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.
21. The FSA does not regulate second charge lendinga
second charge mortgage is a mortgage secured against an asset
such as a house which is already granted as security to the first
charge lenderwhich is the responsibility of the Office
of Fair Trading (OFT) under the 1974 Consumer Credit Act.
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
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.
Finally, the FSA assumed responsibility for regulating sale and
rent back (SRB) schemes on 1 July 2009.
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.
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".
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
THE LENDER LOTTERY
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".
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.
Shelter concluded that these differences in treatment by lenders
towards households in mortgage difficulties had led to what is
described as "the lender lottery".
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 surveybased
upon interviews with both advisors and borrowersshowed
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.
28. Both Shelter and Citizens Advice pinpointed
poor arrears management practices amongst "sub-prime lenders"
and "second charge lenders" as a particularly problematic
area. 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".
She added that it was not necessarily the first charge mortgage
that was the problem, but often other borrowing.
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
and that amongst those who had been in contact with
- 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.
Shelter argued that "there were a number of
practicesparticularly among sub-prime lendersthat
clearly contravene FSA rules and guidance",
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".
Ms Edwards went on to tell us that Citizens Advice had seen "some
cases where lenders were not complying" with MCOB 13.
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".
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.
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
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".
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.
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.
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.
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.
MORTGAGE ARREARS CHARGES
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.
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".
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.
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.
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
- 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.
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
||1st letter free, Each further letter/telephone call £35
||£195 Instruction and £70.50 processing fee
|Capstone (Preferred and Southern Pacific mortgages)
||£60-rising to £115 a month when they have instructed a solicitor
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".
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".
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.
35. Both Which? and Citizens Advice referred
to debt advice charges being made by some lenders.
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.
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.
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".
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".
Ms Bennett said that where excessive charges were being levied
these could be investigated by the FSA.
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.
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
- 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
- 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.
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
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.
CHANGES TO MCOB RULES
41. The FSA has said that, as part of its Mortgage
Market Review, it will re-examine the mortgage conduct of business
rules. 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".
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".
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".
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
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".
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".
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.
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
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".
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".
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 rulesthey are voluntary not binding, there
is often little monitoring or supervision and there are no sanctions
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.
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.
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.
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".
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.
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
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.
NAMING AND SHAMING MISCREANT FIRMS
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".
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
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.
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.
55. Which? told us that they had submitted a
Freedom of Information requestwhich had been rejected by
the FSAasking 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
- disclosure to the public of
the names of the firms with whom we had discussions
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
- 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
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".
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
In Dominic Lindley's view, such a policy demonstrated that the
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.
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".
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.
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
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.
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".
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.
62. There was supportfrom the CML amongst
othersfor 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".
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.
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.
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
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.
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.
Peter Williams, for IMLA, had no such doubts, telling us that
size of the market would increase, a comment echoed by Adrian
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.
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".
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
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.
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".
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
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.
REGULATION OF THE SALE AND RENT
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.
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.
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. 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".
Ms Boycott also expressed some disappointment that the interim
regime did not require independent valuations.
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.
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". 
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
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.
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 sectorwhich
will be in force until 30 June 2010may 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
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
Ev 123 Back
Ev 151 Back
Ev 123 Back
Ev 122-123 Back
FSA, Mortgages: Conduct of Business, January 2007 Back
Ev 79 Back
Ev 132 Back
Q 30 Back
Ev 132 Back
Ev 47, 132 Back
Ev 48, 132 Back
Q 175 Back
Ev 132 Back
Q 24 Back
Q 30 Back
Ev 48 Back
Q 136 Back
Ev 55 Back
Ev 123 Back
"FSA reiterates call for firms to treat customers fairly
in current market conditions", FSA press notice, 5 August
Ev 79 Back
FSA, Mortgages: Conduct of Business, January 2007 Back
Q 209 Back
Ev 59 Back
Q 31 Back
Ev 61 Back
Q 35 Back
Q 32 Back
Q 34 Back
Ev 59 Back
Ev 48-49 Back
Q 33 Back
Q 95 Back
Q 94 Back
Q 104 Back
Qq 209-210 Back
Ev 61-62 Back
Ev 124 Back
Q 30 Back
Ev 133 Back
Ev 150 Back
Q 117 Back
Q 120 Back
Q 158 Back
Ev 56 Back
Q 117 Back
Ev 150 Back
Q 224 Back
Q 228 Back
Ev 132 Back
Ev 150-151 Back
Ev 132-133 Back
Q 227 Back
Q 109 Back
Ev 132 Back
Ev 63 Back
Q 36 Back
Q 226 Back
Q 232 Back
"Securing a fair framework for homeowners", HM Treasury
press notice, 22 October 2009 Back
Q 121 Back
Ev 56 Back
Ev 52,79 Back
Ev 52 Back
Ev 151 Back
Ev 155 Back
Q 57 Back
Q 147 Back
Ev 155 Back
Ev 51 Back
Ev 57 Back
Ev 133 Back
Q 143 Back
Q 144 Back
Ev 122-123 Back
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
Q 60 Back
Q 52 Back
Ev 133 Back
Ev 111 Back
Ev 57 Back
Qq 152-153 Back