The Financial Policy Committee’s recommendation on loan to income ratios in mortgage lending: General Guidance (Revised February 2017)

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1 Overview
1.1 In November 2016 we published a consultation 1 proposing changes and clarifications to
the general guidance we issued in October 2014 regarding the Financial Policy Committee's (FPC) Recommendation on loan to income (LTI) ratios in mortgage lending 2 . Following the consultation period, we are now publishing this Finalised Guidance 17/2 on ‘the Financial Policy Committee’s recommendation on loan to income ratios in mortgage lending: General Guidance (Revised February 2017)’. Context
1.2 Our initial guidance (FG14/8 3
) set out the expectation for FCA-authorised mortgage lenders to limit the number of mortgage loans made at, or greater than, 4.5 times loan￾to-income (LTI) ratio to no more than 15% of their new mortgage loans. This limit is referred to as the ‘LTI flow limit’. Our guidance on the LTI flow limit was consistent with rules put in place by the PRA.

1 GC16/8 ‘Amendments to Guidance on loan to income rations in mortgage lending’ (November 2016) https://www.fca.org.uk/publication/guidance-consultation/gc16-08.pdf 2 http://www.bankofengland.co.uk/financialstability/Pages/fpc/loanincome.aspx 3 FG14/8 ‘Guidance on the Financial Policy Committee’s recommendation on loan to income ratios in mortgage lending’ (October 2014) https://www.fca.org.uk/publications/finalised-guidance/fg14-8-guidance￾financial-policy-committee%E2%80%99s-recommendation-loan FG 17/2 - The Financial Policy Committee’s recommendation on loan to income ratios in mortgage lending: General Guidance (Revised February 2017)

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Finalised guidance
1.3 Following a review of the implementation of the FPC's recommendation, the PRA found
that the design of the LTI flow limit (a fixed limit that no more that 15% of new mortgage contracts in a given quarter can have a LTI at or above 4.5 times) can affect firms' ability to manage their business pipeline. In response, we proposed changing the design of the LTI flow limit from a quarterly limit to a four-quarter rolling limit.
1.4 Additionally, our consultation set out some additional clarifications on the scope of the LTI
flow limit. These confirmed that the following are excluded from the LTI flow limit:
 second and subsequent charge mortgages
 interest roll-up bridging loans, and
 mortgages ported to another property where there is no increase in the principal outstanding.
1.5 Our proposed changes and clarifications mirror those being made by the PRA. The
Finalised Guidance reflecting the amendments can be found in Annex 1 to this document. Consultation process
1.6 Our consultation period closed on 10 January. We received two consultation responses
which supported our proposals. This means that we have not made any changes to the guidance as proposed (see Annex 1).
1.7 FG 17/2 is implemented with immediate effect so that the LTI flow limit is applied on a
four-quarter rolling basis from the current quarter onwards. This means that starting from Q1 2017 we will monitor the LTI flow limit on a four-quarter rolling basis. For Q1 2017, this will also include data flows from Q2 2016 - Q4 2016.
1.8 Firms should note that if they are already within the current fixed quarterly limit, they
would also be under the limit if it is calculated on a four-quarter rolling basis.

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Annex 1 – Finalised Guidance FG 17/2
THE FINANCIAL POLICY COMMITTEE’S RECOMMENDATION ON LOAN TO INCOME RATIOS IN MORTGAGE LENDING:
GENERAL GUIDANCE
(Revised February 2017)
A. Application and interpretation
Status of guidance

1. This is general guidance given under section 139A(1) of the Financial Services and
   Markets Act 2000 with respect to the functions of the FCA.
2. The implementation of the Financial Policy Committee’s (FPC) recommendation on loan to
   income ratios primarily advances the FCA’s market integrity objective as it leads to macroeconomic stability by reducing the chance of an unsustainable credit boom, which in turn leads to a more sound, stable and resilient financial system. Doing so is also compatible with the FCA’s strategic objective by ensuring that the relevant markets function well.
3. This guidance sets out the FCA’s expectations for following the FPC’s recommendation.
   3A. This guidance was initially issued on 1 October 2014 (FG14/8). On 27 February 2017 the guidance was revised. The amended guidance is shown highlighted. Application
4. This guidance applies to a firm with Part 4A permission that includes entering into a
   regulated mortgage contract as lender, except if it is:
   (1) a bank; or
   (2) a building society; or
   (3) a subsidiary undertaking of a bank or building society with Part 4A permission that includes entering into a regulated mortgage contract as lender; or (4) an insurer; or (5) a friendly society; or (6) a credit union.

