Examination of Witnesses (Question Numbers
120-139)
MR JON
PAIN AND
MR LESLEY
TITCOMB
23 MARCH 2010
Q120 Ms Keeble: The arrears charge
is one.
Mr Pain: Yes. So the arrears charges
and then the issues about the approved persons regime, our rules
are out for consultation now. That closes at the end of April
and we would expect then in June to be issuing our rules.
Ms Keeble: In time for the summer. Thank
you very much.
Q121 Chair: The industry was here
before and they are looking for clarity, clearer rules and the
speeding up of the timescale. I think that is really important.
Do you agree then with the Financial Services Panel that (and
I quote them): "the issuing of a warning notice essentially
marks the beginning of the disciplinary process against a firm,
as few cases fail beyond this point"? Do you agree with that?
Ms Titcomb: I think it is a statement
of fact that few cases fail beyond that point. I cannot disagree
on that.
Q122 Nick Ainger: I will come back
to the legislation covering disclosure. We have had submissions
and evidence this morning that a survey carried out by the CAB
and Shelter indicated that of 450 cases they looked at a third
had not complied with the pre-action protocol. The Council of
Mortgage Lenders told us they thought that most of those would
have been coming from outlier organisations that were in the sub-prime
sector. Would you agree with that?
Ms Titcomb: Certainly the evidence
of our work in the arrears thematic work that we did last year
showed that the principal problems in terms of how customers were
being treated lay with what we call the specialist lender community.
I would not necessarily describe them as outliers, that suggests
there are a few on either end of the spectrum, and we found a
number of problems across the specialist lender sector, that was
where they tended to be focused.
Q123 Nick Ainger: The seven firms
that you are currently investigating, would they fall into that
category?
Mr Pain: I think, yes. As we indicated
when we were last here, our process of the work we did in the
arrears part of the marketplace focused, as a second phase of
that work, on the specialist lenders. We did say then that as
a consequence of that we were taking some enforcement action.
So I think it is logical, obviously, that the vast majority of
those firms come out of that particular sector.
Q124 Nick Ainger: In response to
the Chairman's question, you accepted that once you had issued
the warning notice it was very unusual that the process did not
conclude with action by the FSA. Yes?
Ms Titcomb: That is a statement
of fact, but it is important to say also that the period after
the warning notices, when the firms get the chance to make their
representations, is their chance to contribute formally to the
process their point of view.
Mr Pain: Of course, they can also
appeal.
Q125 Nick Ainger: Just so I am clear
on this: a warning notice is issued, and the firm can then respond
in detail to the allegation or whatever. How many do not end up
with disciplinary action? What sort of proportion?
Ms Titcomb: I cannot answer that
off the top of my head, I am afraid. We would have to get back
to you on that particular point.
Q126 Nick Ainger: No idea? Is it
50%?
Mr Pain: The vast majority do
proceed, so I think that is the conclusion you were seeking. However,
of course, as Lesley was trying to point out, the firms and individuals
do have a right of appeal through that process. That is an essential
part of that process that has not been completed at warning notice
stage, so you cannot be sure because obviously the outcome of
the appeal might change the shape of what sanctions, if any, are
applied to an individual or to a firm.
Q127 Nick Ainger: In terms of those
cases which, even after this appeal process, succeed, what is
the average length of that investigation from the issuing of the
warning notice?
Mr Pain: I think it is probably
important to take a step back and then see the process as it is
as a whole. We have already carried out some of our investigations
to be able to issue the warning notice. The warning notice is
not the start of the process, the warning notice—
Q128 Nick Ainger: No, but the important
thing is you have got, basically, prima facie evidence
that they are in breach.
Mr Pain: Correct.
Q129 Nick Ainger: That is when you
issue the warning notice.
Mr Pain: And that is when they
have the opportunity to make their own representations and the
appeal process.
Q130 Nick Ainger: How long between
the warning notice and the conclusion? What is the average length?
I know it will vary.
Mr Pain: I know you are searching
for a nice answer but the reality is, of course, that is hugely
variable. If actually a firm or an individual goes all the way
through to a tribunal appeal process, that can take many, many
months, extending into a year for that process to be exhausted.
That whole process then, in effect, is, from a tribunal's point
of view, starting again looking at those individual cases. You
could have a firm or an individual that we issue a final notice
to who then agrees in respect of the view that the FSA has taken
and actually co-operates as part of that process, and that case
then can be wrapped up in a matter of weeks as part of that process.
Q131 Nick Ainger: Let us go back
to the seven firms currently under investigation. Can you send
us information about how long they have actually been under investigation
following the issuing of a warning notice?
Mr Pain: Yes, we could. I think
that would reflect exactly what I have just been saying, that
some of those firms will be at various stages of the appeal process.
At this moment in time, I do not know whether they will proceed
to make a full appeal in the manner I have outlined.[4]
Ms Titcomb: Some of them have
not yet reached warning notice stage. That is the other point
to understand.
