Commons Reason and Amendment
1A: Page 36, line 13, at end insert the following new Clause—
“FCA rules about level of care provided to consumers by authorised persons
(1) The Financial Conduct Authority must carry out a public consultation about whether it should make general rules providing that authorised persons owe a duty of care to consumers.
(2) The consultation must include consultation about—
(a) whether the Financial Conduct Authority should make other provision in general rules about the level of care that must be provided to consumers by authorised persons, either instead of or in addition to a duty of care,
(b) whether a duty of care should be owed, or other provision should apply, to all consumers or to particular classes of consumer, and
(c) the extent to which a duty of care, or other provision, would advance the Financial Conduct Authority’s consumer protection objective (see section 1C of the Financial Services and Markets Act 2000).
(3) The Financial Conduct Authority—
(a) must carry out the consultation, and publish its analysis of the responses, before 1 January 2022, and
(b) must, before 1 August 2022, make such general rules about the level of care that must be provided to consumers, or particular classes of consumer, by authorised persons as it considers appropriate, having regard to that analysis.
(4) The duties to consult under this section may be satisfied by consultation carried out after 1 January 2021 but before this section comes into force (as well as by consultation carried out after this section comes into force).
(5) In this section—
“authorised person” has the same meaning as in the Financial Services and Markets Act 2000 (see section 31 of that Act);
“consumer” has the meaning given in section 1G of that Act; “general rules” means rules made under section 137A of that Act.”
My Lords, this Financial Services Bill will enhance the UK’s world-leading prudential standards, promote financial stability, promote openness between the UK and international markets, and maintain an effective financial services regulatory framework and sound capital markets. I acknowledge the work of your Lordships in scrutinising this important Bill. The issue of parliamentary scrutiny has been prominent in our debates and noble Lords have more than demonstrated the positive role that they can play in this regard.
During the passage of the Bill, Members of both Houses debated how best to address issues of consumer harm in the financial sector. Amendment 1, which this House approved on Report, proposes that this should be addressed through a requirement for the FCA to bring forward rules on a duty of care. Let me underline that the Government are committed to ensuring that financial services consumers are protected and that steps are taken quickly to address issues, when they are identified. However, as the Economic Secretary set out in the other place, the Government believe that the FCA already has the necessary powers and is acting to ensure that sufficient protections are in place for consumers, so I cannot accept this amendment.
It is important to remember that financial services firms’ treatment of their customers is already governed by the FCA’s Principles for Businesses and specific requirements in its handbook. These fundamental principles set out specific requirements for firms, including that
“A firm must pay due regard to the interests of its customers and treat them fairly.”
The FCA’s enforcement powers allow it to ensure that these standards are met, but it recognises that the level of harm in markets is still too high. It is committed to taking further actions.
The Government accept, as the noble Lord, Lord Tunnicliffe, has rightly suggested, that this harm may stem from asymmetry of information between financial services firms and their customers. The risk is that some firms may seek to exploit this asymmetry. The FCA is well aware of how informational asymmetries and behavioural biases can influence consumer behaviour, and it works every day to address these issues where it considers that they may result in harm. The Government therefore support the FCA’s ongoing programme of work in this area and believe that it will deliver meaningful change for the benefit of consumers.
The FCA has considered its existing framework of principles and whether the way in which firms has responded to them is sufficient to ensure that consumers have the right protections and get the right outcomes. Building on this, in May, the FCA will consult on clear proposals to raise and clarify its expectations of firms’ actions and behaviours and on any necessary changes to its principles to deliver them. These proposals will consider how to raise the level of care that firms must provide to consumers, through a duty of care or other provisions. Ultimately, the proposals in this consultation seek to ensure that consumers benefit from a better level of care from financial services firms.
Amendment 1A puts this work on a statutory footing. It requires the FCA to consult on whether it should make rules providing that authorised persons owe a duty of care to consumers. It ensures that the FCA will publish its analysis of the responses to this consultation by the end of the year. It also ensures that the FCA will make final rules, following that consultation, before 1 August 2022. I hope that this provides reassurance of both the FCA’s and the Government’s commitment to this important agenda. I urge the House to accept this proportionate and, I believe, well-judged amendment.
The FCA will bring its consultation to the attention of the relevant parliamentary committees. This will give them an opportunity to consider the proposals and, if they choose, to express a view or raise any issues. The FCA will respond to any issues raised by parliamentary committees, in line with commitments made during the passage of this Bill.
Let me end there. I hope that noble Lords will accept Motion A and this amendment in lieu.
My Lords, we will not challenge this Motion. I cannot say that it goes as far as reassurance, but I think we are in a much better place to have the consultation and its characteristics in statute on the face of the Bill. I particularly thank the Minister and his team. I suspect they have been instrumental in making sure that the concerns, from all sides of the House, were communicated back to the Treasury and the Treasury team.
