Mortgage arrears and access to mortgage finance - Treasury Contents

3  The regulatory framework

The framework for regulating mortgages

20.  The Treasury announced in January 2000 that it would introduce a statutory regime for regulating mortgages, replacing the system of voluntary regulation under the Mortgage Code. The FSA assumed responsibility for regulating mortgage lending, administration, advice and arranging in October 2004, when the mortgage conduct of business rules came into effect. As a result all first charge loans over residential property entered into on or after 31 October 2004 are regulated by the FSA. The FSA's responsibility was initially limited to first-charge mortgages on residential properties and lifetime mortgages, but in April 2007 their responsibility was extended to cover home reversion and home purchase plans.[39]

21.  The FSA does not regulate second charge lending—a second charge mortgage is a mortgage secured against an asset such as a house which is already granted as security to the first charge lender—which is the responsibility of the Office of Fair Trading (OFT) under the 1974 Consumer Credit Act.[40] We note that in certain respects consumers are better protected under the Consumer Credit Act However, there are many commentators who are calling for the FSA to take over the regulation of secondary lending.[41]

22.  We believe that the issue of the regulation of second charge mortgages should be reviewed by the Government. This Report focuses mainly on the principles and rules relating to first mortgages regulated by the FSA and it would be a cause for concern if second mortgages (likely to be taken out by those with greater needs) were less well regulated

23.  Neither does the FSA regulate buy-to-let (BTL) mortgages. This is because when the Government introduced mortgage regulation through the FSA it drew a distinction between occupiers who faced losing their homes if things went wrong, and BTL landlords, whose properties are investments and who do not face the risk of losing their home. As a result consumer protection regulation was not extended to BTL mortgages.[42] Finally, the FSA assumed responsibility for regulating sale and rent back (SRB) schemes on 1 July 2009.[43]

24.  The FSA's mortgage regime includes rules and guidance for mortgage lenders on arrears and repossessions, with the aim of ensuring that customers are treated fairly when they fall into mortgage difficulties. This is contained in section 13 of the mortgage rules. More specifically, the mortgage conduct of business rules in this area state that "a firm must deal fairly with any customer who (a) is in arrears on a regulated mortgage contract; or (b) has a mortgage shortfall debt". It goes on to state that "firm must put in place, and operate in accordance with, a written policy (agreed by its respective governing body) and procedures for complying with the requirement to deal fairly with customer in arrears. Such written policy and procedures should include:

  • using reasonable efforts to reach an agreement with a customer over the method of repaying any payment shortfall or mortgage shortfall debt;
  • adopting a reasonable approach to the time over which any shortfalls in payments can be made good; and
  • liaising, if the customer makes arrangements for this, with a third party source of advice regarding the payment shortfall or mortgage shortfall debt.

Importantly, the mortgage conduct of business rules state that repossession of the property should only take place "where all other reasonable attempts to resolve the position have failed". Additionally, charges imposed on a customer in arrears should not exceed a reasonable estimate of the cost of the additional administration required as a result of the customer being in arrears.[44]

25.  There are also various industry codes of conduct that sit alongside the FSA's mortgage conduct of business rules. The CML has published industry guidance on arrears and repossessions which it explained expanded on "treating customers fairly, existing mortgage conduct of business rules and other issues raised by the FSA and the Financial Ombudsman Service".[45] The CML guidance in this area is voluntary, although CML believed that it had been widely adopted by its members and that many members had undertaken gap analysis between this guidance and their arrears policies.[46]


26.  We requested evidence on the treatment by mortgage lenders of homeowners in arrears or at risk of repossession as well as their adherence to the FSA's rules in this area. Shelter explained that, whilst there had "certainly been a significant improvement in practices towards homeowners in difficulty among many lenders", there were still "variations in practice" which meant that some borrowers were "particularly vulnerable to harsh or unfair treatment".[47] Kay Boycott, Director of Communications, Policy and Campaigns for Shelter, expanded on this theme, explaining that there were also "variations within lenders" as well as between lenders which meant that borrowers with the same lender were often being treated very differently.[48] Shelter concluded that these differences in treatment by lenders towards households in mortgage difficulties had led to what is described as "the lender lottery".[49]

27.  Citizens Advice and Shelter both cited research that they had jointly undertaken (together with AdviceUK and the Money Advice Trust) on the treatment by lenders towards households with mortgage and secured loan arrears. The results of the survey—based upon interviews with both advisors and borrowers—showed that, of those in mortgage arrears, some 57% were satisfied with the way they were treated by their lender, but that 27% said their lender offered them no help when told about their repayment problems.[50]

28.  Both Shelter and Citizens Advice pinpointed poor arrears management practices amongst "sub-prime lenders" and "second charge lenders" as a particularly problematic area.[51] Ms Jackie Bennett, Head of Policy for CML, agreed that there were particular problems amongst second charge lenders. She said that feedback from her members indicated that some homeowners were in "trouble because they have second and other unsecured charges against their properties".[52] She added that it was not necessarily the first charge mortgage that was the problem, but often other borrowing.[53] Shelter also highlighted a separate piece of research that it had conducted specifically with respect to sub-prime lenders, which they argued demonstrated "particularly poor practice among sub-prime lenders":