Q132 Nick Ainger: Do you accept—and
this is the point made by the Financial Services Panel—that
there is likely to be consumer detriment in the fact that the
public out there do not know that these particular firms, or any
others that could be disciplined in the future, are under investigation
and there may be a question mark over their performance?
Ms Titcomb: I accept that the
public do not know; I do not accept that the public are necessarily
at detriment, because a very important part when we are investigating
firms is that we do not forget that we are still supervising them
for their ongoing activities. So we continue to take a very close
interest in what they are doing and at various points we will
also consider other actions still proving so wrong that we should
stop them doing business, for example. We are continually looking
at whether they should be forced to either stop or change their
practice now. The enforcement investigation is the backwards looking
bit, if you like. We also have to look at what they are doing
now and, if necessary, get them to change their behaviour. Whether
they co-operate with us and make the changes we want is a factor
that we then take into account in the enforcement investigation
and in consideration of sanction.
Q133 Nick Ainger: As we have heard,
a third of cases that are coming to court for repossession have
not followed the protocol, it would appear. Surely, if the industry
knew that you were considering taking disciplinary action against
firms because they failed to do that, that would send out the
message that you surely want to change everyone's behaviour?
Mr Pain: I understand the point
you are making, but what I do not accept is the fact the industry
is not very clear about what our expectations are. A £10 million
fine/redress message in terms of the GMAC case is a very clear
message to the industry. The protocols are well understood, well
aired and actually communicated by the industry by its trade body
to its members. Our rule book is not new in this area. There is
no evidence, in my mind, that the firms inadvertently slipped
into these practices without knowing that they were breaching
the expectations that we have of them. I think the point you are
making is whether or not we reinforce that message in terms of
enforcement action and I am trying to say to you, "Yes, we
do". The issue then, as we are governed by FSMA at the moment
in respect of when we can publish that, is a statement of fact.
We have already acknowledged that there is a Bill in front of
the House at the moment that will change that process, and we
also are pretty emphatic if that does not get through we will
revisit the question at a later stage.
Q134 Nick Ainger: Would you like
to have that ability to publish the names of the firms for which
you have started with a warning notice on disciplinary action?
Mr Pain: I think, obviously, it
is a matter before the House, at the moment—
Q135 Nick Ainger: Would you like
to have that power?
Mr Pain: Clearly, we think that
that process is something that strikes the right balance between
the individual firms and the process.
Q136 Nick Ainger: So the answer is
yes?
Mr Pain: Yes.
Q137 John Thurso: Can I ask you, first
of all, given the fragile state of the economy, are you concerned
that introducing some of your proposed changes to encourage more
responsible lending too quickly could actually restrict lending
further and delay an economic recovery?
Mr Pain: There is, obviously,
a wide range of issues involved in that. I think we made it quite
clear when we issued the Mortgage Market Review that what we saw
that doing is addressing the future of the mortgage market going
forward, and we did want to say, despite the fact that the market
actually had shrunk and had been constrained by all sorts of issues
that you are referring to in terms of funding and access to the
marketplace, we nevertheless wanted to address some of the issues
that had emerged over the last couple of years and make sure that
a market that then moves going forward actually has those issues
addressed. That was the whole purpose of the Mortgage Market Review.
The challenge for us is to strike the right balance between having
a vibrant marketplace that allows people to have access to mortgages,
but we think that should be on the basis that they can demonstrate
they can afford those mortgages and the appropriate guidance and
safeguards for consumers is built into that marketplace. That
is what the mortgage market seeks to review.
Q138 John Thurso: There is a danger.
We have been through a decade, more, when we have been addicted
to debt, and people have had very high loan-to-values and minimal
interest cover to be able to deal with their borrowings. However,
if you just say overnight, "Right, that was bad, therefore
we will now change to a completely new system", you actually
leave an immense number of people who will have the opportunity
to get to a good situation over time actually in limbo. Do you
think there is a danger that in recognising that we have been
far too lax about offering credit if we tighten too hard we actually
end up in a system where there is not enough credit and people
are denied the ability to get on the housing ladder and all the
other things that they need money for?
Mr Pain: I think those are the
issues and balances you have to strike, but I think it comes back
to the fundamental issue from our perspective that we do not want
to deny anybody access to the mortgage market if they can have
the comfort that they know they can afford their mortgage, not
in terms of just initially affording their mortgage but afford
their mortgage over the lifetime of that mortgage. That is what
we are seeking to address as a principal issue on affordability
and income verification as part of the mortgage market.
Q139 John Thurso: Can I come back
briefly to the question of LTV and LTI? It seems that the vast
bulk of your respondents took the view that a statutory cap was
really not a particularly intelligent way to go ahead, but you
mentioned the fact that they may well be an interesting macro
prudential tool. What would be a more sophisticated approach that
might be required if we are not going to penalise borrowers in
these categories?
Mr Pain: You will recall that
one of the things we looked at then was what we call a cocktail
of high risks with particular mortgages. So where we had a high
LTV to somebody with an impaired—
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