Consultant Zone

Are Customers in Arrears Being Treated Fairly?

Lenders and third party servicers will be interested in the contents of the recent Financial Conduct Authority (“FCA”) consultation paper – which has been published as a prequel to issuing guidance around the treatment of customers in arrears.

In June 2010, the Financial Services Authority ruled that lenders must not automatically capitalise arrears.  Instead, lenders must consider each borrower’s circumstances individually and then only capitalise with the borrower’s specific agreement.

Historically to that point, arrears handling practices included adding arrears to the mortgage balance (capitalising them) and recovering the arrears through an increase in monthly payments.  Both these tactics resulted in increased interest charges.

However, more recently, the FCA has identified that some lenders and servicers have continued to pursue the capitalised arrears through the arrears collections process, due to failed internal processes.  They have stated that this dual practise of collecting the arrears over the remaining mortgage term and pursuing them through the collections process “lacks transparency and leads to harm”.

The consultation mentioned above will be completed by 18 January 2017 and early indications are that up to 750,000 borrowers could be affected.  Any affected borrowers who have incurred a historic or current loss could be entitled to a credit to their mortgage account if it is still open.  Additionally, if the mortgage has already been paid off, then a refund could be due.

The current advice from the FCA is for lenders and servicers to start identifying customers immediately and not to wait until the final guidelines are published.  The reason behind this is that it is expected to insist that any affected borrowers need to be identified by June 2017, with remediation within 12 months of the notification.

This issue highlights the fact that regulators are getting a lot closer to the issues of customer detriment and are proving that by the publication of regular reviews of aspects of the mortgage market.

Rule changes and updated guidance from regulators are now a regular feature of the market place and should create a ‘heads up’ notification system within firms to ensure internal and external reviews are keeping up with the regulators warnings.