  • 20% of those falling behind with payments reported that their lender had not been in contact with them;

and that amongst those who had been in contact with their lender,

  • 38% rated their lender's willingness to renegotiate a new payment plan as poor or very poor as against 27% who rated it as good or excellent
  • 48% reported the range of options discussed with their lender as poor/very poor, compared with 21% who said this was good or excellent.[54]

Shelter argued that "there were a number of practices—particularly among sub-prime lenders—that clearly contravene FSA rules and guidance",[55] whilst Ms Sue Edwards, Head of Consumer Policy for Citizens Advice, told us that the results of its research work indicated that "mainstream lenders were much better at offering forbearance than sub-prime and second charge lenders".[56] Ms Edwards went on to tell us that Citizens Advice had seen "some cases where lenders were not complying" with MCOB 13.[57] Citizens Advice also expressed strong concerns that, whilst MCOB [FSA: Mortgages and Home Finance Conduct of Business sourcebook] 13 states that repossession should only be used as a last resort, "not all lenders appear to be using court action only as a last resort".[58]

29.  We also received evidence that many mainstream lenders were exercising increased flexibility and forbearance towards homeowners in mortgage difficulties. Jackie Bennett told us of the pro-active attempts by some lenders to make contact and engage with consumers in mortgage arrears.[59] The BSA told us that they had worked in conjunction with Money Advice Trust (MAT) to produce a consumer leaflet which gave "straightforward advice on mortgage repayment difficulties". It also outlined some of the measures BSA members were taking to support consumers in mortgage difficulties, including amending the repayment term of the mortgage to interest only, extending the term of the mortgage, payment holidays and changes to the date when mortgage payments were made.[60]

30.  The FSA, in its written submission, explained that in late 2007 it had become increasingly concerned by evidence, both from its own mortgage effectiveness review and from external reports by charities such as Shelter and Citizens Advice, "that some mortgage lenders were failing to treat their customers fairly when they fell into arrears".[61] As a result it had reviewed the arrears management policy and practices of a sample of mortgage lenders. The FSA published its findings in August 2008 which concluded that "mainstream lenders were largely complying with our requirements", but that there were particular concerns with specialist lenders, including that the suggestion that they:

  • operated a 'one size fits all' approach, focused too strongly on recovering arrears according to a strict mandate, without reference to the borrower's circumstances;
  • were too ready to take court action; and
  • had lower standards of systems and controls in place to control mortgage arrears handling, including training and competency arrangements.[62]

The review also noted issues with lenders in general, including that some:

  • could have done more to consider customers' individual circumstances and offer more options to resolve the arrears problem;
  • imposed charges in circumstances that could result in the unfair treatment of customers; and
  • did not exercise sufficient oversight of third parties contracted to carry out mortgage arrears and repossessions handling activities on behalf of lenders.[63]

31.  We asked industry representatives for their views on lender practice and adherence to the FSA's rules. The CML told us that adherence to the FSA's rules (TCF [Treating Customers Fairly] and MCOB 13) by mortgage lenders was prevalent and highlighted the FSA's 2008 thematic review of lenders' practices in arrears and repossessions, which found that mainstream lenders were largely complying with the FSA's requirements in this area, demonstrated that "the rules are both effective and are substantially being adhered to". The CML did, however, acknowledge that the FSA had identified "some areas for improvement and the need for further work, particularly in the specialist lending sector" and said that they themselves were working with the sector on this.[64]

32.  The evidence we have received suggests that mainstream lenders are, broadly speaking, complying with the FSA's mortgage conduct of business rules. Indeed, we have heard positive examples of some mainstream lenders taking pro-active steps to support consumers in mortgage difficulties. That said, we are extremely concerned by evidence of a lack of flexibility and forbearance in the sub-prime, specialist and second charge sectors to homeowners in arrears.


33.  The issue of mortgage arrears charges levied upon people who fall behind with mortgage payments emerged as a major theme of our inquiry. The FSA's mortgage conduct of business rules cover this area and state that:

A firm must ensure that any regulated mortgage contract that it enters into does not impose, and cannot be used to impose, a charge for arrears on a customer except where that charge is a reasonable estimate of the cost of the additional administration required as a result of the customer being in arrears.[65]

Mr Jon Pain, Managing Director, Retail Markets at the FSA, explained that the rules were "fairly specific" in this area and that there could only be "a recovery of the costs borne by the firm" and the rules were "not designed to allow the firm to generate a profit from handling arrears cases". He explained that, whilst the rules allowed for the recovery of costs, they expected charges to be "proportionate to the costs involved".[66]

34.  Which? told us that they were "concerned about the levying of excessive charges on consumers in mortgage arrears" and that these excessive charges worsened the financial position of consumers already in mortgage difficulties.[67] Dominic Lindley, Principal Policy Advisor for Which?, explained that some lenders were "imposing charges of £50 or £60 a month" on people who were in arrears.[68] In its written submission Which? expanded on Mr Lindley's statement and explained that firms were levying a variety of fees and charges on consumers who fell behind with their mortgage payments, including:

