Mortgage arrears – What is the FCA driving at?

Posted: 21st July 2014

With the implementation of the Mortgage Market Review (MMR), the rapidly rising housing market and new lending continuing to run at a pace, there has been little room left in the column inches of late for any other issues. However, other things have been going on in the area of mortgages and in this article we want to devote some time to the area of arrears management and forbearance.

The background

The approach to arrears handling within firms was one of the first areas considered by the regulator when the Financial Services Authority (FSA) looked at a sample of approaches in its thematic review conducted in 2008/09. The findings were relatively damning and led to some immediate consultation and rule changes around arrears considerations and in particular, how firms charged fees.

When the Financial Conduct Authority (FCA) took up the regulatory reins in 2013, one of its first actions was to conduct a fresh thematic into arrears management and forbearance, published in February 2014. The FCA found that improvements had been made by firms and that greater consideration was being given to forbearance tools. However, there were still issues with firms adopting a process led approach to arrears handling. There were also concerns around giving appropriate instruction to front line arrears handlers in managing a customer in financial difficulties from a holistic point of view. So, good progress but further improvement required.

In recent times there have been a small number of examples of historic conduct issues arising in either the handling or the administration of customers’ accounts in arrears which have been prompted by either FCA intervention or firms’ proactive activity.

The regulator’s areas of interest

Proactivity – Too often, a customer’s response to being in difficulty is to not act early enough or until they have exhausted all available options within their own remit rather than contacting the lender direct. Sometimes this can be too late to make a real difference. Firms need to be doing as much as they can to be proactive in identifying arrears earlier and to spot trends within customer behaviour that may indicate a borrower is reaching a stressed situation. This may be more possible when arrears cases are low – as today – but one of the ‘nice-to-haves’ that will be dropped when activity increases.

Process adherence – An issue called out by the FCA in its thematic paper was the over reliance on process adherence in the internal reporting produced for senior management. This theme runs consistently through many of the communications made by the FCA on customer outcomes. Firms need to be taking an end to end approach to arrears handling, considering the outcomes they intend to deliver at each key step of the customer journey and reporting these to senior management.

Know your customer – An additional complication for arrears is the fact that, when considering the appropriateness of the outcome delivered, firms should look at all of the available customer information. This is to reach a view as to whether the outcome delivered was a good one and was based upon the customer’s personal and financial circumstances. Arrears handlers need to think holistically and consider what options have been previously used and what has worked well, together with the circumstances of the customer today. This is not an easy task, but is a critical one in order to truly evidence the quality of outcomes and provide senior management with the right level of assurance.