FSA – HUGE FINES

A truly dramatic statement from the FSA on those who fail to meet the Threshold Conditions: and other considerations. TCF has been evidenced here most clearly.

Redstone Mortgages Limited fined £630,000 for unfair treatment of some customers in arrears
Margaret Cole

"Many of Redstone’s customers were in a vulnerable position, having fallen into arrears on their mortgage payments, and firms should not charge such customers excessive and unfair fees."

The Financial Services Authority (FSA) has fined Redstone Mortgages Limited (Redstone) £630,000 for poor treatment of some customers facing mortgage arrears.

The firm has agreed to redress customers who were charged unfair and/or excessive charges while they were in arrears. It is estimated that the redress will cost the firm up to £500,000.

The FSA has identified a number of serious failings by Redstone which occurred between 1 January 2007 and 5 August 2009 in relation to its mortgage arrears handling processes and in its dealings with customers in arrears.

These include:

•Failing to ensure mortgage servicing staff acting on its behalf had adequate understanding of treating mortgage arrears customers fairly;
•Focusing on reducing arrears to less than two months, regardless of the customer’s personal and financial circumstances;
•Having written policies that led, in some cases, to the unnecessary use of litigation to secure arrangements to pay;
•Sending repetitive, excessive and confusing correspondence; and
•Applying four charges to customers’ accounts that were unfair and/or excessive.

These were:

•A fee for a returned direct debit which was charged regardless of how many times the direct debit had already been returned unpaid;
•Including arrears fees and charges in the balance on which an early repayment charge was calculated;
•Charging for field counsellor visits in full to some customers who had not been properly informed of the timing of the visit and/or of their right to refuse or cancel the visit; or who should have been charged a reduced rate cancellation fee; and
•A fee for litigation activities, which was applied even when such activities were taken by Redstone unnecessarily.

Under FSA rules, a firm must pay due regard to the interests of its customers and ensure they are treated fairly. Redstone was in breach of these rules for a significant period of time.

Margaret Cole, director of enforcement and financial crime, said:

"Many of Redstone’s customers were in a vulnerable position, having fallen into arrears on their mortgage payments, and firms should not charge such customers excessive and unfair fees. This is not how the FSA expects lenders to treat customers in arrears.

"Rather than assessing each customer’s personal and financial circumstances on an individual basis, the firm was applying a one size fits all approach by aiming to reduce arrears to less than two months.

"The FSA is committed to clamping down on mortgage lenders who fail to adhere to treating customers fairly rules. We are crystal clear about the standards we expect and will take tough actions against firms who breach these rules. "

Redstone qualified for a 30% discount under the FSA’s settlement discount scheme. Without the discount the fine would have been £900,000. The FSA has taken into account that Redstone worked in an open and co-operative way with the FSA and has made significant improvements to its arrears handling and mortgage litigation procedures


Source: Financial Services Authority

FSA Website

CML - RESPONSIBLE LENDING

In response to the FSA's consultation paper on responsible lending, the Council of Mortgage Lenders emphasises that the mortgage industry recognises the inevitability of regulatory change - but points out that there may also be unwelcome side effects for consumers from this process.

The FSA proposes to require borrowers' incomes to be verified in all cases - meaning not only that "self-cert" mortgages will no longer exist, but also that lenders will no longer be able to undertake "fast track" mortgage processing.

Under the "fast track" process, lenders assess the application and, on low risk cases, may then undertake a lower level of documentary scrutiny than on higher risk cases, although the borrower should be unaware of this. "Fast track" loans, according to CML analysis and the FSA's own, have actually experienced lower levels of default than income-verified loans in the prime market, but are no longer expected to be allowed. This will inevitably mean higher administrative costs in processing loan applications.

In terms of affordability, the FSA plans to require mortgage affordability to be assessed on a capital repayment basis, even where the mortgage is interest-only. Most lenders already calculate affordability on this basis, so this is unlikely to be a concern in its own right. However, the position of borrowers who wish to transfer to interest-only to manage periods of financial difficulty needs careful consideration in terms of regulatory treatment and outcomes for consumers.

The FSA also propose a prescriptive approach to assessing the applicant's available income to support the mortgage application, after taking account of other expenditure. Again, lenders commonly use "affordability" models to do exactly this. Nevertheless, it is important to recognise that the FSA's proposed conservative approach to assessing available income may indeed make borrowing "safer", but may also make it more difficult for households to get a mortgage.

