Mortgage arrears: follow up - Treasury Contents

Written evidence submitted by Which?

  Which? is an independent consumer organisation with around 700,000 members and is the largest consumer organisation in Europe. Which? is independent of Government and industry and is funded through the sales of Which? consumer magazines and books. We welcome this opportunity to comment on mortgage arrears and access to finance.


  We shared the Committee's serious concern regarding mortgage arrears fees and supported the recommendations for lenders to provide an itemised breakdown of the additional costs their arrears charges are supposed to cover and for the FSA and OFT to review all mortgage arrears charges made by mortgage providers to determine whether they were reasonable.

  We support the FSA's proposed changes to the rules to prohibit firms from continuing to levy monthly charges where the consumer has made an arrangement to repay the outstanding arrears. We also welcome the FSA's intention to conduct a review of charging and pricing structures.

  In this context it is extremely disappointing that several mortgage providers have recently increased the level of their arrears charges. Abbey has increased its monthly arrears charge from £35 to £40. Capstone mortgages (a sub-prime lender including "Preferred mortgages" and "Southern Pacific Mortgages Ltd") has recently increased its monthly "arrears management fee" from £60 to £85. Bradford and Bingley has increased its monthly arrears charge from £25 to £30, though it has reduced its charge for an unpaid direct debit from £35 to £8.

  It is vital that the FSA completes its review of charging and pricing structures at the earliest opportunity. Any consumers who have been charged more than the reasonable administrative costs incurred should be provided with automatic refunds.


  Which? continue to be concerned that the FSA's regulatory approach does not provide a strong enough incentive for lenders to treat their customers fairly or facilitate the appropriate sharing of information between the regulator and the judges which will be hearing repossession cases.

  We welcomed the action taken against GMAC by the FSA, which resulted in a fine of £2.8 million and redress of £7.7 million to 46,000 customers. The latest information released by the FSA indicates that they are taking action against six firms for failing to treat customers in arrears fairly. However, the FSA still refuses to publish the names of the lenders which have been referred to enforcement. In response to our most recent Freedom of Information request the FSA gave the following reasons for non-disclosure:

    Section 348 of FSMA restricts the FSA from disclosing "confidential information" it has received in carrying out its functions 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 obtained by the FSA for the purposes of or in the discharge of its functions under FSMA and which is not in the public domain. In particular, the disclosure of the name of the firms, when taken with the statements already in the public domain (see below) about potential breaches of the FSA's rules, would reveal information that the FSA has received from the firms in the course of the Thematic Review into mortgage arrears and repossessions handling. This work was undertaken for the purpose of carrying out our supervision of the firms in the mortgage sector, so information gathered pursuant to that work falls within section 348 of FSMA.

    Section 31 (Law enforcement): ... the information requested, if disclosed, would, or would be likely to, prejudice the exercise by the FSA of its functions for the purposes of ascertaining whether circumstances which would justify regulatory action in pursuance of any enactment exist or may arise ... There is a strong public interest in the FSA being able to exercise its functions under FSMA in the most effective way possible and for the protection of consumers. Disclosure of the information requested, would, or would be likely to, undermine the willingness of firms to participate with the FSA in a future or similar review of the mortgage market. In turn, this would harm the FSA's ability to obtain this type of information voluntarily, so helping us to promote good practice and address the areas and firms where serious and sustained failings had been identified.

    Section 33 (Commercial Interests): The commercial interests of the firms who fall within the scope of the information request would, or would be likely to, be harmed by disclosing the information requested. These form part of the FSA's review of the mortgage sector and our ongoing investigation of particular firms concerning potential breaches of the FSA's rules in relation to poor mortgage arrears and repossession handling practices and excessive arrears charges.

    Disclosure at the present time of the information you have requested would be likely to lead to comment and speculation, which would or would be likely to harm the firm's or firms' brands, reputation and thereby their financial position. This would harm the commercial interests of the firms and stakeholders in it, including investors and employees.

  In an environment where the Chief Executive of the FSA has acknowledged that the regulator's Treating Customers Fairly initiative has "not yet delivered substantial on-the-ground benefits to consumers" it is essential that the FSA uses every possible mechanism available to secure improvement for consumers.

  Consumers should have a right to know if their lender is currently being investigated by the FSA. Similarly, judges hearing repossession cases should also be informed about the concerns the FSA has about the conduct of individual lenders. We believe the FSA should be asked how many homes those lenders which it is currently taking enforcement action against have repossessed in the past year.

  Practices will only improve when firms which treat their customers badly suffer damage to their reputation and bottom line. The lack of information also leads to a lack of accountability. It is impossible for outside observers to determine whether the action the FSA has required firms to take to improve their practices has been effective.

  Which? believes that the FSA should immediately publish its assessments of which lenders have been treating customers unfairly and have been referred to enforcement. It should be prepared to levy high fines on those which consistently flout the rules. The revenue from these fines should be used to help borrowers' access independent debt advice rather than be returned to the industry in the form of lower regulatory fees.