The Minister today repeated a number of the statements that the Economic Secretary made in the other place when he addressed this issue. I will highlight a few that were of particular importance to me. The FCA recognises that,
“the level of harm in markets is still too high and is committed to—”—[Official Report, 24/4/21; col. 867]
taking further actions. That is an important statement to have on the record. I am slightly concerned, however, that the focus of the FCA should not exclusively be on asymmetry of information. Asymmetry of information is fundamental and important, but it is far from everything. The Economic Secretary said that
“the FCA will consult in May on clear proposals to raise and clarify its expectations of firms’ actions and behaviours, and on any necessary changes to its principles to deliver this.”—[Official Report, Commons, 26/4/21; col. 84]
I hope that will not be confined simply to asymmetry of information, but as the Economic Secretary said, and the Minister today said, Parliament wants to be assured that the FCA’s ongoing work will lead to meaningful change. I think that reflects some of the frustrations expressed in this House of having had eight consultations to date and relatively little action. I hope this will lead to a great change.
In the amendment in lieu—this is perhaps something the noble Lord, Lord Eatwell will address more extensively than I—the fact that all consumers are part of the consideration is an important one. I want to use this opportunity to underscore to the Minister how urgent and significant this issue is.
When the Government’s amendment in lieu was passed, I got an email from one of the leading financial services lawyers in the country, and two things are pertinent. It said that it looks like this one is headed for the long grass again. I think that is partly because we are looking at action in 2022 and not immediately. The reason for that level of concern was, apparently, that audit firms are now saying that any credit risk between the client and the authorised firm should be counted as client money within the meaning of CASS—the protection of client assets and money. This is storing up some big problems when one of these babies—we are talking about firms that collectively have well over £10 trillion in assets under management—goes down and a judge finds that the trust is bust because they comingled client money with money that is not. Lehman Brothers, here we go again. I went immediately to the FCA site, and it is an excellent but sad example of the very limited powers that the FCA has to deal with such situations, because of the regulatory perimeter that limits a great deal of their potential for action to their definition of consumers. The issue has always been that that is a very narrow definition of consumer.
Every day we wait for a duty of care to become embedded in the system, we run significant risk. It is a risk that none of us wants—it has the potential to be limited to a small pool of clients, but also to knock the economy off its paces once again. It is important that there is an element of urgency built into all of this, that the issue is taken seriously and that there is not an attempt to narrow examination by and the focus of the FCA to simply something like asymmetry of information, but to consider the much wider picture before we end up with another crisis none of us wants.
My Lords, while we on this side of the House were hoping for action rather than further consultation, and we remain somewhat puzzled as to exactly what further the FCA has to learn that was not learned in the consultation of 2018 when it published a discussion paper entitled with some prescience, A Duty of Care and Potential Alternative Approaches. None the less, despite our desire for action and puzzlement in that respect, we welcome the tenor of the Government’s amendment.
In particular, I congratulate the Government on the clear acknowledgement that real harm is done today to millions of users of financial services by this famous asymmetrical relationship in financial transactions and that harm is done to those excluded from access to financial services. As evidence of this acknowledgement, I refer to the remarks just made by the noble Earl, Lord Howe, and also the remarks by the Economic Secretary to the Treasury, referred to by the noble Baroness, Lady Kramer. For example, Mr Glen said:
“The Government agree with the concerns that … this harm may in part stem from an asymmetry of information between financial services firms and their customers. The risk is that many firms may seek to exploit this asymmetry. The FCA is well aware of how informational asymmetries and behavioural biases can influence consumer behaviour, and is committed to ensuring that these issues are addressed where it considers that they may result in harm”.—[Official Report, Commons, 26/4/21; cols. 83-84.]
All I can say to that is: “Quite right too”.
I am particularly pleased that in new subsection 2(b) in their amendment, the Government refer to the need to extend the duty of care to “all consumers”. I urge the FCA to ignore the suggestion that a duty of care might be limited to “particular classes of consumer”. That way lies unnecessary complexity and the potential for error and injustice. Any inclusive list of “particular classes” is also a list that excludes. Confining the duty of care to particular classes would also eliminate the peculiar advantages of principles-based regulation, namely the flexibility of the principle in an industry of which persistent innovation is a defining characteristic. This is an advantage not to be sacrificed lightly.
In the debates on this issue—including those in the other place—not only Mr Glen, but the noble Earl, Lord Howe, the noble Baroness, Lady Kramer, and several noble Lords have referred to the prevalence of asymmetric information in retail financial services. As we know, this renders markets inefficient. In retail financial markets, asymmetric information results in excessive risk being loaded on to consumers. A duty of care will rebalance risk by shifting the balance of risk from the consumer back towards the provider, which in an efficient market is where it should be.
