30th September, 2022

GK Monthly Insights

The GK Insights team goes through some of the previous month’s biggest policy developments, focusing on actions taken by regulators to help consumers through the current economic climate. For more information, please get in touch via

FCA provides update on switching in the mortgage market

Although the FCA chose not to make a major intervention into the mortgage market at the height of the pandemic, we wonder if the number of ‘mortgage prisoners’, might be giving the FCA cause for concern. Last year, the FCA announced that it would seek a ‘proportionate’ response. In other words, a solution for borrowers that would not be too onerous for lenders.

However, the FCA has recently released a statement on mortgage switching during the ‘cost of living crisis’, underlining the fact that approximately half of mortgages currently arranged on fixed rates expire in the next two years. Interestingly, the statement also highlights how many mortgage borrowers have paid comparatively low interest rates in recent years, on both fixed and variable rates – therefore, most will likely face increasing mortgage costs as base rates and the cost of new fixed or other incentivised deals increase.

The regulator has implored lenders and mortgage intermediaries to support consumers to consider their options and potentially facilitate switches to a less costly mortgage if it meets a consumer’s ‘needs and circumstances’.

The FCA has also set out its expectations for mortgage lenders, including giving borrowers in financial difficulty appropriate tailored forbearance. Crucially, this forbearance should consider the individual circumstances of the most vulnerable borrowers. Additionally, firms are expected to help those struggling with debt by directing them towards free debt advice or money guidance.

The FCA has stated that it will continue to track the number of borrowers who are not switching despite the prospect of saving more money. It’s not out of the question that the FCA could also assess the impact of increased costs where cheaper legacy deals are replaced with more expensive ones in a rising interest rate environment. This could lead to dialogue with firms in the mortgage sector to discuss future actions to ensure good consumer outcomes.

We should note, at this stage, that the FCA does not believe that significant regulatory intervention is required, or, at least, it has not said that an intervention is planned. The regulator noted that it thinks that pricing is generally transparent, and the structure of a mortgage product is well understood by consumers.

However, the FCA’s stance may not be ironclad. The impact of this month’s fiscal event looms large over the regulator. Sheldon Mills, who holds responsibility for regulation of consumer finance and competition, emphasised that the FCA is aware of the “upward pressures on mortgage rates” and the removal of certain products in the past week. There is mounting evidence that the FCA is increasingly focused on ‘outcomes’, which means that, in the future, the regulator may not give much leeway to mortgage providers, even if the current circumstances may be beyond their control.

Therefore, the FCA could well return to this issue, if the economic climate worsens or instances of consumer harm increase dramatically, and one would expect that it may adopt a tougher stance that it has done in the past.

FCA takes issue with misleading adverts for Buy Now Pay Later products

Buy Now Pay Later (BNPL) continues to attract the attention of the Financial Conduct Authority (FCA). The FCA has written to providers of Buy Now Pay Later (BNPL) products warning that advertisements must comply with standard financial promotion rules. The Financial Conduct Authority is concerned that some BNPL lenders are misleading consumers through their advertising, which may not notify borrowers of potential risks such as taking on debt that customers cannot afford to repay and the consequences of missed payments.

While conventional promotions by firms have received much attention in recent years, the more recent role of social media in the distribution of BNPL promotions presents the regulator with a familiar problem – preventing consumers from making poor financial decisions.

The FCA’s assertion that some collaborations with influencers could be taking advantage of behavioural biases, leading to impulse buying, is certainly reasonable. However, a ‘minor’ issue for the regulator is the fact that lenders and merchants do not need to be authorised by the FCA to enter into BNPL agreements.

Nevertheless, the FCA is still minded to act on the issue – a sign, perhaps, of the pressure it is under to intervene (rather than simply supervise) in certain markets, as a result of the ‘cost of living crisis’. The FCA has emphasised that the financial promotions of those unregulated / exempt agreements will still need to comply with certain regulatory requirements regardless (depending on who is communicating or approving the promotion). Crucially, this means that not only may unauthorised companies be seen to be breaching rules if they don’t have an authorised firm approve their financial promotions, but also that firms must communicate promotions in a way that is ‘clear, fair and not misleading’.

In terms of next steps, the FCA has stated that it will continue to monitor the BNPL market and act against individual firms found to be non-compliant. This is a development that should surprise no one, given the work that both the FCA and HM Treasury have undertaken to ensure greater regulation of BNPL products. The FCA also expects firms to follow the rules of its new Consumer Duty, highlighting the need for firms approving or communicating financial marketing to have understanding of FCA expectations and the ways in which the ‘cost of living crisis’ could impact consumer outcomes.