  • charges of £25 to £35 for missing a payment/direct debit, which could be on top of any fee levied by the consumers' current account provider for missing the payment;
  • charges for sending letters/making telephone calls of up to £35 for each occasion;
  • monthly administration charges when a consumer is in arrears ranging from £25 to £60; and
  • charges incurred if the lender makes an appointment for the consumer with a debt counseller or collection agent of up to £150.[69]

Table 1: Examples of mortgage arrears charges being levied by lenders
Bank / Sub-Prime lender
Monthly arrears fee
Unpaid direct Debit / Standing Order/ Cheque
Arrears letter [sending a letter or default notice to the customer / general correspondence
Visit of debt counsellor or collection agent
Instruction Solicitors / collection costs
£20 [Charged if account is one of more months in arrears and there is no agreement to repay]
£95 [described as an arrears visit)
£150 summons fee; £240 solicitor's pre-enforcement litigation costs
West Bromwich
Not available
1st letter free, Each further letter/telephone call £35
Not available
£195 Instruction and £70.50 processing fee
Not available
Capstone (Preferred and Southern Pacific mortgages)
£60-rising to £115 a month when they have instructed a solicitor
Not available
Not available
Not available

Source: Which?

Mr Lindley said that lenders had "not justified these charges in any way". He gave the example of one lender whom the FSA had found "trying to recoup its advertising costs against these charges" which Mr Lindley asserted was "totally against the rules".[70] Mr Lindley told us that Which? wanted to see the lenders "open their books and justify these charges and provide a full breakdown of what this £35 or £55 a month is actually supposed to cover in terms of administrative cost". Which? wanted to see not only "lower charges" but also to see all charges suspended where a consumer had "made an agreement with a lender to repay their arrears".[71] Ms Edwards picked up on this point, telling us that Citizens Advice Bureaux had seen a lot of sub-prime lenders charging customers in arrears even where the borrower had made a repayment arrangement with the lenders and was sticking to the arrangement.[72]

35.  Both Which? and Citizens Advice referred to debt advice charges being made by some lenders.[73] Citizens Advice said it frequently saw cases "where lenders have charged £100 for one of their debt counsellors to visit their customers", with many lenders "making compulsory charges to borrowers for debt advice" before they would "negotiate over an arrears plan.[74] Sue Edwards said that £100 charged for a debt counseller seemed to be "very steep", but noted that such fees were commonplace, even in cases where Citizens Advice were already negotiating with the lender on the client's behalf.[75] She referred to one lender who had asked Citizens Advice to "pay a £60 charge in order to deal with them".

36.  We asked industry representatives whether they agreed that some lenders were levying excessive charges on people in mortgage difficulties. Responding to the specific charge about some lenders continuing to charge arrears fees even where an agreement had been reached with the mortgage holder to pay off the arrears, Ms Jackie Bennett, Head of Policy for the CML, explained that its industry guidance was against such practices. She justified arrears charges as being permitted under the rules "for the additional work that having someone in arrears can cause", and went on to explain that there was a "balance to be struck" in this area and that "if the cost was not borne by those people in arrears were not charged it has to be passed on to the wider population", such that "everybody's mortgages would be more expensive".[76] Mr Adrian Coles, Director-General for the Building Societies Association (BSA), suggested that the problem of excessive charging was concentrated in the specialist or sub-prime sector. He argued that "building societies especially are not guilty of the crime that is being suggested", adding that he suspected that "most mainstream lenders would also come into that category".[77] Ms Bennett said that where excessive charges were being levied these could be investigated by the FSA.[78]

37.  Jon Pain acknowledged that the FSA had found instances of "inappropriate" and "excessive" charges and that part of the enforcement action it was taking against four firms related to mortgage arrears charges.[79] The FSA would be re-examining arrears charges as part of the mortgage market review, with a view to seeing "whether the rules need amending". Lord Myners expressed his own concern "that charges could be excessive" and agreed that arrears charges should be a major focus of the FSA's work on the mortgage market.

38.  In its written submission Which? outlined its suggested remedy to the problem calling on:

  • lenders to provide an itemised breakdown of the additional costs their arrears charges are supposed to cover;
  • the FSA/OFT to review all arrears charges made by mortgage providers and secured lenders to determine whether they are reasonable with any excessive charges automatically refunded to consumers;
  • all arrears charges to be suspended if a consumer has made an agreement to pay off the arrears;
  • consumers in discussions with an independent debt agency to be given a 90 day charge- free window in which to negotiate an arrangement for the repayment of arrears;
  • consumers to be allowed to change their payment date without charge to help minimise the possibility of missing payments or getting into arrears; and
  • double dipping of fees (levying a fee for the missed payment on both the current account and the mortgage) where a consumer has a current account and a mortgage with the same bank should be stopped.[80]

39.  We share the serious concern expressed by many of our witnesses that some lenders are charging high and excessive mortgage arrears fees to customers who fall into mortgage difficulties. Whilst we have not received conclusive evidence that the mortgage arrears charges levied by lenders are excessive and go beyond recouping additional administrative costs, we fear that some lenders are using arrears charges as an alternative profit stream. Indeed, the wide variation in the level of mortgage arrears charges levied by different firms adds weight to such a view.

