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Dear CEO | Release Date: 11th March 2022

To read a shorter summary of this Dear CEO letter, click here.

To access the original FCA document, click here.

Long Summary

This communication from the Financial Conduct Authority (FCA) outlines a comprehensive strategy and set of expectations directed at CEOs of Non-Bank Mortgage Lenders (NBLs). The letter acknowledges the unprecedented challenges posed by the COVID-19 pandemic and outlines the strategic adaptations undertaken by the FCA to enhance its regulatory capabilities. In moving forward, the FCA sets clear expectations for NBLs, focusing on several critical areas including customer support in financial difficulty, management of interest-only mortgages, responsible lending practices, and the transition from LIBOR. This letter serves as both a directive and a preparatory guide for NBLs as they navigate forthcoming regulatory and market challenges.

Introduction to FCA’s Enhanced Regulatory Approach

The letter begins by contextualising the recent hardships faced by the financial sector due to the COVID-19 pandemic, noting the significant operational pressures exerted on firms. The FCA commends NBLs for their responsiveness in implementing necessary support measures such as the Tailored Support Guidance, which has been crucial in providing temporary relief for consumers.

Building on these experiences, the FCA describes its evolution into a more agile and responsive regulator. This transformation is characterised by greater innovation, assertiveness, and adaptability, enabling the FCA to tackle rapidly emerging challenges in the financial markets. This shift includes a substantial increase in the use of data and technology, enhancing the FCA’s ability to act swiftly and effectively.

Strategic Focus and Regulatory Expectations

Ongoing Support for Mortgage Customers in Financial Difficulty

With the cessation of government support schemes like furlough and changes in the economic landscape, such as potential interest rate increases, the FCA anticipates additional financial pressures for consumers. NBLs are expected to continue offering substantial support and forbearance, guided by the FCA’s Tailored Support Guidance. This framework aims to ensure that all customers receive fair treatment, particularly those facing payment difficulties, ensuring that support measures consider individual circumstances and broader financial obligations.

Effective Management of Maturing Interest-Only Mortgages

The FCA highlights the impending challenge of maturing interest-only mortgages, with a significant peak expected in 2032. It stresses the importance of NBLs implementing comprehensive communication strategies to inform customers about their repayment options well in advance. This proactive engagement is crucial to prevent potential financial distress for borrowers who may lack adequate repayment plans.

Upholding High Standards of Responsible Lending

In light of economic pressures that could tempt firms to loosen lending criteria to maintain business volumes, the FCA reiterates the importance of stringent affordability assessments. This is particularly pertinent as changes in the economic environment, such as rising interest rates, could strain consumers’ finances further. The FCA expects NBLs to maintain prudent lending practices without compromising on affordability checks, especially in market segments like later-life lending.

Smooth Transition Away from LIBOR

Acknowledging the end of LIBOR in 2021, the FCA outlines expectations for NBLs to ensure that any remaining dependencies on ‘synthetic’ LIBOR are transitioned to fair alternative rates promptly. This transition is critical to avoid any disruption in lending practices and to maintain the integrity of financial contracts.

Ensuring Adequate Financial Resources

Reflecting on the vulnerabilities exposed by the pandemic, the FCA emphasises the necessity for NBLs to maintain robust financial resources. This includes adequate liquidity to manage potential increases in arrears and to withstand possible firm failures, especially in a landscape of rising interest rates and economic uncertainties.

Broader Regulatory Initiatives and Updates

The letter also covers updates on several broader regulatory initiatives, including efforts to assist mortgage prisoners, the integration of environmental, social, and governance (ESG) considerations into business practices, and the implications of Brexit-related transitional powers concluding.

Conclusion and Proactive Steps Moving Forward

The FCA calls on NBLs to thoroughly review the outlined risks and expectations, ensuring their practices align with regulatory standards and adequately protect consumer interests. NBLs are urged to demonstrate proactive engagement and compliance, with an emphasis on fair treatment of consumers, particularly those in vulnerable circumstances.

The FCA concludes by reinforcing its commitment to a transparent and cooperative regulatory environment, urging NBLs to maintain open communication channels for any queries or significant issues that arise. This ongoing dialogue is crucial as the FCA continues to monitor the sector and adjust its supervisory approach in response to evolving market conditions.

Contact and Further Guidance

NBLs are encouraged to contact the FCA through designated channels for any immediate concerns or clarification needed regarding the regulatory expectations. The letter serves as a foundational document, guiding NBLs in aligning their operational strategies with the FCA’s enhanced regulatory framework and societal expectations.

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