This is particularly relevant given that most cases of mortgage arrears and repossession cannot be attributed to failures in the affordability assessment of the original lending decision. Most cases of financial difficulty occur because of changes in the borrower's circumstance, as evidence repeatedly shows. For example, joint research by the three main advice agencies in December 2009 suggested that over-commitment was a feature in only 10% of arrears cases. Job loss, by contrast, was cited as a factor in 40% of cases.

Commenting on the FSA's proposals, CML director general Michael Coogan said:
"There will always be a regulatory trade-off between protecting consumers from over-borrowing, and increasing the barriers to home-ownership. The mortgage market for the time being has already corrected, to a degree that the main consumer concern right now is about access to finance, not about risky lending.

"The risk is that the gain will not match the pain in the short term. The industry and consumers will feel the costs of imposing new regulatory requirements now, in a market where they are not needed, but the potential consumer benefits will only be felt at some unspecified time in the future. We look forward to working with the FSA to ensure that a pragmatic approach to implementation can be adopted as far as possible, to reduce the negative side-effects that may arise from well-intentioned regulation. There is also a need to manage the regulatory burden that may emerge if the UK proceeds with changes just at the time that the European Commission is also due to publish proposals on the same aspects of mortgage regulation."


Source: Council of Mortgage Lenders

CML Website

LLOYDS OF LONDON

Lord Levene speaks:

Lord Levene says businesses must take a close look at their risk management systems in the face of global threats

Companies around the world must take a close look at their business models, in particular their risk management systems, if they are to avoid the increasingly complex dangers thrown up by globalisation.

That was the message delivered by Lloyd’s Chairman Lord Levene at the launch of the new Lloyd’s 360 Risk Insight report entitled ‘Globalisation and Risks for Business’. “We cannot simply try to hide away from risks, which travel further and faster than ever before,” he said. “Businesses around the world must manage risks better. Distance is no longer nature’s insurance policy which insulates you from the disasters and tragedies happening on the other side of the world.”

The report, published in partnership with the James Martin 21st Century School, University of Oxford, states that the new risks posed to businesses by globalisation include vulnerabilities arising from shared infrastructure (transport, energy and the internet) through social, health and political risks, to challenges around supplies of increasingly scarce resources (water, food and energy). It adds that these challenges are further complicated by being interlinked and interrelated.

Lord Levene cited the case of the Icelandic volcano earlier in the year as an example of how a single event can have a much greater worldwide impact in today’s globalised world. When the volcano last erupted in 1821, it poisoned a few cattle grazing on its slopes,” he said. “One hundred and ninety years later, it has caused chaos among airline passengers throughout the world, with an estimated loss to European business of £400 million a day in lost productivity.

“International businesses are not simply passive victims of globalisation,” he added. “They are also major beneficiaries of the breakdown in trade barriers. And they have a third role, which is usually underemphasised: they are highly active agents in creating and managing the global frameworks which move people and goods around the world – whether that is the construction of a railway, the operation of a mobile phone network, or indeed underwriting an insurance policy on a transnational oil pipeline.”

Lord Levene said that a company which successfully operates in the globalised world and which protects itself against the risks of globalisation, is one which “thinks globally”.

“The characteristic which distinguishes between failure and success will require a mobility of mind as much as a mobility of action. We need to think global. We need to know what is happening in the countries where we build factories, invest capital or sell services. We need to understand the risks in these places and crucially how a failure in location X will effect our operations in location Z.”

Also speaking at the launch of the report, Sir Michael Rake, chairman of BT Group, said the financial crisis must not undermine nor slow the pace of globalisation by allowing governments to batten down the hatches and restrict international trade.

“We need to stop knee-jerk reactions from politicians turning into reality,” he said. “We do need reform but we have to try to steer away from populist political rhetoric in favour of a level playing field which allows for growth in all sectors of the economy. The most difficult thing at the moment is stopping the populist political rhetoric becoming policy because there is so much pressure on them to ‘do something’.”

Lord Levene agreed with this view. “We cannot go backwards,” he said. “We should not be protectionist.
“Instead, we must manage our risks better. Business models, and particularly our risk management systems, must change as the risks change. The financial crisis has reminded us that removing trade barriers carries risks, but we do not believe that fact creates a case for reconstructing the obstacles that prevented us from trading with many nations in the 70s and 80s.”


Source: Lloyds of London

Lloyds of London