40.  Such practices are intolerable, placing additional strain on homeowners already struggling to keep up with their mortgage payments. We note that the FSA has already referred four mortgage firms to enforcement action and understand that part of the case against some of these firms is based on excessive mortgage arrears charges. We suspect these cases represent the tip of the iceberg and call upon the FSA to take a much more robust stance towards tackling and eliminating unfair arrears charges. As a first step we believe lenders must be required to provide an itemised breakdown of the additional costs their arrears charges are supposed to cover. This would help shed valuable light on whether such charges are reasonable and justifiable as industry representatives claimed was the case amongst mainstream lenders. Alongside this, we believe that the FSA and OFT respectively should review all mortgage arrears charges made by mortgage providers and secured lenders to determine whether they are reasonable.


41.  The FSA has said that, as part of its Mortgage Market Review, it will re-examine the mortgage conduct of business rules.[81] We asked witnesses whether the FSA's principles-based approach in this area was ensuring that customers who found themselves in mortgage arrears were being treated fairly, and also whether the rules around mortgage arrears remained effective, given the very different economic climate the UK faced, or whether the rules needed to be amended.

42.  A number of organisations criticised the FSA's principles-based approach in this area. Ms Sue Edwards ascribed part of the problem of compliance with the FSA's rules to the fact that the rules were, "a bit vague".[82] Mr Dominic Lindley, for Which?, reiterated this point, explaining that the FSA's rules were "very principles-based" making it "difficult for consumers to know what they [the rules] actually mean let alone the firms".[83] Shelter made a similar point, explaining that a principles-based approach left "far too much flexibility for lenders to interpret [the rules] how they choose", with the consequence that "consumers are not treated consistently and have no way of establishing what is 'fair' practice and what is not".[84]

43.  The Financial Services Consumer Panel expanded on this theme in its submission. It explained that MCOB 13 contained "relatively few actual rules that are binding on lenders" and said that it "would like to see either more rules or a more explicit statement of what is required from the guidance". As an example, the Panel cited MCOB 13.3.4 which sets down guidance that firms should give borrowers "a reasonable period of time to consider any proposals for payment". In its view, "it would be reasonable for this to be enshrined as an obligation on firms and perhaps with a specified time period rather than merely guidance".[85]

44.  Responding to the charge that the FSA's rules were "vague", Peter Williams, for the Intermediary Mortgage Lenders Association (IMLA), contended that the CML's guidance in this area supplemented the FSA's rules and brought together "principles and practice in a very, very creative way".[86] Adrian Coles, for the BSA, spoke of the "balance to be drawn between principles which are vague … and rules which are so detailed that the lender cannot step outside of the rules and give a tailor-made service to people's particular circumstances".[87] He concluded that the CML's guidance in this area had "got that balance right". We asked Jackie Bennett, Head of Policy for the CML, whether the CML monitored member compliance with their guidelines. Ms Bennett said that, whilst she was unable to tell us how many adhered to the guidelines, she believed that a large number had compared their policies and practices against the CML guidance and made amendments where practices fell short.[88]

45.  The BSA called for the FSA to be "clear and concise with the requirements upon firms in relation to arrears and possessions, with the aim of making existing rules clearer", but cautioned against "adding additional requirements to MCOB".[89] Jackie Bennett felt the MCOB 13 rules, when combined with CML industry guidance which put "a lot more colour around what lenders should be doing on a day-to-day basis" were "fit for purpose". She explained that the CML had developed guidance in this area because "the high level principles that were set out by the FSA were not detailed enough for lenders to be able to understand exactly what sections meant".[90]

46.  However, others disagreed with Ms Bennett's assertion that there was no need to revisit the rules in this area. The Financial Services Consumer Panel explained that the MCOB rules were "written after a period of sustained growth in UK house prices when mortgage arrears were low and when the vast majority of borrowers in arrears had the opportunity to voluntarily sell their properties to repay their debt". It concluded that "with hindsight, there was insufficient regard to ensuring that the rules establish the best balance between the interests of lenders and borrowers for a much more difficult time for the mortgage and housing markets".[91]

47.  We share the concerns expressed by groups such as Shelter, Which? and Citizens Advice that the FSA's principles-based approach in the area of mortgage arrears has given far too much flexibility to lenders to interpret the rules as they wish. The consequence has been a wide divergence in practice amongst firms with consumers treated in an inconsistent manner and little way of establishing whether they are being treated fairly. We agree with the Financial Services Consumer Panel that there is an urgent need for more rules or a more explicit statement of the requirements on firms in guidance to help put some 'grit into the system'. We note the arguments put forward by the industry that the FSA's high-level principles in this area are complemented by more practical industry guidance, but believe the need for industry guidance in this area actually illustrates the deficiencies of the FSA's current approach. Industry guidelines are not a substitute for more robust rules—they are voluntary not binding, there is often little monitoring or supervision and there are no sanctions for non-compliance.

