Some of the comments and proposals in last month’s FSA paper on responsible lending, CP10/16, are entirely sensible but others are downright dangerous, with the potential for considerable consumer detriment.
Making proposals that it admits will hurt some consumers is an interesting way of fulfilling the FSA’s statutory responsibility for consumer protection. It claims that the number of consumers who will benefit from its proposals is greater than the number who will be hurt and concludes that the collateral damage to those who will suffer is an acceptable price to pay. I suspect that the millions of consumers who will be adversely affected may not see it that way.
The cost-benefit analysis that the FSA is required to produce before introducing new rules is a cop-out when it comes to assessing the degree of consumer detriment as a result of its proposed draconian affordability tests. For example, it says: “We have not estimated the loss of welfare to affected borrowers in having to settle for a less preferred property (be it a rental or more affordable purchase) due to difficulties in measuring these effects.”
The FSA is proposing to completely rewrite the existing MCOB chapter 11 and the new rule 11.3.12 R (1). It says: “For the purposes of this rule, the customer’s free disposable income is the amount (if any) remaining when the customer’s expenditure has been deducted from the customer’s income. A regulated mortgage contract or home purchase plan is not affordable for a customer if it is foreseeable that, at any time during the term of the regulated mortgage contract or home purchase plan, the payments to be made under it by the customer for a particular month (or other agreed payment interval) will be equal to or more than the customer’s free disposable income over the same interval.”
Unless lenders change their mortgage conditions to require a single annual payment, perhaps allowing borrowers to make monthly payments on account without incurring an ERC as a concession, which seems rather unlikely, this rule means that for the millions of borrowers with a fluctuating income, the FSA will only allow them to borrow what would be affordable from the income they receive in their worst month.
This would be extremely detrimental not only to virtually every family with at least one income earner who is self-employed but also to the many employed borrowers who earn a significant proportion of their income by way of bonus, commission or overtime.
An extreme example of a victim would be a top criminal lawyer who might earn over £500,000 a year from a small number of cases, receiving a cheque for six figures some months and nothing in others. According to the FSA, the maximum mortgage such a lawyer could afford is nil.
Ray Boulger is senior technical manager at John Charcol