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Mortgage arrears: follow up - Treasury Contents

Written evidence submitted by the Financial Services Consumer Panel


  1.  The Financial Services Consumer Panel welcomes the opportunity to contribute to the Treasury Committee's follow up inquiry into mortgage arrears and access to mortgage finance.

  2.  As with our submission in July 2009, this submission focuses on specific areas where the Panel has the most expertise. This includes some of the proposed measures announced by the Financial Services Authority in its discussion paper on the mortgage market, and its recent consultation paper into firms' handling of mortgage arrears. We have also commented on the effectiveness of the FSA's enforcement strategy in the mortgage arrears sector.


  3.  The Consumer Panel believes that every mortgage should be affordable at the time of sale, taking into account any expected changes in affordability. For any mortgage customers experiencing financial difficulty, firms should be treating them positively and sympathetically, with a solution to managing arrears being developed on an individual basis. However we acknowledge that it is not generally helpful for borrowers with mortgages that are unaffordable, in the medium term, to be encouraged to struggle along just to put off the "day of reckoning".

  4.  The Panel is supportive of the FSA's proposals to strengthen its approach to firms' arrears management practices. This is an area with significant risk of detriment and hardship for consumers, especially in the current economic climate. It is very disappointing that the unfair treatment of consumers has persisted so widely within the mortgage market. Strong and decisive action by the FSA is required to remind firms of their duty to treat customers fairly and signal the FSA's commitment to identify and take action against firms who are non-compliant.

  5.  The Panel would be keen to the see the FSA bring into regulation best practice already outlined in the Council of Mortgage Lenders' (CML) industry guidance on mortgage arrears and possessions and the Civil Justice Pre-Action Protocol.

  6.  The Consumer Panel is pleased that enforcement action has been taken against a number of mortgage lenders; seven firms have been referred to enforcement but, so far, only one case has been published. To date it is not yet known who the other six firms are, nor what their misdemeanours may be. The Panel has been encouraging discussion around the need for more transparency from the regulator during the passage of the Financial Services Bill, and hopes that cross-party support will be given to improving the FSA's freedom to be more transparent over its actions.

FSA proposals on the handling of mortgage arrears.

  7.  The Consumer Panel believes that a central aim of the FSA's rules in firms' handling of arrears should be that borrowers are given sufficient time and guidance to enable them to decide whether they will able to regularise their arrears situation within a reasonable time. Borrowers who have a reasonable chance of regularising their repayments should not be hindered from doing so by their lender, nor penalised with unfair charges that perpetuate the cycle of debt.

Converting MCOB 13 forbearance guidance into rules

  8.  In the Consumer Panel's submission to the Committee in July 2009, we called for the FSA to ensure firms were complying with MCOB 13. We support the FSA's proposals to convert MCOB forbearance guidance into rules; however we think that there is an opportunity here to join up several recent initiatives to provide for more effective consumer protection.

  9.  In comparison with the response seen in the early 1990s to mortgage arrears, there has been a welcome raft of recent initiatives that aim to help struggling homeowners. In particular, we note:

    (a) the FSA review of MCOB rules pertaining to arrears;

    (b) the mortgage pre-action protocol; and[1]

    (c) the CML Industry Guidance on mortgage arrears.[2]

  10.  Some very good practice has been suggested in all three initiatives, but they are not joined up and they appear to take different approaches. These differences present difficulties for homeowners and advisers in knowing what they can expect or require from mortgage lenders and just how much they can rely on the protection of regulation. The difficulty is most noticeable where some of the initiatives mandate practices whilst others leave it to the discretion of the individual lender whether they follow good practice. We can best illustrate our point through a few examples:

  11.  The Civil Justice Pre-action Protocol describes the behaviour that the court will normally expect of the parties prior to the start of a mortgage possession claim. It aims to ensure that lenders (and borrowers) act fairly and reasonably in dealing with mortgage arrears. Section 6.1 of the protocol states that:

      A lender should consider not starting a possession claim for mortgage arrears where the borrower can demonstrate to the lender that the borrower has:

    (1) submitted a claim to an insurer under a mortgage payment protection policy and has provided all the evidence required to process a claim;

    (2) a reasonable expectation of eligibility for payment from the insurer; and

    (3) an ability to pay a mortgage instalment not covered by the insurance.