48.  We note that the FSA has begun moving from a principles to an outcomes-based approach and trust the FSA's Mortgage Market Review, which includes a re-examination of the mortgage conduct of business rules, will lead to a shift in this direction with a better balance between high-level principles and rules that are binding upon firms. The FSA's Mortgage Market Review must also give serious consideration as to whether the mortgage conduct of business rules need revising. The rules were drawn up in the early part of this decade in a very different economic environment and there is concern, expressed by the Financial Services Consumer Panel amongst others, that revisions need to be made to ensure the rules are appropriate for the very different economic circumstance prevailing today.

FSA enforcement

49.  We requested evidence on the action that the FSA took against lenders who breached its rules in this area as well as its broader regulatory approach towards enforcing its rules on mortgage arrears. As we have noted previously, the FSA announced on 22 June 2009 that four firms had been referred to enforcement and Ms Lesley Titcomb, Director Small Firms and Contact at the FSA, also informed us that the FSA was considering referring a number of other firms to enforcement.[92] We asked Jon Pain how long this enforcement action would take to complete. He told us that the length of time would depend on "their level of complexity, but three to six months is a normal part of that process.[93]

50.  Shelter suggested that "there have been serious weaknesses in the FSA's regulatory approach to date, and that overall the FSA has been slow to tackle non-compliance".[94] A similar point was made by the Financial Services Consumer Panel, who expressed concern that, despite the fact that the FSA had written to the chief executives of all mortgage lenders and administrators in November 2008 giving them until January 2009 to ensure that their customers in arrears were being treated fairly, the FSA's June 2009 review found poor practice was still prevalent, particularly amongst specialist lenders and third party administrators.[95]

51.  Shelter suggested that the length of time the FSA was taking to conduct its thematic mortgage arrears review was excessive. Between publication of the first phase of the review in August 2008, and the second phase in June 2009, approximately 40,000 more households were repossessed. Shelter also criticised the leniency with which the FSA had treated lenders who were found to have breached the mortgage conduct of business rules. It accused the FSA of adopting "a carrot rather than a stick approach" which had "left borrowers at the mercy of unscrupulous lenders for far too long". Shelter pointed out that, after the first phase of its mortgage arrears review, which found serious weaknesses in the way some lenders were handling arrears, the FSA had called for lenders to treat customers fairly and published examples of good and poor practice, but had taken no enforcement action against specific lenders.[96]

52.   The FSA stated in its submission said that "in late 2007, we became increasingly concerned by evidence, both from our own mortgage effectiveness review and from external reports by charities such as Citizens Advice and Shelter, that some mortgage lenders were failing to treat their customers fairly when they fell into mortgage arrears'. Yet it was not until June 2009 that the FSA announced that it was finally taking enforcement action against four firms. Furthermore such enforcement action against these firms could potentially take up to a year to conclude. During this period of time, which included the FSA's investigation, over 40,000 more homes were repossessed. The seemingly leisurely approach of the FSA in terms of completing its mortgage arrears review and enforcing possible breaches in the rules in the area of mortgage arrears is a matter of grave concern. We call upon the FSA to spell out clearly in its mortgage market review how it will improve its performance in terms of bringing miscreant firms to book.


53.  A major issue to emerge during the course of our inquiry was the FSA's approach towards naming firms against which it is taking enforcement action or which it has found guilty of poor practice or breaching FSA rules. For example, the FSA has not published the names of the four firms currently subject to enforcement action and has not named those firms who had performed poorly in its August 2008 review of mortgage arrears policies and practices by lenders.

54.  Jon Pain, for the FSA, explained this was because firms referred to enforcement action were only named once that action was concluded and that "until the full enforcement process is complete, it would be unjust to say they are guilty before they are proven guilty".[97] Eric Leenders, Executive Director responsible for retail banking at the British Bankers Association, offered a similar argument, telling us that the names of firms should "remain confidential" until enforcement action was concluded. He added that "where there is an investigation there is not necessarily guilt" and that where an issue was resolved "to the satisfaction of the regulator that is probably something that could be dealt with in-house".[98] However, Shelter dismissed the argument propounded by Mr Leenders, of the need to maintain anonymity while suspected breaches are being investigated, insisting that:

The firms referred for enforcement have been found categorically in breach of FSA regulations and we see no reason not to name them while they are undergoing enforcement action.[99]

Shelter said that this "lack of transparency in the regulatory regime" was a "significant barrier to securing improved practice and behaviour across all lenders", a point which was also stressed by Dominic Lindley for Which? who argued that until firms saw a real penalty from this disclosure, they were hardly likely to change their practices.[100]

55.  Which? told us that they had submitted a Freedom of Information request—which had been rejected by the FSA—asking for the names of firms who had performed poorly in the FSA's August 2008 review of mortgage arrears, but were told that the FSA, despite acknowledging that the information would benefit consumers, had come down against disclosure on the grounds that:

