Arrears Handling and Approved Persons: the first proposals under the Mortgage Market Review

Updated January 2010

Background

On 26 January 2010 the Financial Services Authority (FSA) published Consultation Paper 10/2 (the Consultation) setting out its first round of proposals under the Mortgage Market Review (MMR). This follows the original MMR Discussion Paper published in October 2009 (the Discussion Paper), which identified several issues the FSA believes have led to consumer detriment in the UK mortgage market.

The FSA has focused on:

• ensuring that lenders treat customers who are in arrears fairly, which was highlighted in the Discussion Paper as being an area requiring immediate attention, and
• extending the Approved Persons (AP) regime to include mortgage arrangers and advisers.

In addition to the mortgage market generally, arrears handling and the AP regime have been core aspects of the FSA's supervisory agenda for some time. The relatively quick publication of these proposals, particularly when viewed alongside the recent (and pending) enforcement cases in respect of unfair arrears charges, indicates the FSA's haste to now effect material change.

The proposals

Arrears handling
Part 1 of the Consultation explains the FSA's proposed changes to rules on mortgage arrears, which are aimed at strengthening and enhancing current requirements in the Mortgages and Home Finance: Conduct of Business sourcebook (MCOB).

In summary the proposals are to:

• reiterate in stronger terms that where a firm has an agreement to pay (ATP) in place with a borrower, it must not continue to apply a monthly arrears charge;
• implement rules in place of what is currently guidance on lender forbearance in MCOB 13, reaffirming that repossession must only be a last resort;
• clarify that firms must not apply early repayment charges (ERCs) to arrears fees or charges or to the interest levied on those;
• require firms to record telephone calls made as part of the arrears handling process and to keep all arrears-related records for three years rather than the current 12 months;
• confirm that payments made by customers in arrears are to be allocated first to clearing missed payments rather than settling arrears fees or charges, which can be paid later.

The AP Regime
In Part 2 of the Consultation the FSA sets out its intention to extend the scope of the AP regime in the mortgage market, as a way of tackling mortgage fraud, unsuitable advice, and to more robustly regulate mortgage intermediaries.

The AP regime will be extended by:

• introducing a new controlled function, CF31, as the customer function for home finance business; and
• applying the current CF10 (compliance oversight) controlled function to home finance activities.

The new CF31 function will apply to individuals who advise on or bring about home finance business either now and in the future, and whether on behalf of an intermediary or the lender itself.

Any individuals applying for FSA approval to hold either of these controlled functions will first have to be assessed as 'fit and proper' by the FSA and will also have to comply with the Code of Practice for APs (APER), meaning that all mortgage advisers will be personally accountable to the FSA.

Comment

There has been much public, political and regulatory debate about how lenders, in particular specialist lenders, treat customers who are in arrears (or facing repossession) since the financial crisis took hold in September 2008. The FSA has placed a lot of emphasis on its treating customers fairly (TCF) initiative to help address this, but the combination of TCF high-level principles and MCOB guidance does not, at least in the FSA's view, go far enough. The resulting rule changes, whilst representing a tougher stance by the FSA, mainly reinforce current guidance and early signs are that they are broadly welcomed by the industry.

Few would dispute that the intermediary and advice channel has been exploited by a minority of dishonest individuals seeking to defraud lenders. The extension of the AP regime, it is hoped, will go some way to helping identify and prevent organised mortgage fraud, but is it using a sledge hammer to crack a nut?. A view from the Council of Mortgage Lenders is that the FSA has underestimated the number of mortgage sales advisers who will be affected. This undermines the FSA's cost benefit analysis and means that implementation may be more expensive than indicated, which will come as ominous news to lenders and brokers already working hard to manage costs.

Next steps

Firms wishing to influence the form of the final rules can review and comment on the FSA's draft rules which are attached as appendices to the Consultation. Feedback on both sets of proposals is welcomed until the consultation period ends on 30 April 2010. The FSA then expects to publish a Policy Statement in June 2010. If you have any queries in relation to these proposed measures please do not hesitate to contact Suzanne MacDonald, who will be happy to assist.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at January 2010. Specific advice should be sought for specific cases; we cannot be held responsible for any action (or decision not to take action) made in reliance upon the content of this publication.