However, the FCA must be alert to a potential consequence. This may well result in some financial services providers deciding to withdraw from the provision of services where previously they happily dumped the risk on consumers. This increase in exclusion would be contrary to the intent and spirit of the Government amendment. We should therefore emphasise that having the status of an authorised person in financial services is a privilege, and with that privilege comes responsibility. Indeed, as Mr Glen remarked in the other place,
“authorised persons owe a duty of care to consumers.”—[Official Report, Commons, 26/4/21; col. 84.]
He is quite right. It is the responsibility of financial institutions providing financial services not to withdraw but, on the contrary, to play their full part in tackling financial exclusion. I am sure that the FCA will address this issue as it draws up its new general rules on the level of care.
The amendment sets out proposals on consultation. Consultations are important sources of information, and it is beneficial that those most active in the industry have the opportunity to express their views and to identify potential pitfalls. However, there is always the danger that the consultation that the FCA undertakes will be seen as an exercise in circumscribing the field of action—in watering down the duty of care. We should support the contrary. The FCA should not regard the results of the consultation as defining what it should do; rather, it should do the right thing. Having been a regulator myself, I know that regulators are never popular, but consultation is not a popularity contest.
A most welcome element in the Government’s amendment is the timetable for action—not the immediate legislative action that we on these Benches sought, but a timetable none the less. I assure the Minister that we will be ticking off the dates by which the FCA is required to act, and of course we will scrutinise the new general rules with great care. In doing so, I look forward to working with the noble Earl, Lord Howe, to achieve what is now a clearly shared objective: a well-defined regulatory principle of duty of care.
My Lords, I express my thanks to the noble Baroness, Lady Kramer, and the noble Lord, Lord Eatwell, for what they have said. I am pleased that they have both taken the trouble to read the words of my right honourable friend the Economic Secretary when responding to the debate in the other place on Monday. I was careful to frame my remarks in a way intended to ensure that there is not a hair’s breadth of difference between his words and mine.
The noble Lord made some very well-observed remarks on the risks arising from asymmetric information. However, I am happy to confirm to the noble Baroness that the FCA’s consultation will not be solely focused on asymmetry of information, important though that is; it will look more broadly at raising the level of care that firms provide to consumers—not particular classes of consumers, but all consumers.
Some hesitation—I think that is the best word—was expressed as to why there is yet another consultation. In response to that, I say that it is important that consumer groups and firms have the opportunity to comment on clear proposals and subsequent draft rule changes before final rules are set in stone. So I argue that it is a necessary step, even though I fully understand the noble Baroness’s wish for action this day. I remind her that we are talking about a consultation to be launched very shortly, and I hope that indicates that the sense of urgency which both noble Lords have indicated is right is shared by the FCA.
The FCA will and must act in accordance with its statutory objectives, which include the consumer protection objective. I come back to that point: this is not an issue that is ever lost on the FCA. With those comments, I am grateful to both noble Lords for their acceptance of the amendment in lieu, and I beg to move.
My Lords, we have a request to speak after the Minister from the noble Baroness, Lady Neville-Rolfe.
My Lords, I join others in congratulating my noble friend the Deputy Leader of the House and other Members of the Front Bench on the way they have dealt with the Bill and got us to this final stage. I just have a question about the consultation on the duty of care, and it stems from my experience in other areas of regulation—that is, health and safety and food safety. I have found that, where a duty of care is introduced, it is sometimes possible to change adjacent rules and regulations in a regulatory area and reduce the bureaucracy that can be a problem for both consumers and operators in the field. I would be interested to know whether that sort of work is likely to be envisaged by the Economic Secretary.
Motion A agreed.
8A: Because the Commons consider that it is not a proportionate or practical means of tackling the issues around consumers who have mortgages with inactive firms.
My Lords, Amendment 8 concerns mortgage prisoners, an issue that the Government take extremely seriously. We are committed to finding practical and proportionate solutions to help this group but, as Motion B in my name makes clear, the amendment is not one that the Government can accept. As explained in Reason 8A, the amendment is neither a proportionate nor a practical response to this complex issue, and this is why the Government cannot support Motion B1, tabled by the noble Lord, Lord Sharkey.
In our previous debates, my noble friend Lord True set out the FCA’s analysis of this complex issue. To recap briefly, according to FCA data, there are 250,000 borrowers with inactive lenders. Of these, analysis suggests that 125,000 borrowers could switch mortgage providers if they chose to, even prior to the introduction of the FCA’s new rules. Of the 125,000 who cannot switch, the FCA estimates that 70,000 are in arrears and so would struggle to access a new deal even in the active market. The FCA therefore estimates that there are 55,000 borrowers who may struggle to switch but are up to date with their payments. Its data show that, on average, the 55,000 borrowers with inactive firms who have characteristics that would make it difficult for them to switch but are up to date with payments are paying around 0.4 percentage points more than similar borrowers with active firms who are now on a reversion rate.