  • disclosure to the public of the names of the firms with whom we had discussions…would be likely to undermine theirs and other firms' willingness to engage in a dialogue with us and to provide us with information.
  • disclosure could affect [a] firm's brand and reputation in the market in which it operates, thereby making it more difficult for it to win new business.
  • the publicity could lead to an increase in complaints from customers which, on analysis may turn out not to be justified, so not only causing additional burdens on the firm but also disappointing customer expectations.
  • Section 348 of the Financial Services and Markets Act 2000 ("FSMA") restricts the FSA from disclosing "confidential information" it has received except in certain limited circumstances (none of which apply here). Confidential information for these purposes is defined as information which relates to the business or other affairs of any person and which was received by the FSA for the purposes of or in the discharge of its functions under FSMA and which is not in the public domain. Any information received by the FSA from the firms regarding their arrears and repossession practices has been received for the purpose of carrying out our supervision of those firms, so falls within Section 348.[101]

Which? argued that none of the above justifications offered by the FSA stood up to "external scrutiny". It contended that the FSA had "provided no evidence that disclosure of the names of the firms which have been treating customers unfairly would reduce firms' willingness to provide it with information" and, that regardless, "a strong regulator should not be relying on the voluntary disclosure of information in order to do its job effectively". Which? also argued that the provisions of Section 348 of FSMA contained "important gateways which allow the FSA to disclose information in certain circumstances", including "the ability for the FSA to disclose information to third parties to enable or assist the FSA to perform its functions". This, Which? maintained, meant the FSA could publish information "in pursuance to its function of providing guidance, information or advice in order to meet its regulatory objectives such as securing the appropriate degree of protection for consumers".[102]

56.  Which? concluded that the excuses offered by the FSA for not revealing this information were symptomatic of "the cosy relationship the FSA has with the financial services industry".[103] In Dominic Lindley's view, such a policy demonstrated that the FSA placed:

the commercial interests of firms which are trying unfairly to evict people from their homes and levying unfair charges are more important than the public interest and the interest of consumers in disclosing this information.[104]

57.  We asked Jon Pain and Leslie Titcomb whether they had concerns that, during the period the FSA was taking enforcement action against these four firms, customers of these firms could be treated unfairly or the firm could gain new unsuspecting customers who risked being treated unfairly. Mr Pain tried to offer reassurance that "as part of that enforcement action … we are taking a very close look in terms of their treatment of customers as part of our supervisory activities on a daily basis".[105] He added that some of those lenders might no longer be active in the mortgage market and that, even where they were, he hoped that new customers would not go immediately into arrears.[106]

58.  Currently the FSA only publishes the names of firms it has found guilty of wrongdoing once enforcement action against the firm has been concluded. The industry has told us that it supports the continuance of this approach, although others have argued that this places the interests of lenders ahead of those of consumers. We have concerns that the balance between disclosure to the public and the need to protect firms before they have been found guilty of wrongdoing has tilted too far towards the interests of the industry.

59.  Whilst we would not go so far as to describe the FSA's stance on naming firms guilty of wrongdoing as symptomatic of the cosy relationship between the FSA and industry as others have done, we understand why such a suspicion lingers. We were, for instance, surprised that the FSA, in part, justified its decision to reject a freedom of information request in this area on the grounds that publication would damage its relationship with firms who might as a consequence be less willing to provide the FSA with information. Such a softly softly approach contradicts the pronouncements by Hector Sants, Chief Executive of the FSA, who has publicly stated that he wanted firms to be afraid of the regulator. We invite him to add substance to this statement by informing claimants whether or not their cases are being investigated. The impression given at the moment is that it is the FSA that is scared of the firms it is charged with regulating. One possible approach would be for the FSA to publish information on the breadth of practice in the sector which of itself would highlight outliers.

The pre-action protocol

60.  The pre-action protocol came into existence in November 2008 and was designed to "help protect homeowners who may be facing the threat of repossession". These new court protocols were to "help make repossessions a last resort" and set out "clear guidance on the steps that lenders are expected to take before bringing a claim in the courts to ensure that repossessions are a last resort". As a result, lenders would:

now be expected to demonstrate that they have tried to discuss and agree alternatives to repossession when borrowers get into trouble with their mortgage repayments. If a case reaches court, lenders will be required to tell the court precisely what they have done to comply with the protocol.[107]

61.  Jackie Bennett, for CML, explained that the reason for introducing a protocol in this area was because the UK had been through a period where fewer arrears and repossession cases were coming to court. The protocol helped familiarise judges with the mortgage conduct of business rules and ensured that "the lender has been through all the steps … and that repossession really is a last resort".[108] The BSA told us that the protocol did not result in additional requirements for lenders to adhere to, as much of the protocol reflected the existing requirements of MCOB 13. It felt that the main impact of the protocol was in relation to evidential requirements, which the lender had to provide to the court, to demonstrate the protocol had been adhered to.[109]

62.  There was support—from the CML amongst others—for the introduction of a pre-action protocol in the submissions we received, whilst Citizens Advice told us that "the combined effect of lower interest rates, negative equity and the pre-action protocol appears to have been to encourage lenders to take court action as a last resort".[110] It cautioned, however, that it had received evidence that the protocol was not generally being observed by sub-prime and second charge lenders and that it continued to see cases where the protocol had not been observed.[111] The Financial Services Consumer Panel expressed satisfaction that, since the introduction of the protocol, judges were at least aware of the FSA rules in this area (which had previously not been the case). The panel did, however, express concerns regarding "a lack of clarity about how much judges can take failure to keep to these rules into account in a possession action" and said they were looking "to the FSA and the Ministry of Justice to take steps to bring more clarity to this arena in England and Wales". The panel concluded by stating that:

Repossession proceedings can come to court very quickly and although the mortgage arrears pre-action protocol appeared to be a helpful initiative we consider that it is relatively toothless. The protocol sets down little by way of sanctions in the event that firms fail to abide by its requirements. We would be keen to see the FSA include some elements of the protocol as new rules within the amended MCOB 13.[112]

63.  The pre-action protocol has been helpful but should be more specific including the giving of examples of unreasonable actions by lenders (for example excessive charging of arrears) which the court may take into account.