This may give the BNPL market cause for concern, as the FCA will soon expect all parties involved in sales to ensure that consumers understand the short and long-term financial implications arising from the purchase of their products. While larger firms operating in other areas of consumer finance, who use more conventional sales and promotions methods, have already taken steps to ensure compliance with the Consumer Duty, the BNPL market may be less prepared for the changes on the horizon.

CMA takes further action to protect leaseholders

At a time when all eyes are trained on the housing market, the Competition and Markets Authority (CMA) has continued to act decisively to help leaseholders. The latest development is that thousands of leaseholders who paid a doubled ground rent will receive refunds and that nine more companies will remove such terms from leasehold contracts. The regulator has also stated that many of those who paid a doubled rent will receive a refund – the move could impact over 5,000 households across the country. Crucially, the CMA’s action has been influenced by the view that these terms result in people being stuck in homes they cannot sell or mortgage – an issue that we believe could be exacerbated over the next few years, as homeowners currently on fixed rate mortgages look to re-mortgage.

Arguably, the most striking decision that the CMA has taken is to ensure the removal of contract terms which were originally doubling clauses but were converted so the ground rent increased in accordance with the Retail Price Index (RPI). However, when one considers the context in which the decision was made, the reasoning that underpins it becomes clear. The FCA is not the only regulatory body that has felt compelled to intervene more frequently to protect consumers; CMA decisions have also been trending in the same direction. The CMA’s multiple interventions, during the pandemic, on behalf of consumers purchasing airline tickets and holiday packages that would eventually be cancelled, is clear evidence of an emboldened regulator.

Once the CMA took the view that the doubling clauses were unfair to leaseholders, it was inevitable that the body would rule that all those effected will see ground rents remain at the original amount when the property was first sold. Notably, this amount will not increase over time and the freeholders involved have also agreed to refund residential leaseholders who had already paid out under doubled ground rent terms.

We do not expect the CMA to relent on the issue, given that its investigation into the leasehold sector, began in June 2019, and now spans three governments. There’s remains a significant amount of political will, amongst MPs and campaign groups, to see whether (or the extent to which) there have been breaches of consumer protection law. As the investigation has at this juncture, identified the escalation of ground rents, potentially harmful sales practices, excessive service / permission charges and a lack of checks and balances as key issues to address, it is unlikely that the CMA will face any political pressure to wind down its activities.

The Pensions Regulator addresses refinancing in the current economic climate

The Pensions Regulator (TPR) has also given thought to the impact of the UK economic woes. The regulator has also set out its expectations of pension trustees and sponsoring employers when refinancing, imploring relevant parties to take stock of the worsening economic climate. David Fairs, the Executive Director of Regulatory Policy, Analysis and Advice at TPR, has stated the new macroeconomic challenges that country could face in the coming months may make refinancing even more challenging for sponsoring employers, as many organisations look to recover from the pandemic.

After the disruption of the pandemic, the gradual return to a more familiar business environment was always likely to result in the return of refinancing in a more traditional sense. However, the growing economic uncertainty in recent months, has led TPR to list several things that employers and trustees should consider, as they could have a tangible effect on the employer covenant. These include interest costs and fees, as changes in the cost of debt could impact an employer’s ability to meet pension contributions and debt structure, with the regulator noting that trustees should command a good understanding of any impact of replacing one type of debt with another.

Additionally, trustees are expected to consider financial covenants – typically measures of company financial performance that, once breached, allow debt holders to act, such as calling in their debt, charging a fee, taking security or otherwise make commercial improvements to their terms. TPR believes that changes to such covenants could represent a power shift between trustees and lenders in the event of financial stress.

In truth, trustees and employers will already be aware of these issues, however, TPR is likely to continue to voice its concerns this autumn. Despite the resilience one can find in certain markets – such as asset-backed lending – TPR has noted that credit conditions are tightening and larger refinancings have become more challenging, having been impacted by lender concerns around certain sectors and ensuring adequate returns on their investment.

The regulator has taken the view that these conditions are likely to be reflected in higher interest rates and tighter covenants, with potentially more onerous security requirements and greater restrictions on use of funds. An important counterpoint, however, is TPR’s admission that the rise of alternative lenders, including hedge funds and private equity, alongside newer retail banks or ‘challenger banks’, may help to ensure that liquidity remains available to sponsoring employers.

Ultimately, TPR’s key desire is for sponsoring employers and trustees to understand the implications of any refinancing on pension schemes and the employer covenant, and to go reasonable lengths to mitigate any damage that may be caused by refinancing – again, this should not be a surprise. The reality is that TPR’s messaging is similar to the other regulators that we have already mentioned. As the ‘cost of living’ bites and the Government attempts to enact its reforms, the intentions and context underpinning decisions made by organisations may become less relevant. Instead, the FCA, CMA and TPR are likely to focus on the material impact of any decision made by an organisation on individuals.