As the Economic Secretary set out on Monday, the reason these borrowers are unable to switch is not that their mortgage is with an inactive firm; it is that they do not meet the risk appetite of lenders. For example, they may have a combination of high loan-to-value, be on interest-only mortgages with no plan for repayment, or have higher levels of unsecured debts, non-standard sources of income or a poor credit history. Similar borrowers in the active market are also very unlikely to be offered deals with new lenders.
My noble friend Lord True has previously set out the significant work undertaken by the Government and the FCA in this area, which has created additional options to make it easier for some of these borrowers to switch into the active market. If we look at Amendment 8, we see that what it proposes would be a very significant intervention in the private mortgage markets and in private contracts. It would bring with it a risk to financial stability as it would restrict the ability of lenders to vary rates in line with market conditions. The ability to vary standard variable rates allows lenders to reprice products to reflect changes to the cost of doing business and could therefore create risks with significant implications for financial stability. On top of that, the amendment is not fair to borrowers with active lenders in similar circumstances as it targets only borrowers with inactive lenders. Indeed, this cap would be deeply unfair to borrowers in the active market who are in arrears or unable to secure a new fixed-rate deal because it would not include them.
So, at the most basic level, I just do not think it is right to introduce such a significant intervention for those with inactive lenders which could cut their mortgage payments far below the level of someone in a similar financial situation who happens to be with an active lender. Nevertheless, while the Government are opposing this amendment today, I want to reiterate our commitment to finding any further practical and proportionate options for affected borrowers, supported by facts and evidence.
On Monday, the Economic Secretary set out what further steps the Government and the FCA are taking and I want to repeat those commitments today: namely, that
“the Treasury will work with the FCA … on a review to its existing data on mortgage prisoners”.
This will ensure that we have the right data
“on the characteristics of those borrowers who have mortgages with inactive firms and are unable to switch despite being up to date with their mortgage payments. The FCA will also review the effect of its recent interventions to remove regulatory barriers to switching for mortgage prisoners and will report on this by the end of November, and … a copy of that review”
will be laid before Parliament.
“The Treasury will use the results of the review … to establish whether further solutions can be found for such borrowers that are practical and proportionate.”—[Official Report, Commons, 26/4/21; col. 87.]
Within the significant constraints that I have noted, I want to reassure the House that the Economic Secretary, as the Minister responsible for this area, will continue to search for any further solutions that may provide support for borrowers with inactive lenders who are unable to switch. But, again, they must be practical and proportionate. The Economic Secretary has also confirmed that he will write to active lenders and encourage them and the wider industry to go even further and look at what more they can do to ensure that as many borrowers as possible benefit from these options.
I hope I have convinced the House that the Government are taking the appropriate next steps and have demonstrated our commitment to continuing to work tirelessly on this. Therefore, I ask the House not to insist on this amendment and I beg to move.
Motion B1 (as an amendment to Motion B)
My Lords, I was very disappointed that the Government felt unable to accept our amendment, which would provide relief for mortgage prisoners. I was disappointed, but the mortgage prisoners themselves were devastated by what they heard on Monday in the Commons. Many have called me, some in tears and all in obvious distress. None of them could understand why no solution had been offered by the Government and none could credit the arguments used by the Government in rejecting our—or, as they saw it, their—amendment. I entirely understood their point of view, their distress and their fears for the future.
I emphasised on Report that I was worried we were stuck in an unproductive disagreement about the interpretation of statistics while real lives were being ruined and moral responsibility was being completely overlooked; and so it has proved. On Monday, the Government advanced some of the arguments for rejecting the amendment and the noble Earl, Lord Howe, has set out some of them again this afternoon. All the arguments are technical or speculative and all are highly contested. The Minister is, of course, aware of this. I made available a detailed rebuttal of most of them to him and his officials last week. I shall not go through them again in detail, but I will summarise the more important points.
The first argument was that half the 250,000 mortgage prisoners could in fact switch to better, fixed-rate mortgages. This is an FCA estimate, based on projections from a small sample. We think that it is self-evidently wrong. As Pat McFadden said in the Commons on Monday,
“why have so few of them switched if they had the ability to do so? It cannot be because they like being stuck on a rate of 4% or more.”—[Official Report, Commons, 26/4/21; col. 91.]
The second argument advanced in the Commons, and in this House again today, was that mortgage prisoners paid SVRs only 0.4% above similar non-mortgage prisoners. We have explained previously to the House why this figure is wrong. We have also pointed out that SVRs are not the norm in the mortgage market. Only 10% of mortgages have them, and 75% of those move off them within six months on to much lower, fixed-rate deals.
