Mortgage arrears: follow up - Treasury Contents

Examination of Witnesses (Question Numbers 60-79)


23 MARCH 2010

  Q60  Nick Ainger: Let me stop you there, Mr Coogan. This is a pre-action protocol. In other words, you do not get to court. That is the purpose of it, to actually stop people ending up in court and going through the stress of that and the cost of that. A third of the cases had not followed that pre-action protocol. Presumably that is why they had ended up in court. Perhaps if they had followed it they would not have been in court in the first place.

  Mr Coogan: It is difficult to comment on the precise cases. I think the first thing to be said is that one of the reasons why we were the first to push for a check-list, which was introduced and referred to earlier, to ensure that there is comparability and consistency in the courts, was that we recognised there was scope for a difference of interpretation, both at the adviser level in terms of what they thought the lender should be doing and in the courts on how they interpreted what the firms did. The check-list should remove that uncertainty and, hopefully, the next survey will reflect it.

  Q61  Nick Ainger: Again, in your submission, in referring to these outliers, you are hopeful that the FSA will now start to clamp down on these outlier organisations. Who are these outlier organisations?

  Mr Coogan: The FSA know who they are, and that is no doubt a question you will ask them.

  Q62  Nick Ainger: Presumably the CML know who they are as well?

  Mr Coogan: The answer to your question is that it is unhelpful to the industry to have the suggestion that people will be enforced against continue ad infinitum without a resolution either way. It would be nice to know if any of the firms who have been subject to enforcement are no longer being pursued; it would also be nice to know if that enforcement action is going to end any time soon, because what we all need is the clarity of the reasons for the enforcement and the actions that the industry as a whole need to take in response to those concerns. The GMAC-RFC case was very illustrative of some of the issues that lenders need to be reminded of, in particular that charges are not a profit centre but they should be an administrative recovery.

  Q63  Nick Ainger: So you would be in favour of publishing the names of those organisations that are under investigation?

  Mr Coogan: I did not say that; I did say that we would like to have clarity sooner rather than later, which is the enforcement process being concluded properly, because that is what the rules currently state.

  Q64  Nick Ainger: Being concluded, rather than when the FSA have made a decision that they are going to carry out a full investigation?

  Mr Coogan: "Innocent until proven guilty" is still an important principle, I think.

  Q65  Nick Ainger: There are many other organisations, and Ofcom is one of them, that actually announces when they are investigating a particular company for a possible breach of regulation. What is the difference between the financial services sector and the rest of industry?

  Mr Coogan: I think the difference is when it went through Parliament the view was taken that it was different.

  Q66  Nick Ainger: What you are saying is you would like the status quo to continue in relation to that piece of legislation?

  Mr Coogan: I think it is fair to the firms in an environment where enforcement action can last for quite a considerable time that you do not have uncertainty hanging over them by referring to them in public in one stage and having many, many months before a final decision is taken either way.

  Q67  Nick Ainger: In terms of bringing in the rules as regulation in relation to arrears handling, and so on, the MCOB 13 proposals, (perhaps Mr Broadhead would like to comment on this) is that a way forward so that these outlier firms know that, rather than just abiding by guidance, these are regulations that they have to abide by?

  Mr Broadhead: I think any clarity in the rules is absolutely welcome and some of the proposals that have come out would help with that. The CML have industry guidance and the BSA has guidance for its members as well which helps them to understand and comply with those rules. I think there are two points here: first of all, lenders must know exactly what the rules are, and, second of all, the FSA must enforce those rules effectively. In terms of guidance outside, if we got the rules right and they were absolutely clear—which is where we are trying to move—then I do not think the guidance actually would need incorporating into the rules because the rules themselves would be clear enough. The key then, of course, is that the FSA investigate and monitor compliance with those rules effectively. Michael has alluded to the GMAC RFC case where there were some issues but, actually, those issues had been apparent since 2004 and it was only fined last year. What has taken so long there? It is a long, drawn-out process, so that needs to be helped. We have recently seen some changes with the FSA enhancing its supervisory team, recruiting more staff to make that far more effective. So we need to assess whether or not that is successful. Once that has been assessed we can then look at making changes to the conduct of business rules to make sure those are targeted where there is persisting consumer detriment which is absolutely the key thing here.

  Q68  Nick Ainger: Mr Coogan, can I come back to you? You never got to the point of these outlier organisations. I am not suggesting that you name them all, but are they in a particular sector?

