The Financial Conduct Authority said it was “disappointing” to discover inconsistencies in some lenders’ practices after it had issued detailed guidance on arrears management designed to prevent harm to customers.
Lenders are expected to look at the individual circumstances of borrowers who fall into long-term arrears, defined as 12 months or more, and make “reasonable efforts” to agree a method of repayment, with repossession to be considered only when all alternatives have been exhausted.
After reviewing a sample of arrears cases at banks, building societies and other lenders, however, the FCA pinpointed shortcomings in the way some lenders dealt with these customers, including cases where borrowers on high interest rates saw their mortgage debt continue to rise and were unable to re-emerge from arrears.
The FCA said it had given feedback to lenders it reviewed, “and is considering where in some cases further regulatory action is necessary”.
Arrears management has become a bigger issue for the regulator as it considers the possibility — flagged in recent months by the Bank of England — of steadily rising interest rates in the medium term. Long-term low interest rates have flattered the finances of some borrowers, who may find themselves in difficulties if rates continue to climb.
Sarah Nield, financial services risk and regulation director at consultancy PwC, said it was important for lenders to identify customers who were sensitive to interest rate rises and provide forbearance. “This is amplified given continuing political uncertainty, the potential effect it may have on the UK economy and the ability of customers to keep up with repayments.”
The FCA had advice for borrowers as well as lenders. Recalcitrant borrowers who found themselves in financial difficulties were urged not to bury their head in the sand but get in touch with their lender to prevent problems from worsening.
Jonathan Davidson, FCA executive director of supervision, said: “We know that many customers remain hesitant to contact their lender to discuss their mortgage arrears for a variety of reasons. We encourage customers to talk to their lender as early as possible as this may give them more time and options when it comes to the steps they can take.”
Shortcomings among some lenders identified by the FCA included poor record keeping and a failure to identify customers who might be vulnerable, a lack of regular reviews of payment arrangements and a failure to consider all the alternatives.
“We found examples where firms would repeatedly pursue arrangements to pay, when it may have been suitable for them to consider alternative options,” the FCA said.
The FCA did not provide figures for the number of mortgage borrowers in arrears of more than 12 months, but its interim market study published in May found there were 100,000 borrowers in arrears with authorised lenders by at least one month, out of a total of just over 8m borrowers.