The Government also claim that our amendment would distort the market and, even more implausibly, may be a threat to financial stability. There can be no significant market distortion in relieving the plight of 250,000 people in a well-defined, identifiable and closed group. The notion that rescuing these people would, or could, threaten financial stability is wholly unconvincing. The Government claim that a threat to financial stability may exist because it would restrict the lenders’ ability to vary SVRs to reflect changes in the cost of doing business. It is notable that the cost of funds has decreased very significantly over the past decade. The SVR charged to mortgage prisoners has not.
We then come to the issue of fairness. The Government claim it would be unfair to provide special treatment to mortgage prisoners compared to others with similar credit characteristics. There is something truly ironic in this. The mortgage prisoners are in the position they are in precisely because it is they who have been treated unfairly by the Government. They are looking for a remedy for this mistreatment. They are looking for fairness to be restored to them. They did not cause their difficulties. They are not to blame for their misfortunes, as Martin Lewis emphasised when he recommended that MPs accept the Lords amendment. The responsibility for the plight of the mortgage prisoners lies squarely with UKAR and therefore with the Treasury. When UKAR decided to sell on the nationalised Northern Rock and Bradford & Bingley mortgage books to Cerberus, it said it had been reassured by Cerberus that the mortgagees would be able to access new deals and fixed rates, but they were not able to do that; it did not happen. UKAR then wrote to the noble Lord, Lord McFall, then chair of the Commons Treasury Select Committee, explaining that it had clearly been misled, but at the time it had no reason to disbelieve Cerberus. It also had no reason not to ask for these vital reassurances from Cerberus to be put in writing. The astonishing failure to do that is at the heart of this problem and is why the Treasury has direct moral responsibility for the state in which 250,000 mortgage prisoners find themselves.
The Treasury has never acknowledged this moral responsibility, nor have Ministers in our debates on this Bill. I invite the Minister to make that acknowledgement when he replies. Given that the Treasury caused this problem, it is very hard to see why, after all these years, it has not provided any significant relief. The Economic Secretary to the Treasury has repeatedly made the point that he is committed to finding a solution. I think no one doubts the strength of that commitment; I certainly do not. But equally, I think no one doubts that this commitment has come nowhere near to solving the problem.
On Monday, the Economic Secretary to the Treasury renewed his commitment and announced the measures that the Minister has just explained, which includes a commitment urgently to seek further solutions and to write to active lenders to urge them and the wider industry to go even further and look at what more they can do. That is entirely appropriate. I repeat that, so far, restrictions that were relaxed in October 2019 appear to have benefited only 40 mortgage prisoners. I mentioned this in Committee, and again on Report, and I invited the Government to rebut the figure. They have not done so.
All the measures proposed by the Economic Secretary are welcome, but I can tell the Minister that none of these things has given any comfort to the mortgage prisoners I have talked to. What is required is an acknowledgement of moral responsibility, at last, and a speedy and thorough remedy. I close with a concrete suggestion: the Minister will know that moratoria on repossessions will come to an end in May and October. Will he consider urgently extending these moratoria for certain types of mortgage prisoners until we have a solution to the underlying problem? If not, people will lose their homes. Let us at least prevent that while we continue to work together on a comprehensive solution. I beg to move.
The original question was that Motion B be agreed to, since when Motion B1 has been moved as an amendment to Motion B. Therefore, the question I now have to put is that Motion B1 be agreed to.
My Lords, I am very grateful to the Deputy Leader, the noble Earl, Lord Howe, for introducing the debate today. I particularly thank the noble Lord, Lord Sharkey, and his all-party parliamentary group for their determined efforts to make sure that this issue is kept alive and at the forefront of our debates on the Bill. We discussed this issue at Committee, on Report and now at ping-pong. We have had the opportunity to meet Ministers and we have been extensively briefed by civil servants, and I am grateful to all of them for the time they have taken to make sure we are fully briefed about the issues.
It is not uncommon to come across issues in Bills containing matters of public policy which seem to pose difficulties to the Government, despite general support for a solution expressed in amendments such as those we have before us today. In my experience, these often turn out to be what are called wicked issues, ones that span departments and need more time, it turns out, to be resolved in Whitehall than is available in the Bill. In this Bill, we had debates on statutory regulation for bailiffs, which probably falls into that category, as it was primarily a matter for the Ministry of Justice. Sadly, we have to wait for a resolution of a problem that all concerned agreed is actually settleable, albeit we have a deadline imposed of some two years. With that, now, the mortgage prisoner issue, but this is not really a wicked issue: the question of how to deal with mortgage prisoners really boils down to how to provide a “get out of jail” card for the small but not inconsiderable number of people—we think it is about 15,000—who are not able to exercise the basic choices about mortgage borrowing that we would regard as fair and appropriate for comparable citizens not caught in this prison. The sad fact is that while this issue continues, injustice is occurring.
