***CHECK AGAINST DELIVERY***

Welcome to the second UK Finance Annual Scottish Mortgage Lunch.  This was one of my first official engagements after I joined just over a year ago and I?m delighted to be back here again. 

2018 was a busy year and I?d like to make a few remarks about mortgages and housing in Scotland and the broader UK. 

The Scottish Housing and Mortgage Market

As we saw across the UK, 2018 was the year of the remortgage in Scotland as people locked into competitive deals to take them through a potentially uncertain economic period.  The £4.5 billion of remortgaging in Scotland was 13.8 per cent more than in 2017, marking a seven-year high.  And that's without the addition of product transfers which was the new data set we started publishing last year.  We don't have specific figures for Scotland but across the UK there was an additional £150 billion of product transfer activity in 2018.

First time buyers and home movers saw more modest growth, with Scottish year-on-year figures showing £4 billion of new lending in the year for first-time buyers, which was 2 per cent more than in 2017; and £5.5 billion of new lending for home movers 1.5 per cent more than in 2017.

We are engaging with the Scottish Government's debate on Housing Beyond 2021.  The Government is in the early stages of developing its route map for policy interventions in the coming decades, and wants to take a ?whole housing system? approach, which we welcome.  In doing so, however, we want government to take account of the role and contribution of private finance across all tenures in helping to meet its housing targets and wider delivery outcomes.  Much of what the government would like to achieve would simply not be possible without private finance.

Decisions on the future of the Help to Buy scheme, which ends in March 2021, are expected to be made in the context of Housing Beyond 2021.  However, it's important to have clarity on the future of the Help To Buy Scotland scheme, sooner rather than later, so that the potential for market disruption is avoided if the scheme ends and/ or new arrangements are put in place. 

The increase in the Land and Building Transactions Tax additional homes supplement from 3% to 4% announced in the Scottish Government Budget 2018-19 recently is likely to add to the cumulative burden on Scotland's private landlords.  We are seeing the impact of regulatory and other fiscal change on the buy to let sector, and there is a concern that an unintended consequence of the changes could be professional landlords leaving the sector, impacting the private rented sector more broadly and putting more pressure on people's housing choices. 

Our members continue to have a healthy appetite for private lending and investment in Scottish housing associations.  Their confidence in this market is derived not only from the certainty of government grant but also from the strength and robustness of the regulator's approach.  We welcome the recent publication of the new regulatory framework, and the move to graded regulatory opinions and Board assurance, as this should help to give funders a clearer picture of the businesses they lend to and ensure that private finance continues to be widely available.

The wider mortgage market

I?d like to turn to some of the wider developments in the mortgage market. 

My first year at UK Finance has been dominated by the FCA's Mortgage Market Study and a number of other papers we have seen that link to the issues raised by it.

Following the publication of the FCA's interim report last May, and in response to the challenge laid down by the regulator, I was delighted that UK Finance was able to deliver a voluntary industry agreement to help existing borrowers on reversion rates at the end of July 2018 with BSA and IMLA within the space of just a few weeks.  Thousands of customers will have been contacted by their lenders by the end of 2018. 

However, there are thousands more customers with inactive lenders or unregulated owners that active lenders are currently unable to help, even if they can demonstrate they are successfully making higher payments.  Many of those customers cannot meet the new affordability requirements and lenders cannot use the previous transitional arrangements because of the way the Mortgage Credit Directive was brought in, in the UK. The FCA has signalled their willingness to consider a more relative affordability test for these customers which they will consult on this spring.  We await to see details but for those customers who do not want to borrow more the lender is likely to be able to take into account payment history and whether the new mortgage cost is more affordable than the current mortgage cost.  This will allow active lenders to offer remortgage products for customers of closed books.  

However, it will be a commercial decision for each lender as to whether this is something they will wish to offer.  And not all customers are likely to benefit as some will have circumstances that are likely to put them outside of the commercial risk appetite of lenders.  This might include customers who are in arrears, in negative equity or have considerable other debts.  Customers may have other reasons for not wanting to switch if they have a low balance or a short time left on their mortgage.  That is why alongside any changes the FCA makes we believe government and FCA should ensure that the FCA has sufficient powers to protect customers who can't or won't switch, particularly where the book owner is not regulated.

We know more generally there has been considerable debate about customers on back book rates.  We don't believe this is an area where there should be a pricing intervention.  Lenders have made considerable strides in contacting customers both pre and post the end of a fixed term and made it easier for people to switch on to a new rate.  This is demonstrated by the nearly £150bn of product transfers carried out in 2018 which is in addition to £87bn of remortgaging in the residential mortgage market.  Within this just over half of customers take advice when they do a product transfer.  Taking product transfers and remortgaging together, this means that almost 1 in 5 customers switched their mortgage in 2018.

We look forward to seeing what else is in the final report of the FCA's Mortgage Market Study due this spring.  It's important to remember that the interim report actually said that the market was working well for the majority of customers. 

How the mortgage market performs this year is going to be somewhat dependent on Brexit and what impact that has on not just funding markets but also more general economic conditions and consumer confidence.  At this point it's just too unpredictable to know what that might look like.  We expect remortgaging and product transfers to continue to be strong in 2019 as it was in 2018, as previous 2 and 3 year fixed rate products come to an end.  But with a move to over half of all new mortgages going on to 5 year fixed rates the rate of churn will not continue at the same level into 2020.  We also expect that the BTL market will continue to see the impact of the tax, legislative and other changes continue to be felt particularly as landlords are now paying their increased tax bills.

Whatever happens in 2019 I am confident that the mortgage industry will continue to survive, if not thrive, and UK Finance will continue to represent your interests and that of your customers.