TR18/5: Management of long-term mortgage arrears and forbearance

In our Business Plan 2017/18[2] we set out to understand whether long-term mortgage arrears customers were experiencing harm from extended forbearance.

We wanted to identify how firms treat customers who have long-term arrears and whether there are areas where firms could improve.

What we found

In the cases we reviewed, we found that firms generally treated customers in long-term financial difficulty appropriately.

Our observations included:

• Appropriate arrangements: we saw examples of firms agreeing reasonable arrangements with their customers on sustainable terms.
• Individual circumstances: we observed examples where firms took an appropriate approach to considering customers’ individual circumstances. In these examples, firms handled the customer with both sensitivity and purpose which encouraged them to stay engaged throughout.
• Designated call handlers: some firms in our sample had introduced specific call handlers or designated sub-teams which provide the customer with a consistent point of contact and improved the overall customer experience.
• End-to-end quality assurance: a small number of firms in our sample had adopted a quality assurance approach that focused on broader end-to-end reviews. This may have enabled firms to evaluate better the suitability of customer outcomes, while also assisting with robust root cause analysis.

We found some inconsistencies in firms’ arrears management practices that may result in a poor customer experience and have the potential to cause harm. 

This was disappointing, particularly given that we have previously issued detailed guidance on good and poor arrears management around areas such as customer engagement, quality assurance and customer vulnerabilities. We have previously taken action against firms where we have identified poor practice and weak oversight. 

We found isolated examples of harm where customers were unable to recover from their arrears position and their mortgage debt continued to increase. This was observed where customers were on high interest rates.

We identified the following issues:

• Incomplete record keeping: we saw examples where customer case file notes had insufficient information. This resulted in customers having to repeat their circumstances on multiple occasions and may lead to the customer being disengaged.
• Inconsistent handling of vulnerable customers: we observed instances where customers did not receive the appropriate level of support as their vulnerabilities were not identified.
• Inadequate reviewing of arrangements: some firms in our sample adopted a reactive communication approach, where agreed payment arrangements were not regularly reviewed to ensure they remained suitable.
• Inaccurate communications: in some examples, customers received inaccurate information as the firm had not reviewed the correspondence before it was issued.
• Lack of consideration of other options: we found examples where firms would repeatedly pursue arrangements to pay, when it may have been suitable for them to consider alternative options for the repayment of a customer’s arrears.
• Narrow quality assurance processes: some firms reviewed calls in isolation rather than taking a broader ‘end-to-end’ approach. This did not provide the firms with sufficient information to assess the overall customer experience or the opportunity for alternative action.
• Barriers to effective engagement: we observed instances where customers were required to complete detailed forms, with little assistance from firms, in order to have their income and expenditure assessed and their vulnerabilities registered.

How we conducted the review

Our firm population provided us with a cross-section of the market and included large retail banks, building societies, non-bank lenders and closed-book lenders.

Our work focused specifically on firms’ interactions with customers with mortgage arrears of greater than 12 months.

We looked at firms’ arrears management policies and strategies and reviewed customer files, to understand how well firms are delivering appropriate customer outcomes.

As part of the management of customers in arrears we did note a small number of cases in which customers were offered a lower interest rate, however our work did not seek to assess whether customers were mortgage prisoners. The FCA has carried out work in this area, detailed in the Mortgage Market Study interim report[3].

What we expect from firms

We expect firms to review their practices in line with our published rules, guidance and examples of good and poor practice. Where appropriate, firms should make relevant changes to meet our expectations in minimising harm to customers.

We remind firms that they must be compliant with all relevant MCOB rules when dealing with customers with mortgage arrears. These rules include the following:

• Firms must consider the individual circumstances of the customer and determine whether it is appropriate to discuss alternative options (MCOB 13.3.4A R[4]).
• Firms must make reasonable efforts to reach an agreement over the method of repaying the arrears, as an alternative to repossession (MCOB 13.3.2A R (1)[4]).
• Firms must not repossess the property unless all other reasonable attempts to resolve the position have failed (MCOB 13.3.2A R (6)[5]).

Firms should also consider

We also remind firms of our prudentially focused Finalised Guidance in respect to arrears, which firms should also consider. This includes:

• The primary aim of forbearance should be to enable the complete recovery of the mortgage through the full repayment of arrears (FG 11/15[4]).
• In circumstances where this primary aim cannot be achieved, the secondary aim would be to recover the customer into a sustainable terms position on their mortgage. Sustainable terms are defined as revised contractual terms where the mortgage can be fully serviced over its full life (FG 11/15[7]).
• Payment arrangements that are agreed with the customer should be reviewed regularly (eg every 3-6 months), with the aim of recovering the loan as soon as is reasonably possible (FG11/15)[8].

Our message to customers in arrears 

• They should not ignore the situation.
• Customers should engage with their mortgage provider about mortgage arrears – more appropriate and sustainable options are available to customers who engage early and are open with the lender.
• Early engagement may also prevent the situation from worsening.
• They should seek additional support and free, independent guidance from MoneyHelper (formerly the Money Advice Service), which can direct them to providers of free debt advice.
• Under our rules, firms may only consider repossession as a last resort.

Next steps

We have provided feedback to the firms in our sample. In some cases, we are considering whether further regulatory action is necessary.

We will continue to monitor and review firms’ practices through ongoing supervisory activity and we will be prepared to take action against firms where we find evidence of poor practice. 

Where to find out more

• MCOB 13 Arrears, payment shortfalls and repossessions: regulated mortgage contracts and home purchase plans[6]
• MCOB 12 Charges[2]
• FG17/4: Finalised Guidance - The fair treatment of mortgage customers in payment shortfall: impact of automatic capitalisations[3]
• TR 14/3: Thematic Review - Mortgage lenders’ arrears management and forbearance[4]
• FG 11/15: Finalised Guidance - Forbearance and Impairment Provisions – Mortgages[9]
• FSA – Mortgage arrears and repossessions handling (2009)[3]
• Mortgage Market Study interim report (2018)[3]