Yes, there are problems of who qualifies; yes, there is a moral hazard; and yes, there may be unforeseen consequences. As Her Majesty’s loyal Opposition, we do not normally recommend that any Government should intervene directly in the market—although providing support for those who are trapped in financial difficulties not of their own making has many precedents and, ironically, is presumably where we are likely to end up on this issue, as I very much doubt that the current voluntary solutions will take the trick. As the noble Lord, Lord Sharkey, says, only 40 have so far managed to make the transfer that is on offer through the changes the Government have already made.
I have to say that, since the powers to deal with this issue are already invested in the Treasury, it is hard to see why a possible solution based on the efforts to date to modify the normal affordability checks for existing borrowers, perhaps underwritten or guaranteed by the Government, cannot be devised so that it deals with the situation in what the Government say they need, a proportionate and appropriate way—well, we would all applaud that.
All of us involved in this issue in both Houses have been impressed by the commitment and understanding of the issue displayed by the Economic Secretary to the Treasury, John Glen. We are supportive of his efforts to resolve this issue and want him to carry on—but with pace. We would be happy to continue the dialogue with him if that would be helpful. He stressed in the other place that one of his main concerns was that any solutions proposed should
“not provide false hope to borrowers”.—[Official Report, Commons, 26/4/21; col. 85.]
He is right to say that, but I put it to him that our main concern, and the reason we have pursued this issue to this very late stage in proceedings, is that it is surely unconscionable for the Government to leave a group of their citizens with no hope of recovery from circumstances that, as the noble Lord, Lord Sharkey, pointed out, they did not create. We need to keep in mind the need for hope.
I trust that the positive words we heard earlier from the Deputy Leader, the noble Earl, Lord Howe, about the Government’s strong commitment to finding proportionate and appropriate solutions to this problem will be turned into action very early in the new Session, with strong leadership from the Treasury, giving hope to those suffering the injustice we have been discussing. If the noble Earl can give that assurance when he comes to respond to this debate, I can confirm that we will not seek to test the opinion of the House on Motion B1.
The noble Baroness, Lady Noakes, has indicated a wish to speak.
My Lords, I spoke at length on this amendment on Report, and I will be brief today. The first part of the amendment proposes to cap SVRs at two percentage points over base rate. As my noble friend the Minister pointed out, this is a potentially dangerous market intervention with financial stability connotations. A recent study by the London School of Economics specifically recommended against this solution to the problem of mortgage prisoners. As my noble friend the Minister explained, it would confer a benefit on mortgage prisoners beyond what they could have obtained as customers of current mainstream mortgage lenders. The loan and borrower characteristics of mortgage prisoners often put them in the high-risk and therefore high-interest rate categories. It is just not fair to confer better terms than are available to borrowers with active lenders but in similar financial positions.
The second half of the amendment proposes that the FCA should make rules that some borrowers would be offered new fixed-rate deals, but this is probably incapable of operation given that the FCA cannot tell mortgage providers it regulates to whom they should lend and on what terms. Alternatively, if the FCA really could dictate to mortgage providers in this way, it would be a stake in the heart of financial regulation as it works in this country.
I have great sympathy for those who find themselves on high SVRs because they took out their mortgages with lenders that for whatever reason are no longer active in the market. However, we should be very wary of solutions that do not take account of the particular characteristics of these borrowers. It is a far from homogenous population with, at one extreme, borrowers who can and probably should remortgage, through to those who simply do not fit the risk appetite criteria of any active lenders. The devil really is in the detail, and across-the-board solutions such as Amendment 8 will throw up more problems than they solve.
My noble friend the Minister has explained how the Government are committed to finding practical solutions to help those trapped on mortgage terms unrepresentative of market rates on offer for equivalent mortgage situations. In the other place, my honourable friend the Economic Secretary said he was “absolutely committed” to working with the FCA to find practical solutions and to being in touch with active lenders to see to what extent they can help with this problem. I believe that he is sincere in his commitment and that we should await the outcome of the further work he now plans to carry out, which should come to fruition later this year. I urge the noble Lord, Lord Sharkey, not to press his amendment.
My Lords, I will be brief. My noble friend Lord Sharkey comprehensively answered the points raised by the Economic Secretary on Monday and by the noble Earl, Lord Howe, today in rejecting this amendment. I should point out that if the Government thought that the amendment was not quite correctly finessed, they could easily have brought in an amendment in lieu that would have achieved relief for mortgage prisoners, and they have chosen not to do so.
