3.4 Trends in (Un)sustainability Flashcards
Responsible borrowing definition
A person or a business borrowing only as much as they can afford to repay within the stated time of the loan
Consumer culture definition
A culture of high spending
What happened in terms of banks lending after the financial crisis?
They were wary of lending to each other so could not raise funds needed to underpin lending and so tightened lending criteria
Deleveraging definition
Stopping spending and saving money from incomes to pay off debts in fear of losing a job
Perilous debt definition
Debt on which someone is spending more than half of their monthly income to meet repayments
The FCA published a Mortgage Market Review which set out what?
The case for ‘reforming the mortgage market to ensure it is sustainable and works better for consumers’.
What does the MMR report include?
Recommendations for reform, aiming to ensure continued access to mortgages for those who can afford them, but to prevent a return to poor practices of the past
What are the most important changes set out in the MMR report?
- Lenders are fully responsible for assessing whether a potential mortgage customer can afford the loan and for verifying the customers income
- Lenders are allowed to grant interest-only loans, but they must see evidence that the customer has a credible strategy in place to repay the capital amount at the end of the mortgage.
Under the MMR report, who is held responsible for failings of assessing if a customer can afford the loan - an intermediary, such as a mortgage broker, or the lender?
Always the lender
Example of a strategy to repay the capital amount at the end of an interest-only loan:
An endowment policy that is due to pay out the required amount at the required time
When assessing a borrower’s ability to repay a loan, the lender must look at both income and expenditures. This involves:
- Checking income with their employer (financial accounts if self-employed)
- Assessing regular committed expenditure
- Checking if borrower could still afford mortgage repayment if interest rates were to rise
- Not lending to a high-risk borrower
Financial regulators state that who must take responsibility for financial decisions made - the customer or the lender?
The customer
When the FCA is securing an appropriate degree of protection for consumers they need to take what into account?
- Different degrees of risk involve in different types of transactions
- Differing degree of experience and expertise in different consumers
- Consumers need for the timely provision of accurate information and advice
When will the FCA intervene with firms?
When firms treat customers unfairly or behave in ways that risk the integrity of the market
The FCA has the power to impose a range of penalties for firms who break the rules, including what?
- Withdrawing a firm’s authorisation
- Suspending firms
- Fining firms
- Bringing criminal prosecution
