The protections enjoyed by UK mortgages borrowers are to be strengthened under new proposals published by the Treasury.

Borrowers whose mortgages are sold onto third parties will be protected by Financial Services Authority (FSA) regulations requiring fair treatment of customers and in addition, the Government is proposing the expansion of the FSA’s remit to include the regulation of buy-to-let and second-charge mortgages.

Exchequer Secretary, Sarah McCarthy-Fry said: “Since the onset of the global financial crisis, the Government has worked hard to ensure mortgage borrowers are treated fairly by their banks. Our focus has been to do all we can to make sure people can stay in their homes and to limit repossessions as much as possible.

“But we are aware that this crisis has raised issues around the world about the regulation of the mortgage market. We are determined to reform the system for the future, to offer both stronger protection for consumers and greater stability in the housing market.”

The Government is publishing a consultation document, which sets out its proposals to extend the scope of FSA regulation to include second-charge mortgages; extend the scope of FSA regulation to include buy-to-let mortgages and protect borrowers when lenders sell on mortgage books to third parties.

The consultation sets out the details of the proposed legislation and will close on 15 February 2010 and any final measures will be implemented through secondary legislation.

The consultation builds on announcements made in “Reforming Financial Markets”, which was published by HM Treasury in July of this year and set out the Government’s analysis of the causes of the financial crisis, along with a series of proposals to reform and strengthen financial regulation, and protect and support consumers. The Government will implement these proposals via the Financial Services Bill currently before Parliament.

The Council of Mortgage Lenders (CML) has given a mixed response to the proposals. It supports an extension of FSA regulatory scope to second-charge lending and understands and broadly supports the rationale for extending FSA regulatory scope to the acquirers of mortgage portfolios when they are sold on by the originator. Although it says there are bound to be technical issues to be ironed out in this area, and it is vital that such regulation avoids creating other knock-on negative effects.

But on buy-to-let, the CML is more sceptical and says it is unclear whether the Treasury's main rationale for the proposed extension to scope relates to market risk or consumer protection.

CML director general Michael Coogan commented: “We will now study the Treasury consultation paper in detail, in parallel with the FSA’s consultation on potential changes arising from the Mortgage Market Review. 2010 is clearly going to be a year of regulatory change for mortgage lenders - but it’s important that change should have a clear rationale and a clear set of outcomes, and not be implemented simply for its own sake as a reaction to past events that conduct of business regulation would not have prevented.”