  Mr Coogan: It is fair to say that it is most likely that firms who have got customers who are higher risk, who have past credit problems, who may not be able to keep promises to make regular payments, are more likely to be subject to more assertive repossession processes, and, in particular, the arrears management process is much more intensive. So in the sub-prime sector I think the advice sector has highlighted a number of organisations who are appearing in courts more than their market share and that is all I can say on the point. The risk sector will be those borrowers who are least likely to engage with the customers most likely to have had past problems that have been repeated, and those customers who therefore need to have intensive management.

  Mr Broadhead: I think, Mr Ainger, in terms of the FSA, the FSA has said in part two of their thematic review that the issue was with specialist lenders—that is the term that they use there—which, essentially, is wholesale lenders targeting particular, not mainstream, lending. So it is those organisations that the FSA have been looking closely at more recently.

  Nick Ainger: Thank you.

  Q69  Chair: Could I just clarify your point? You are complaining that the FSA are taking too long on the enforcement process and you want that to change.

  Mr Coogan: I think we are still waiting for the outcome of a number of cases that were announced—

  Q70  Chair: There is a bit of frustration on your part here that you want the FSA to get on with it.

  Mr Coogan: The industry wants clarity, and that means that if there have been mistakes made they want to know what they were and how to correct them, and if there are problems to be avoided they want to know what those problems are. While there is just rumour about what the problems might be and uncertainty about the timeframe, no one is helped.

  Q71  Chair: If there was a long timeframe then, does that not leave consumers vulnerable and unable to protect themselves the longer this goes on?

  Mr Coogan: I think it is clear that no one is able to prepare themselves against what may or may not happen as a result of FSA action, but we saw specifically in the GMAC case there was a review backwards.

  Q72  Chair: Hold on, hold on, I am asking you a specific question: does this not leave consumers vulnerable and more unable to protect themselves, with this process being long?

  Mr Coogan: It should not do if the FSA does its job. As it highlighted in the GMAC case, it will look to review the cases of past customers.

  Q73  Chair: However, if you have vulnerable consumers, the company is still in business, and you have got a long process going on, there can be consumers who have been affected adversely as a result of this situation.

  Mr Coogan: That is one of the reasons why enforcement needs to be prompt.

  Chair: Okay, fine. Good.

  Q74  Ms Keeble: Paul Broadhead, you have put forward some proposals to changes to SMI. How many households do you think would benefit from that? What do you think the costs would actually be?

  Mr Broadhead: We have put forward some suggestions but we have not done a cost-benefit analysis of exactly what needs to be done here. We have made a point that it does need overhauling. We do believe that if the SMI is about preventing repossessions that, actually, all loans and second-charge loans, perhaps, ought to be considered as being included as well.

  Q75  Ms Keeble: Can I just pick you up on that? If people take out a loan secured on their home to, I do not know, buy a car or something like that, why should the taxpayer cover that under SMI?

  Mr Broadhead: What was suggested as well is that not necessarily is it always paid as a benefit. So there may be an argument in those particular circumstances that if we want to keep borrowers in their home longer term, if that is the case—and this is somebody has lost their job or suffered a reduction in income—then through the SMI scheme perhaps the interest can be paid for a period of time but, of course, once they get back into employment and back on their feet, it is actually repaid at a later date. I think that is a very, very valid point because if we repossess there is always going to be costs to government, whether it is central government or local government in terms of re-housing people as well.

  Q76  Ms Keeble: Would all of you agree to the wider review of SMI that the previous witnesses spoke about?

  Mr Broadhead: I think the key thing going forward—

  Q77  Ms Keeble: Can we hear from the other two as well?

  Mr Coogan: I think the straightforward answer is that the SMI changes made by the Government in 1995 were unhelpful but we did not see the impact of them because there was not a recession until the last few years. The downturn in the economy has brought to the fore the need to have a better safety net as we touched upon earlier. The SMI changes can be implemented and maintained at no cost to government if they introduce a second-charge approach, and that also addresses the issue that you touch upon, which is that people should repay the support. If the purpose of government support is to keep people in their homes it is not necessarily to support people who have bought cars with the money.

  Q78  Ms Keeble: So would you agree to the wider review of SMI that the previous witnesses spoke about?

  Mr Broadhead: Yes.

  Q79  Ms Keeble: And yourself as well?

  Mr Sklaroff: Yes, very much so. Just to expand on specifically that point, as several of the witnesses have said already this morning, what we have had so far is a series of perfectly sensible expedients in terms of government policy looking at how we cope with the consequences of current circumstances, and, indeed, the industry itself has brought forward a whole series of measures to do with forbearance and so on that we have been discussing. However, I do think that there is a strong argument for taking a wider look at what this landscape is going to be like over the next number of years as the economy changes—hopefully we come out of recession—but looking at everything from, as was mentioned earlier, insurance arrangements, right through to these government supported schemes.

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