  We support the decision to convert the MCOB forbearance guidance into rules. However, we also believe that more needs to be done to ensure the fair treatment of customers who are experiencing financial difficulties but have not yet fallen into arrears. Our Money Advice helpline is still receiving phone calls from customers who are trying to engage with their lenders as soon as they are experiencing financial difficulties and are not receiving the type or level of assistance that lenders are claiming to provide to consumers.

  The term "payment difficulties" is not defined in the regulation. It is important that lenders take a flexible and proactive approach to the treatment of consumers who are not yet in arrears but have contacted the lender with early notice of their financial difficulties. The advice given to the consumer below by Northern Rock to cancel their direct debit is irresponsible and risks damaging a consumer's credit rating and restricting their ability to remortgage. We believe that the regulator should make it clear that the term "payment difficulties" and the associated rules should apply even if a consumer has not yet missed a payment.


Case Study 1

  A Member called because due to reduction in income they approached Northern Rock to arrange to switch from repayment to interest only. Northern Rock asked them to fill in an income and expenditure form for them to consider the request. It has now come back and said they don't fit the criteria. The member called to find out why and was told that they just don't and the only advice Northern Rock could offer is for them to cancel their direct debit. The member isn't currently in arrears but will not be able to pay February's payment on a repayment basis.

Case Study 2

  A Member has been made redundant and his wife doesn't work. His mortgage is with Northern Rock and is held within the "bad bank" part (Northern Rock Asset Management). He's asked if it will consider switching him to interest-only but it won't negotiate at all.


  Consumers have seen the low official interest rates have been partly offset by a substantial increase in mortgage spreads. Whilst, there has been a small decline in recent months, the chart below shows the significant rise in margins on tracker and discount mortgages since the start of the credit crunch. Which? continues to believe that these increasing spreads are a function of reduced competition in the market.


  In addition to the increasing spreads on individual products, the industry as a whole is increasing its margins as consumers leave favourable short-term deals agreed prior to the start of the credit crunch and move onto Standard Variable Rates. For example, at the 2009 RBS annual results, Brian Hartzer, responsible for UK retail, said "... we've certainly have seen a shift to SVR which is helping our margin and will help our revenue growth in the year ahead as well, because the margins are healthier on SVR".

  The Bank of England recently estimated that if spreads remain at their elevated levels then a Bank of England base rate of just 3% would leave the proportion of income accounted for by interest payments back where it was at the start of the credit crunch. To put these figures into context an amount equal to around 2.6% of income would be around £25 billion each year.

Table 1

SpreadsBank rate (%)
0.52 345 6
2009 Q27.79.1 10.612.113.6 15.1
1999-2003 average4.26.5 8.09.511.0 12.5
Source: Bank of England, Financial Stability Report, December 2009 page 26

Standard Variable Rates

  Several lenders have begun to increase the Standard Variable Rates for existing borrowers. The highest of these increases has been undertaken by Skipton Building society, which increased its SVR from 3.5% to 4.95% with effect from 1 March 2010. This could increase the average cost of a £150,000 mortgage by over £1,450 a year. Skipton had previously given its borrowers a contractual commitment that the SVR would be no more than 3% above base rate. They are now relying on a term allowing them to remove the SVR ceiling under "exceptional circumstances".[118] These changes illustrate the complete lack of contractual protection for many consumers on their lender's Standard Variable Rates. This could pose particular problems for customers of Northern Rock when it is returned to the private sector. Many customers will be unable to move elsewhere due to low levels of equity or previous repayment difficulty.

Table 2


SVR increase New SVRDate changed

Accord mortgages
+0.65% 5.99%23 December 2009
Amber Home Loans+1.45% 4.95%1 March 2010
Hanley Economic Building Society+0.45% 5.19%1 March 2010
Mansfield+0.35%5.59% 5 January 2010
Norwich & Peterborough+0.50% 5.35%2 February 2010
Skipton BS+1.45%4.95% 1 March 2010
UCB Home Loans+0.30% to +0.50% 5.09% to 5.49%1 February 2010

Source: Defaqto

Tracker mortgages

  We continue to be concerned that some first time buyers may take out tracker rates at very high margins above base rates and be unable to afford the repayments if interest rates were to rise significantly. For example, Halifax continue to promote a tracker mortgage using the phrase "If you want to be able to take advantage of lower interest rates if they go down, a tracker mortgage could be what you need. But remember, interest rates can also go up."[119] It is clear to us that the base rate is extremely unlikely to be cut further, but no one can predict when or how fast interest rates may return to their long-run average. Lenders and intermediaries need to be required to look at repayments when the rate goes back to its longer-term average and consumers need to be told how much their repayments could increase.

March 2010

118   Skipton, SVR, Questions and Answers, Back

119 Back

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