The nub of the problem is straightforward. Would the financial experience of a mortgage holder be the same if his or her mortgage had been sold by the Government to an active, rather than an inactive, lender? Even the Government do not deny that the answer to that is no. The difference in experience between those whose mortgages were held by active lenders, compared with those whose mortgages were sold to inactive lenders, has been markedly different. Those whose mortgages were held by active lenders that did not collapse in the 2008-09 crash have been able to take advantage of the fact that rates have fallen very sharply and have been offered a whole variety of new and different deals, as part of the normal practice of banks in dealing with their mortgage opportunities and portfolios. Those who ended up in the hands of inactive lenders have faced between limited options and none, and have been unable to take advantage of interest rates falling exceedingly sharply.
That is the only issue at play here. To compare those mortgage prisoners to people today seeking a mortgage is to look at an entirely false set of circumstances. I am concerned that the Government are choosing not to rectify the situation. It was the Government who chose to sell those mortgage assets to inactive lenders. They did so in good faith and without any expectation that the mortgage holders would end up in a different position from their peers who had taken out mortgages with institutions that did not fail. I understand that that was not an intentional process, but, regardless, the Government remain responsible for their decisions when they sold off those assets.
People are genuinely suffering and I ask the Government that the very small measure that my noble friend Lord Sharkey begged for at the end of his speech—that those individuals could at the very least be protected from foreclosures as we exit from Covid and the rules change on repossessions—could be put in place. The Government would then have an opportunity to justify the arguments made in both Houses that they are genuinely trying to find a solution to the problems and devastation that so many individuals face.
My Lords, we have not made as much progress on this issue as many people, including thousands across the country, would have hoped. That is not through any lack of effort. The noble Lord, Lord Sharkey, and my noble friend Lord Stevenson have been tenacious in their pursuit of change. However, for that to be possible, both sides must want to work towards a favourable outcome.
I said on Report that we were not convinced that this amendment provided the answer to the long-running problems experienced by mortgage prisoners. It certainly provides an answer, but I accept the argument that there would be consequences for the mortgage market as a whole. With this in mind, colleagues offered an alternative option in what was then Amendment 37B. Your Lordships’ House has a reputation for being constructive and, in that spirit, the noble Lord, Lord Sharkey, and my noble friend made further offers to look at any text that the Treasury would be prepared to bring forward. Unfortunately, Ministers chose not to put an amendment on the table.
The Economic Secretary has, to his credit, demonstrated knowledge of the challenges in this area. Every time he has spoken, I have believed his wish to identify workable solutions. The noble Earl, Lord Howe, and the noble Lord, Lord True, have said similar things in our meetings; again, I have viewed their comments as earnest. The problem is that warm words do not pay bills—nor do they generally lead to lenders taking the kind of steps that are required. The initiatives launched to date have helped only a tiny fraction of mortgage prisoners, so one would have thought that the case for further action was overwhelming.
We wanted—and continue to need—the Government to take proper ownership of this issue. We welcome the fact that the FCA will conduct a further review of the options available to mortgage prisoners and that the Treasury will revisit its data on the different cohorts of affected customers. As well as following these processes closely, we will of course continue to press the Economic Secretary to do what is needed.
It is regrettable that we have not been able to achieve a satisfactory outcome on this legislation, which should have been more than another false dawn. However, Conservative MPs have rejected the case for action, and it is hard to imagine meaningful progress being made unless Ministers revise their red lines. Accordingly, we do not believe we should press this matter any further today and look to the noble Lord, Lord Sharkey, to withdraw his amendment. However, I can assure the Minister that we will return to this issue at the next legislative opportunity.
My Lords, I am grateful to noble Lords who have spoken in this short debate, both for their constructive comments and for re-emphasising the genuine concerns they clearly have for this unfortunate group of people who find themselves trapped in mortgages that cause them great difficulty. I do not doubt for a second the distress that many such people are experiencing, but my noble friend Lady Noakes brought us back to some very important realities on this vexed subject. I agree with the noble Lord, Lord Tunnicliffe, that it is regrettable that we have not been able to reach full agreement on the way forward. Nevertheless, I hope my earlier remarks indicated that we take this subject extremely seriously. I am confident that noble Lords who have listened to my honourable friend the Economic Secretary speak on the subject will be in no doubt whatever of his intention to keep on top of it in the weeks ahead.