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5. As this guidance applies only to a firm with Part 4A permission, it does not apply to an
incoming EEA firm (unless it has a top-up permission that includes entering into a regulated mortgage contract as lender).
6. This guidance applies to an overseas firm only in relation to activities carried on from an
establishment in the United Kingdom.
Exclusions
7. The following are excluded from the expectation on high loan to income limit set out in
this guidance:
(1) re-mortgages with no change to the principal sum outstanding; (2) lifetime mortgages; and (3) regulated mortgage contracts that are not a first charge legal mortgage. Interpretation
8. Interpretative provisions (including definitions in the Glossary) of the Handbook apply to
this guidance in the same way they apply to the Handbook, except where a definition is otherwise provided in paragraph 10 that definition applies for the purpose of this guidance.
9. Where an expression in italics is not defined in the Glossary, it has the meaning given in
paragraph 10.
Glossary of terms defined in this guidance
10. For the purpose of this guidance, the following definitions apply:
credit the cash loan provided by a firm under a regulated mortgage contract:
(a) at the time the regulated mortgage contract is entered into; or (b) drawn down at a later date. high loan to income allowance the number of high loan to income mortgage contracts that a firm may enter into in a relevant period consistent with the expectation in paragraph 14 without any modification under paragraphs 19 to 21. high loan to income mortgage contract a regulated mortgage contract under which the credit provided by a firm to an individual, or individuals jointly, is at, or exceeds, the loan to income ratio. income the gross annual income, before tax and other deductions, of an individual taken into account by a firm to calculate the credit it will provide under a regulated mortgage contract.

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Finalised guidance legal mortgage includes a legal charge, and in Scotland, a heritable security. Loan to income ratio a multiple of 4.5 times of an individual’s income or individuals’ joint income, at the time at which that income is assessed by a firm for the purpose of entering into a regulated mortgage contract with the individual or individuals. quarter any of the four calendar quarters of each calendar year. relevant period (in relation to a quarter) the quarter and the three consecutive quarters preceding it. re-mortgage with no change to the principal sum outstanding a regulated mortgage contract in respect of which the following conditions are met:
(a) the amount of credit provided under the regulated mortgage contract does not exceed that outstanding to:
(i) the firm; or
(ii) a different lender, under a previous regulated mortgage contract, or any other type of contract under which the obligation to repay the credit provided is secured by a legal mortgage on land; and (b) in determining the amount of credit provided, no account is taken of:
(i) arrangement fees;
(ii) professional fees and costs; and
(iii) administration costs.
B. Guidance to firms
De minimis conditions
11. Condition A is that in the set of four consecutive quarters ending on 30 June 2014, a firm
has entered into regulated mortgage contracts under which the sum of the credit provided is, or exceeds, £100 million, but Condition A is not met if the firm entered into less than 300 regulated mortgage contracts in that period.
12. Condition B is that during both of two consecutive sets of four quarters, a firm has
entered into regulated mortgage contracts under which the sum of credit provided in each set of four quarters is, or exceeds, £100 million, but Condition B is not met if the

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Finalised guidance firm entered into less than 300 regulated mortgage contracts in each of those sets of four quarters.
13. In this guidance, two consecutive sets of four quarters is computed as follows:
(1) a new set of four quarters starts at the beginning of each new quarter; (2) the four quarters in each set run consecutively; and (3) for the purpose of Condition B:
(a) the first set of four quarters ends on 30 June 2014 and the second set of four quarters ends on 30 September 2014; and (b) thereafter:
(i) a first set of four quarters ends on 30 September 2014 and on the last day of each subsequent quarter that follow; and (ii) followed by a second set of four quarters ending on 31 December 2014 and on the last day of each subsequent quarter that follows. High loan to income limit
14. If either Condition A or Condition B is met in relation to a firm, the FCA expects that by
the end of each quarter, the number of high loan to income mortgage contracts that the firm enters into in the relevant period does not exceed 15% of all regulated mortgage contracts it enters into in that relevant period, unless the firm has allocated or received high loan to income allowance under paragraphs 19 to 21.
15. Where Condition A is met, the firm should carry on its regulated activity of entering into a
regulated mortgage contract in a way that is consistent with the expectation in paragraph 14 from the quarter beginning on 1 October 2014.
16. Where Condition B is met, the firm should carry on its regulated activity of entering into a
regulated mortgage contract in a way that is consistent with the expectation in paragraph 14 from the start of the second quarter following the end of the final quarter relevant to the determination that Condition B has been met in relation to the firm.
17. Once either Condition A or Condition B is met, the firm should carry on its regulated
activity of entering into a regulated mortgage contract in a way consistent with the expectation in paragraph 14 until Condition C is met. Condition when expectation ceases
18. Condition C is that during both of two consecutive sets of four quarters:
(1) the firm has entered into regulated mortgage contracts under which the sum of credit provided is less than £100 million; or (2) the firm has entered into less than 300 regulated mortgage contracts in each of those sets of four quarters.

