Mortgage arrears: follow up - Treasury Contents

Supplementary written evidence submitted by the Financial Services Authority

  1.  We are submitting this note as a follow-up to the oral evidence given by Jon Pain and Lesley Titcomb on 23 March.

2.  In this note we provide answers to the specific questions the Committee asked on:

    — A list of the reasons why the seven cases dealing with mortgage arrears and practices have been referred to the FSA's Enforcement division for investigation;

    — The length of time (following the warning notice) for which the seven cases in Enforcement dealing with mortgage arrears and practices have been under investigation;

    — The numbe of current GMAC customers that received compensation; and

    — Tripartite discussions about the contract between GMAC and Bradford and Bingley.


A list of the reasons why the seven cases dealing with mortgage arrears and practices have been referred to the FSA's Enforcement division for investigation

  3.  We expect firms to comply with our requirements when dealing with customers in mortgage arrears. This includes treating such customers fairly, handling customers' complaints promptly and fairly, and communicating with customers who are in mortgage arrears in a way which is clear, fair and not misleading. We take a hard line when firms do not meet our standards, and we have taken action against such firms as a result.

  4.  The cases have been referred to Enforcement for investigation because there are circumstances suggesting breaches of the FSA's Principles for Business (such as Principle 2—due skill, care and dilligence, Principle 3—systems and controls, Principle 6—fair treatment of customers, Principle 7—information to clients, and Principle 9—customers' relationships of trust) and relevant rules in the Mortgages Conduct of Business Sourcebook (especially those rules relating to charges to customers in mortgage arrears and treatment of customers being repossessed). Some of our investigations involve individual senior managers as well as the firm. The cases were referred between July and December 2009.

  5.  The Committee will have noted the settlement of one of these cases in the form of enforcement action taken against Kensington Mortgage Company Limited, publicised on 12 April 2010. Kensington has been fined £1.225 million and will provide redress to consumers who have been disadvantaged which is expected to cost them £1.066 million. We identified a number of serious failings which occurred between 1 January 2007 and 31 October 2008 in relation to its mortgage arrears handling processes and in its dealings with customers in arrears. These include:

    — Failing to ensure mortgage servicing staff acting on its behalf had adequate understanding of treating mortgage arrears customers fairly; and

    — Concentrating on the repayment of mortgage arrears over a short period of time rather than agreeing an arrangement to pay the arrears based on the customer's individual circumstances.

  Applying three charges to customer's accounts that were unfair and/or excessive. These were:

    — A fee for a returned direct debit which was charged regardless of how many times the direct debit had already been returned unpaid;

    — An excessive fee for cancelled direct debits which did not reflect administrative costs; and

    — An early repayment charge on mortgage balances which included arrears fees and charges within that balance.

  6.  The firm also failed to take reasonable care to organise and control its affairs responsibly and effectively, and to ensure adequate risk management systems. Its management information focused on the performance of the firm's mortgage book and the profitability of the business, rather than on treating customers fairly.

The length of time, following the warning notice, the seven cases have been under investigation

  7.  Once a warning notice is sent out, the firm or individual has 28 days to make oral or written representations and can apply for extra time if required. Six cases are currently being investigated by our Enforcement team, but have not yet reached warning notice stage.

  8.  The case that has reached warning notice stage has been settled, as noted above.

The number of current GMAC customers that received compensation

  9.  In October 2009, we fined GMAC £2.8 million for failing to treat their customers fairly. We also secured redress of up to £7.7 million (plus interest) for over 46,000 mortgage customers. 16,712 of the 46,000 customers involved in the redress programme remain live in the GMAC-RFC balance sheet and securitised accounts as at 31 March 2010. The loans made to 429 of the 46,000 customers involved in the redress programme were sold to Bradford & Bingley.

Tripartite discussions about the contract between GMAC and Bradford and Bingley

  10.  The Tripartite Authorities have regular discussions about financial institutions where, among other things, financial stability concerns exist. Records of tripartite discussions have been and remain confidential and this is a well established practice. The Financial Services Bill proposed partially amending this by mandating the publication of the minutes of standing meetings of the Council for Financial Stability (CFS) but acknowledged that "The confidentiality of market-sensitive discussions will, of course, be protected, and it is likely that this will mean that a significant proportion of the Council's minutes will not be suitable for publication." (Reforming Financial Markets HMT 2009.) Although clauses 1-4 of the Financial Services Bill (those relating to the CFS) were withdrawn on 8 April 2010, the acknowleged need for confidentiality around Tripartite discussions remains.

April 2010

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