Sale and rent back in the private sector

64.  Sale and rent back refers to the practice whereby a homeowner sells their home to a private landlord with the landlord allowing them to remain there paying rent as a tenant. The National Landlords Association (NLA) explained that the sale and rent back market has existed as a sub-market of the private rental sector for some time, but that it had "gained prevalence in the last few years". It estimated that at its height in 2007, the market comprised approximately 2000 firms and individual landlords offering sale and rent back services, but said that this figure had declined sharply over the last 18 months.[113]

65.  We asked witnesses whether the size of the private sector sale and rent back market would increase as a result of the economic downturn. Kay Boycott felt that this was "certainly possible", but that equally things could go the other way if the introduction of the FSA interim regime led some firms to exit the market.[114] Peter Williams, for IMLA, had no such doubts, telling us that size of the market would increase, a comment echoed by Adrian Coles.[115]

66.  The NLA explained that homeowners turned to sale and rent back for a number of reasons. These included: long term illness affecting individuals or close relatives causing reduction in household income and therefore the affordability of home ownership; marital/partnership breakdown leading to the loss of one income stream; over- indebtedness; or where a fixed interest rate period comes to an end, potentially increasing mortgage repayments with the mortgage moved to the standard variable rate.[116]

67.  There has been much criticism of private sector sale and rent back schemes after a number of high-profile cases where landlords have been shown to have acted unscrupulously. Citizens Advice told us that it had been "concerned for some time about the growth of completely unregulated sale and rent back schemes" and that evidence suggested that "homeowners in a financially and emotionally vulnerable situation end up selling their homes for much less than they are worth, in return for a tenancy that offers little security of tenure".[117] Industry groups also acknowledged that the sector was not without its problems. For example, the BSA acknowledged the "very significant financial harm that sale and lease back schemes can cause homeowners".[118]

68.  Shelter outlined the sort of practices which went on and which had brought the industry into disrepute:

  • transactions which often involved significant loss of equity in the home, with sales typically at 15-20% or more (sometimes up to 40%) below market value;
  • leaseback arrangements which were predominantly on assured shorthold tenancies, with a minimum six month contract, with many people evicted by their landlord once the six month contract has ended;
  • cases where the buyer/landlord fails to keep up with mortgage payments, with the home subsequently repossessed and the tenants (former owners) evicted;
  • limited information provided up front with the consequence that consumers were often hit by additional fees and charges and higher rents once they were past the point of sale.

Finally, Shelter said that, in its experience, sale and lease back companies generally did not offer or signpost towards independent advice on alternative options which might be better for the consumer.[119]

69.  Mr John Socha, Vice-Chairman of the NLA, admitted that there had been "cases where there had been [a] quite appalling loss of value to the person who owns the house".[120] However, he rejected calls for private sector sale and rent back to be banned, whilst Adrian Coles said that the sale and rent back had a useful and respectable role to play "if it is run properly":

to say under no circumstances whatsoever can a homeowner ever sell their home to a future landlord and then rent it, if that deal is done transparently and fairly that is what we want. We should not outlaw all practice, it can work very well.[121]


70.  Historically, the private sector sale and rent back market has been unregulated. However, in response to the problems discussed above, the Treasury announced that the FSA would take on responsibility for regulating such schemes on 1 July 2009. As a result, an interim regime for the sector was introduced. Under this, firms will need to meet the FSA's threshold conditions including the requirement to have adequate resources and to be run by fit and proper people. Registered firms will also have to comply with the FSA's Principles for Businesses. The interim regime will be succeeded by a "more comprehensive regime", which is intended to start on 30 June 2010 and on which the FSA will consult in autumn 2009.[122]

71.  When questioned as to whether poor practices within the sector would become a thing of the past once FSA regulation began, John Socha said that this would be the case.[123] Sue Edwards, for CAB, welcomed "the very swift action by the FSA, the OFT and the Government" to introduce regulation in this area, telling us that they acted promptly in response to concerns raised by CAB, Shelter and the Council of Mortgage Lenders.[124] Kay Boycott for Shelter, welcomed the interim regime, but stressed that the FSA must ensure that the regulations had "teeth" and stressed that the FSA must move to enforcement "very quickly where companies are not complying".[125] Ms Boycott also expressed some disappointment that the interim regime did not require independent valuations.[126] Shelter expanded on 'independent valuation' in written evidence, expressing disappointment that the "concern that the provision requiring an independent valuation has been removed" during the course of the FSA's consultation on the interim regime.[127] The Consumer Credit Counselling Service also welcomed the interim rules and guidance introduced by the FSA, but expressed continuing concern that the interim regulations might lead to increased consumer confidence and more applications from consumers interested in private sector sale and rent back, but without the protection that a full regulatory regime would provide. It argued that, as a result, consumers "should receive independent legal and debt advice" before committing to sale and rent back and that, additionally, "it should be incumbent on each company offering sale and lease back to fully disclose its interim status and the impact that has on each customer". [128]

