The FSA paper said: “Innovation can deliver benefits for consumers, but it can also result in increased levels of complexity, thereby creating potential detriment to consumers.
“Without appropriate controls in relation to the targeting and marketing of these products to consumers, there is a risk that innovative niche products will be sold to consumers for whom they are not suitable.”
The FSA highlighted smaller lenders operating in the high loan to value end of the market as a key area of innovation.
The products include new generation guarantor mortgages – unlike existing products, where parents’ income was used to guarantee the mortgage, new schemes can involve parents’ savings being used to offset the child’s mortgage, or a legal charge being taken over a percentage of the parents’ property, which is then used as the deposit.
The regulator also singled out mortgages where part of the loan is a non-FSA regulated shared equity loan to help borrowers to obtain a higher loan-to-value mortgage.
Lenders offering (or planning to offer) these products include Aldermore and loans through the government NewBuy scheme.
The FSA also said it seen some firms operating in niche areas of the mortgage market which have tried to launch unregulated ‘look alike’ products as alternatives to regulated sale and rent back and equity release products.
The regulator said: “We have published consumer alerts to warn consumers of the potential concerns and lack of regulatory protections associated with these products.
“While market conditions remain flat we expect to see more innovation in the mortgage market and we will continue monitoring developments to ensure that, where new products are more complex than a traditional mortgage, the products are clearly targeted and sold to consumers who understand the risks involved.”
The paper also suggests unfair terms in mortgage contracts, unfair treatment of borrowers in arrears, the misuse of buy-to-let mortgages and lenders moving customers onto repayment mortgages from interest-only deals as specific risks.