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Allocation of high loan to income allowance within a group
19. A firm that is part of a group may allocate all or part of its high loan to income allowance
to any member of the group.
20. If a firm has allocated any part of its high loan to income allowance to another member
of the group, the number of high loan to income mortgage contracts that it enters into should be reduced by the amount of the high loan to income allowance it has allocated.
21. If a firm that is part of a group has been allocated the high loan to income allowance of
another member of its group, the number of high loan to income mortgage contracts entered into by the firm should not exceed the expectation in paragraph 14, plus any high loan to income allowance allocated to it.
22. The FCA expects a firm to keep a record of any part of a high loan to income allowance it
has allocated or received.
Worked examples
23. This paragraph explains by way of a worked example how the de minimis condition
applies in the guidance.
For the period 1 July 2013 to 30 June 2014 (Q3 2013 to Q2 2014), Firm X, Firm Y and Firm Z each submit four product sales data (PSD) returns. The cumulative total value of mortgages reported in those four returns for Firm X and Firm Y respectively is less than £100m and for Firm Z it is greater than £100m. On the basis of Condition A, Firm X and Firm Y are each determined to be below the threshold and therefore out of scope of the limit on the date the proposed guidance would apply. Firm Z is determined to be above the threshold and therefore in scope of the limit on the date the proposed guidance would apply. So Firm Z is expected to limit the number of mortgage loans at or above the loan to income (LTI) limit. We repeat the threshold test when the Q3 2014 PSD returns are submitted. The relevant period is now 1 October 2013 to 30 September 2014 (Q4 2013 to Q3 2014). The cumulative total value of mortgages reported in those four returns for Firm X and Firm Y respectively is equal to or greater than £100m. We notify both firms of this fact but there is no expectation that the firms should limit the number of mortgage loans at or above the LTI limit at this stage. The cumulative total value of mortgages reported in those four returns for Firm Z is equal to or greater than £100m. Firm Z continues to be in scope of the expectations of the guidance and should limit the number of mortgage loans at or above the LTI limit as recommended by the FPC. We repeat the threshold test when the Q4 2014 PSD returns are submitted. The relevant period is now 1 January 2014 to 31 December 2014 (Q1 2014 to Q4 2014). The cumulative total value of mortgages reported in those four returns for Firm X is equal to or greater than £100m and for Firm Y is less than £100m. On the basis of Condition B, we notify Firm X that it will be

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Finalised guidance within scope of the expectations of the guidance. So Firm X will be expected to adjust its mortgage lending activities to be consistent with the expectations of the guidance and should limit the number of mortgage loans at or above the LTI limit as recommended by the FPC from the next applicable quarter (Q2 2015) beginning on 1 April 2015. However Firm Y remains below the threshold and out of scope of the expectations in the guidance on the LTI limit. The cumulative total value of mortgages reported in those four returns for Firm Z is equal to or greater than £100m. Firm Z continues to be in scope of the expectations of the guidance and should limit the number of mortgage loans at or above the LTI limit. 23A. The example in Table 1 explains how the four-quarter rolling limit is calculated. It shows total loan flows by quarter (A-G) and total loan flows with an LTI ratio of 4.5 or higher (a-g). The table also shows that the relevant LTI limit calculation takes into consideration flows during the last four quarters. For example, in Q1 2017 the LTI flow limit under a four-quarter rolling limit will be based on flows for Q2, Q3 and Q4 in 2016 and Q1 2017 (ie total loans flows A-D and total high LTI loan flows a-d).
Table 1: comparing the current approach with the new proposal
Firm A’s loans flows:
Quarters based on PSD reporting
Q2
2016
Q3
2016
Q4
2016
Q1
2017
Q2
2017
Q3
2017
Q4
2017
Total loan flows
(volume)
A B C D E F G
Total loans with an loan to income

=4.5 (volume) a b c d e f g
Firm A’s calculation and application for the purpose of the LTI flow limit:
Quarters based on PSD reporting:
Q2
2016
Q3
2016
Q4
2016
Q1
2017
Q2
2017
Q3
2017
Q4
2017
Percentage of flows with
LTI>=4.5 under four-quarter rolling limit
(a+b+ c+d)
÷
(A+B+
C+D)
<15%
(b+c+ d+e)
÷
(B+C+
D+E)
<15%
(c+d+ e+f)
÷
(C+D+
E+F)
<15%
(d+e+ f+g)
÷
(D+E+
F+G)
<15%
C. Monitoring

24. The FCA will use product sales data returns to monitor which firms meet the de minimis
    conditions in paragraphs 11 or 12.

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25. When firms meet the de minimis conditions in paragraphs 11 or 12, the FCA will monitor
their regulated activity of entering into a regulated mortgage contract for consistency with the expectation in paragraph 14, or as may be modified by paragraphs 19 to 21.
26. When a firm meets the de minimis conditions in paragraphs 11 or 12 but has not carried
on its regulated activity of entering into a regulated mortgage contract in a way that is consistent with the expectation in paragraph 14, or as may be modified by paragraphs 19 to 21, the FCA may consider using its power under section 55L of the Act to, on its own initiative, require the firm to stop entering into high loan to income mortgage contracts.