  12.  The Panel believes this, and other provisions of the protocol, give too much discretion to lenders in their "consideration" of what they can do. In this example if a borrower has paid for a mortgage payment insurance protection policy, and expects the insurance to pay out, and can also meet any shortfall in the mortgage payment that will not be covered by the insurance, then the appropriate and balanced regulatory response is to provide that a lender will not take possession action. We recognise that safeguards may be needed for lenders if a borrower has deliberately accumulated arrears, however the Panel believes that, in reality, falling into arrears is not a choice the vast majority of consumers would make.

  13.  Similarly the CML best practice guidance contains a wide range of measures which we readily endorse as being a genuine attempt by the trade association to deal fairly with borrowers in mortgage arrears. But, as the CML states in the introduction to its paper, their guidance "has no regulatory status and some of the examples of good practice given may not be appropriate for all lenders". This waters down the impact of the guidance. A borrower facing mortgage arrears should surely be able to expect that this recommended "best practice" will not vary depending on the company with which they have their mortgage.

  14.  As part of its guidance, the CML explains how its members should agree a plan for the repayment of mortgage arrears. The CML sets down that the lender should:

    (a) assess income and expenditure, using a combination of existing information on file (perhaps from the original application), updated using revised income and expenditure statements. This could also be done through any third party that you have agreed to liaise with (eg an independent free debt adviser). Income and expenditure might need to take into account other priority debts like council tax, etc;

    (b) check this information to see how reasonable it is, for example, by using recent payslips/bank statements;

    (c) suggest that customers seek independent advice before accepting an agreement; and

    (d) compare your agreements to pay with any decided by the court. You may need to review your procedures if courts are arranging lower payments.

  15.  This guidance seems to be sensible and appropriate, akin to what a regulator should require of a mortgage lender. Yet, it should not be left to the discretion of a lender whether it follows this guidance. This is another example of best practice that should be included within FSA rules so that borrowers know exactly what lenders are required to do and what steps the borrower also needs to take.

  16.  In our response to the FSA's consultation paper on mortgage arrears, the Consumer Panel will call on the FSA to have discussions with trade associations, firms and consumer groups on how best to ensure that best practice is enshrined within the FSA rules.


  17.  The Consumer Panel is pleased to note that enforcement action has been taken against a number of lenders, with the FSA focusing its attention on this market. In the introduction to the FSA's consultation paper on arrears (CP 10/2), the FSA states it has referred seven firms to enforcement; yet only one enforcement case has been published; on the 29 October 2009, the FSA announced it had fined GMAC-RFC £2.8 million for unfair arrear charging and estimated the cost of redress payable to customers at £7.7 million. To date, it is not yet known who the other six firms are, or what their misdemeanours may be.

  18.  The Panel has consistently called for more transparency when the FSA is taking action with firms. We believe that consumers have the right to know about the shortcomings of the firms with whom they deal, so that they can protect themselves and be vigilant against unfair behaviour. Therefore, the Panel believes that the Financial Services and Markets Act (FSMA) should be amended to allow the FSA to name firms well ahead of the outcome of any enforcement action. In our view, such disclosure would be in the public interest and would support the FSA's consumer protection objective by giving consumers the information they need to protect themselves.

  19.  We believe that the FSA should be given the power to name firms at the commencement of the disciplinary process. In practice this is at the stage where a warning notice is issued when the FSA considers, after investigation, that the firm does have a case to answer. It is therefore broadly equivalent to the stage at which charges are brought in criminal and civil cases.

  20.  At present section 348 of FSMA prevents the FSA from disclosing information regarding the firms it regulates, with section 391 preventing disclosure of any action until a final decision. This means that the FSA cannot publish the name of the firm until the case is settled and any appeal has been heard. This is long after the FSA believes that it has clear evidence of breaches of FSA rules and imposes restrictions which go well beyond what is regarded as reasonable in other legal hearings.

  21.  The issuing of a warning notice essentially marks the beginning of the disciplinary process against a firm, as few cases fail beyond this point. We firmly believe that a blanket prohibition on disclosure of such warning notices, which is the effect of section 391 of FSMA, is inappropriate particularly when the period between the issuing of the warning notice and the final notice can be lengthy. This is particularly true of the bigger cases involving household names who can employ lawyers to ensure that the process is long and drawn out. In the meantime consumers remain vulnerable to poor treatment.

  22.  The Panel has been supporting discussions around transparency during the passage of the Financial Services Bill, and hopes cross-party support will be given to increasing transparency.


  23.  The Consumer Panel is an independent statutory body established under the Financial Services and Markets Act 2000 to advise and monitor the Financial Services Authority on all its policies and activities, from an independent consumer point of view. We also review and comment on salient wider developments in financial services that fall within the remit of Government Departments or regulators other than the FSA. Information about the Panel and its work is available at

March 2010

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