other firms in the room, even if they remain silent.
• If, during an IWG meeting, a member has concerns about the discussion from a competition law perspective – for example, due to sharing competitively sensitive information - the participant should make their concerns known to the meeting as a whole, and the discussion giving rise to such concerns should cease. If such discussion does not cease, the participants concerned should leave the relevant meeting and request that their departure and the reasons for it are included in the minutes of that meeting.
• Members should also be aware of the possibility that minutes of meetings could become public as a result of a Freedom of Information request.