Mortgage arrears: follow up - Treasury Contents

Examination of Witnesses (Question Numbers 120-139)


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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