Part of the problem we face relates to the data that underpin the case that the noble Baroness, Lady Kramer, and the noble Lord, Lord Sharkey, have made. The report of the UK Mortgage Prisoners group makes accusations about the data held by the FCA, essentially saying that the data analysis is wrong. However, I put it on record that the FCA data analysis was conducted using information on the 250,000 borrowers with inactive lenders alongside a credit referencing agency dataset which includes data on 23,000 borrowers with inactive lenders. The FCA data has shown that, on average, the 55,000 borrowers with inactive firms who have characteristics that would make it difficult for them to switch but are up to date with payments are paying around 0.4 percentage points more than similar borrowers with active lenders who are now on a reversion rate. Its analysis also shows that the majority of borrowers with inactive firms are on relatively low interest rates of 3.5% or less.
It is important that, as part of the review that the Government have announced, the existing data is analysed to provide further details on the characteristics of the borrowers of most concern. That is definitely a core part of getting to grips with what more can be done in this area.
It was suggested that in the first instance the Government failed these consumers. I repudiate that suggestion very strongly. The customer protections that we set were best practice for transactions of this type—or went beyond best practice: the Government strengthened the consumer protections for the last two sales of new car loans in response to concerns raised by parliamentary colleagues.
I do not accept the points made by the noble Baroness, Lady Kramer, about the difference between those whose mortgages were refinanced with active lenders and those who found themselves with inactive lenders. The sales of those mortgages did not impact customers’ ability to remortgage elsewhere: customers with inactive lenders can remortgage with another provider as long as they meet the lender’s risk appetite. The customer protections that we insisted on for new car sales also included prohibitions on placing barriers in the way of customers remortgaging with another provider; for example, all early repayment charges are waived. These lenders are charging interest rates in line with SVRs set by active lenders.
The noble Lord, Lord Sharkey, asked about Cerberus. The customer protections in these sales were best practice in the market at the time. For the last two sales, restrictions on setting the SVR last for the lifetime of the mortgage. I add that Cerberus indicated that it was offering new products to customers but this was not part of its bid, so UKAR did not seek a binding commitment on this point. Cerberus was selected because it agreed to the consumer protections that were sought and provided the best value for money for taxpayers. I underline, therefore, that inactive lenders can, and often do, allow borrowers in arrears to make use of a variety of tools to get themselves back on track. Such tools include capitalisation of arrears, term extensions and payment holidays.
It is simply not true that the FCA has done nothing for this group of people. For example, to reflect the current Covid-19 situation, the FCA has brought forward guidance to allow borrowers who are up to date with their payments on a recently matured or soon-to-mature interest-only, or part-and-part, mortgage to delay repaying the capital on their mortgage while continuing to make interest payments. This guidance has enabled borrowers to stay in their own homes for a significant period. The FCA also confirmed that it was making intra-group switching easier for borrowers with an inactive firm that is in the same lending group as an active lender. On 14 September, the Money and Pensions Service launched online information and a dedicated phone service as a key source of information and advice for borrowers with inactive firms.
The point was made that the modified affordability assessment has helped only 40 households. The modified affordability assessment, I contend, provides an additional and important option for some borrowers who may not otherwise have been able to switch. We must just give it time to take effect. It will not be a silver bullet for all borrowers with inactive firms, many of whom have other characteristics that affect their ability to remortgage.
I will leave it there. I say again that I regret there has been no meeting of minds on this, but I also say that the Government place a great deal of emphasis on the work that is now in train. We will do our utmost to see what more can be done for mortgage prisoners as a result of the further analysis I have referred to. I hope noble Lords will see fit to agree with the Government’s Motion.
My Lords, I thank all noble Lords who have spoken in this brief debate. I listened carefully to the Minister’s thorough reply. I was struck again that there was no acknowledgement of any moral responsibility for the condition of the mortgage business. I was totally confused by his explanation of dealing with Cerberus. I point again to the fact that UKAR wrote to the Treasury Select Committee explaining that it had been misled by Cerberus about its treatment of people who became mortgage prisoners.
I would like to place on the record that, contrary to what the noble Earl said, I have never said the FCA has done or was doing nothing to help relieve the plight of the mortgage prisoners. I know that is not the case, and I have always been careful not to say that.
I do not think there was any convincing explanation offered for why this problem has been allowed to run for over a decade. There was no comfort for mortgage prisoners in what the Minister had to say—or, at least, none in prospect. Regrettably, it is clear the Government are unwilling to meet us, and they have not proposed their own amendment in lieu of ours. Obviously, we have reached the end of this episode in this long and distressing tale. The Government remain, in my view, directly responsible for the major injustice done to our mortgage prisoners and the suffering they are experiencing.
We will, of course, return to this issue at every opportunity and willingly join and co-operate with any initiatives the Government and the regulator may want to consider. In particular, we would like the Treasury to release the data the LSE says its needs to complete its analysis of possible solutions. I would be grateful for that at some point. Perhaps the Minister could write to me and tell me the Treasury is prepared to do that and is doing that. But for now, I beg leave to withdraw.
Motion B1 withdrawn.
Motion B agreed.