In its parting shot of 2022, the FCA issued a consultation in response to the rising cost of living, outlining draft guidance for firms to support customers in financial difficulty. The urgency of the subject matter was obvious as firms were given less than two weeks to respond.
Deteriorating market conditions have been further highlighted by media suggestions that more than 750,000 households are at risk of default over the next two years. This is not surprising as mortgage costs as a proportion of income are now at the highest ratio since the global financial crisis.
Lenders and mortgage portfolio holders have had the benefit of operating in a benign environment, driven by low interest rates, for the last decade and a half. While credit risk affordability assessments were stretched during this period, the subsequent credit creep did not result in increased arrears. However, the most recent data from UK Finance shows there were 74,440 homeowner mortgages in arrears of more than 2.5% of the outstanding balance. So, a potential 10-fold increase on this number is scary. But that is not the full extent of the issue, as that level of defaults will inevitably lead to more serious arrears and ultimately repossessions.
The FCA has also reminded firms of the need for compliance with existing provisions in MCOB, as well as Tailored Support Guidance and a June 2022 Dear CEO letter. The main thrust of these messages is around forbearance and the challenge for firms to ensure that any forbearance granted is appropriate to a customer’s individual circumstances. This could even include circumstances where a customer has not yet missed a payment. The FCA also highlights the need to provide forbearance ‘at scale’.
The draft guidance raises some challenges for firms, in particular:
- Firms can use automation and digital tools to collect customer data, but they should be mindful of the needs of vulnerable customers, tailoring their processes to those needs.
- In the context of rising costs of living, firms can offer groups of customers with similar needs and circumstances a range of options, but these options still must be appropriate to individual customer circumstances.
- The FCA acknowledges that variations to a mortgage contract solely for the purpose of forbearance, may not need to follow the advice process, but firms will still want to ensure that permitted execution only forbearance does not stray into giving advice.
We have been commenting on the deteriorating environment for some time now and the robust approach the FCA is taking. Let’s not forget that it was only a few years ago that it fined a major bank £64m for breaches in its handling of customers who fell into arrears.
Whether you are a lender or a holder of a mortgage portfolio, servicing existing customers will be challenging in 2023. Please give us a call to see how we can help you manage those challenges.