72.  The BSA in its written submission argued that for regulation to be effective it must be properly policed by the FSA and that this would "require the deployment of a significant resource from the FSA to ensure that they can find unregulated operators". It cautioned that this would not be an easy task "in view of the reliance of many of the less reputable operators on direct approaches to householders, local newspaper classified advertising and adverts in shop windows to get business".[129] Mr Socha from the NLA made a similar point, explaining that his organisation was asking the FSA (and other relevant bodies) to advertise to consumers that they should only enter into such arrangements with FSA registered firms.[130]

73.  We are extremely concerned by the evidence we have received of dubious and unscrupulous practices in the private sale and rent back market. Such practices have caused misery and suffering to many families and have brought the sale and rent back industry into disrepute.

74.  We welcome the decision to bring the sector under the regulation of the FSA. However, we have concerns that the interim regulatory regime for the sector—which will be in force until 30 June 2010—may not afford full protection to consumers and may even give some a false sense of security. The FSA must therefore ensure that there will be no slippage in the date for the full regime to come into force and should consider whether this date could be moved forward. We are also surprised that the interim regulations do not contain a requirement for 'independent valuation', despite the fact that the FSA's original proposals in this area contained just such a provision. We seek clarification as to the grounds upon which the FSA made this decision and whether it will include 'independent valuation' as a requirement under the comprehensive regulatory regime which is to be introduced in 2010.

75.  There is also a danger that whilst reputable sale and rent back firms will register with the FSA, many others will continue to operate in the 'dark', away from the prying eyes of regulatory scrutiny. The FSA should therefore set out how it intends to register and monitor the activities of those sale and rent back firms and landlords who may try to slip under the radar. At the same time, the FSA must demonstrate that its regulatory regime in this area has real 'bite' and that it will move to enforcement action much more quickly than has hitherto been the case with respect to breaches of its mortgage conduct of business rules.

39   Ev 122 Back

40   Ev 123 Back

41   Ev 151 Back

42   Ev 123 Back

43   Ev 122-123 Back

44   FSA, Mortgages: Conduct of Business, January 2007 Back

45   Ev 79 Back

46   Ibid. Back

47   Ev 132 Back

48   Q 30 Back

49   Ev 132 Back

50   Ev 47, 132 Back

51   Ev 48, 132 Back

52   Q 175 Back

53   Ibid. Back

54   Ev 132 Back

55   Ibid. Back

56   Q 24 Back

57   Q 30 Back

58   Ev 48 Back

59   Q 136 Back

60   Ev 55  Back

61   Ev 123 Back

62   "FSA reiterates call for firms to treat customers fairly in current market conditions", FSA press notice, 5 August 2008 Back

63   Ibid. Back

64   Ev 79 Back

65   FSA, Mortgages: Conduct of Business, January 2007 Back

66   Q 209 Back

67   Ev 59 Back

68   Q 31 Back

69   Ev 61 Back

70   Q 35 Back

71   Q 32 Back

72   Q 34 Back

73   Ev 59 Back

74   Ev 48-49 Back

75   Q 33 Back

76   Q 95 Back

77   Q 94 Back

78   Q 104 Back

79   Qq 209-210 Back

80   Ev 61-62  Back

81   Ev 124 Back

82   Q 30 Back

83   Ibid. Back

84   Ev 133 Back

85   Ev 150 Back

86   Q 117 Back

87   Q 120 Back

88   Q 158 Back

89   Ev 56 Back

90   Q 117 Back

91   Ev 150 Back

92   Q 224 Back

93   Q 228 Back

94   Ev 132 Back

95   Ev 150-151 Back

96   Ev 132-133 Back

97   Q 227 Back

98   Q 109 Back

99   Ev 132 Back

100   Ibid. Back

101   Ev 63 Back

102   Ibid. Back

103   Ibid. Back

104   Q 36 Back

105   Q 226 Back

106   Q 232 Back

107   "Securing a fair framework for homeowners", HM Treasury press notice, 22 October 2009 Back

108   Q 121 Back

109   Ev 56 Back

110   Ev 52,79 Back

111   Ev 52 Back

112   Ev 151 Back

113   Ev 155 Back

114   Q 57 Back

115   Q 147 Back

116   Ev 155 Back

117   Ev 51 Back

118   Ev 57 Back

119   Ev 133 Back

120   Q 143 Back

121   Q 144 Back

122   Ev 122-123 Back

123   Q 148; Mr Socha gave evidence to the Committee on 30th June 2009, the day before the FSA's interim regime for the sale and rent back sector came into force. Back

124   Q 60 Back

125   Q 52 Back

126   Ibid. Back

127   Ev 133 Back

128   Ev 111 Back

129   Ev 57 Back

130   Qq 152-153 Back

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