Why the financial regulator needs more power to properly protect consumers from 'bad people'

An influential group of MPs has called on the Government to fix gaps in the financial regulator's ability to protect consumers, which are caused by limitations in its 'regulatory perimeter'. This is the line between who the Financial Conduct Authority (FCA) can and can't regulate – and that line is decided by Government and Parliament. Crucially, this line determines whether or not the regulator can properly see into what financial firms are doing, and act to protect consumers from potential (or real) harm.

The Treasury Committee says the FCA needs to be able to formally request an extension of its remit that would boost its ability to meet its objectives, in particular to prevent consumer harm. It says the regulator should also be able to find out more about what's going on outside of what is strictly its remit. Another recommendation is that the regulator should be free to warn consumers about potential dangers, even if these are outside its authority.

The group of MPs argue that if the Government doesn't give the FCA the scope to do that, then it should accept responsibility for detecting and preventing harm to consumers who aren't protected by the regulator.

This issue is important for mortgage prisoners

This call for action is important for mortgage prisoners, who MoneySavingExpert.com have campaigned for since 2015. In fact, the committee named this area as one which would particularly benefit from its proposals.

As MSE has reported, the FCA has said there are 120,000 mortgage prisoners stuck with unauthorised firms, meaning they're outside the regulator's reach. While the regulator knows that many of these consumers might be facing harm, its hands are tied in just how much it can help. Many of these consumers used to have loans with now-defunct lenders, like Northern Rock and Bradford & Bingley, but their mortgages have since ended up being sold on to investment firms which are not regulated.

Consumers outside the FCA's scope are at risk

The FCA is open about the limits of its powers. In a report published in June, it noted that consumers outside of its reach might be at risk from firms that prioritise commercial gain over the interests of consumers. As FCA chair Charles Randell said while giving evidence to the Treasury Committee's investigation, the gap between where consumers are and aren't protected "attracts bad people who wish to exploit those grey areas".

But despite these fears, the FCA is not allowed to prioritise protecting consumers who lie outside its remit.

The FCA's lack of power over unauthorised firms means it can't free all mortgage prisoners

While the regulator should receive recognition for what it's doing, it simply cannot do what's required to solve the majority of the mortgage prisoner issue. The FCA can't force the unauthorised firms that own many of these mortgages to tell it who mortgage prisoners are, or what characteristics they have.

As a result, it has had to create a solution in the dark, and it can't compel these firms like it can those within its remit. And that's just on the mortgage prisoners issue, let alone other areas.

The regulator needs to be able to protect consumers wherever they are

There's a lot of common sense in the Treasury Committee recommendations that the regulator should be able to ask for more powers when it needs them, be able to find out more about what's going on outside of its scope, and be able to issue better warnings about what it sees. The financial watchdog does seem to be doing what it can, but it needs to have a better-equipped toolbox.

The MPs' report identifies apparent consumer confusion around whether a particular financial service is within the sight of the regulator. But there is an additional nuance. As described above, many mortgage prisoners originally took out their loans with fully-regulated firms, then saw their debts sold on by the Government to become owned by unregulated firms. The problem here is not rooted in consumer confusion, but a stark and unacceptable lack of regulatory reach. That is why MSE is campaigning to stop the Government selling mortgages to unregulated firms.

The financial regulator should be given all the powers it needs to properly protect financial services consumers. Until then, if the regulator can't protect some consumers from harm, the Treasury must step in and be held accountable.

Here's a flavour of what MSE has been doing over the years to campaign for justice for mortgage prisoners...

In 2015, Martin met key figures in the EU, the Treasury and the FCA, which are the organisations responsible for UK mortgage regulations.

In 2016, then Chancellor George Osborne wrote to mortgage lenders following a meeting with Martin about the plight of mortgage prisoners. However, Martin said the Chancellor's letter only addressed "a fraction of the problem".

In May 2018, the FCA found 150,000 consumers in the UK were mortgage prisoners. MSE contributed to the regulator's discovery by suggesting and helping facilitate a survey of mortgage brokers. The survey backed up the regulator's findings from analysing mortgage data, and the FCA thanked MSE for its contribution.

The regulator said it was able to help 30,000 of the mortgage prisoners it identified – by forcing the lenders to help their 'imprisoned' consumers if needed. But the other 120,000 'prisoners' have had their mortgages bought by firms that aren't authorised to lend, and so the FCA has no power to make them do anything.

In October 2018, Treasury Minister John Glen admitted that mortgage prisoners "need to be dealt with" at an event run by MSE at the Conservative Party Conference.

The minister also expressed agreement with Martin's call that an affordability check for someone with an existing mortgage – if it's at a cheaper rate and they're not borrowing more – should be: 'Have you repaid and not defaulted?'

In March 2019, the FCA launched a consultation detailing its solution to free mortgage prisoners.

In July 2019, MSE submitted a response to the FCA consultation, welcoming it, but calling for improvements and raising grave concerns that it won't help the majority of mortgage prisoners. Crucially, MSE called on the Government to step in and help those mortgage prisoners who are beyond the reach of the regulator.