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mortgages - the outlook for complaints

speech by Tony Boorman, decisions director and principal ombudsman, at the CML's complaints-handling seminar

London, 12 March 2008

I welcome the opportunity to speak at the Council of Mortgage Lenders' seminar on complaints handling - how can complaints be managed effectively?

I thought I should focus today on an assessment of the complaints landscape that we now face - and how the ombudsman service is working together with the financial services industry and consumer groups to help improve complaints handling in the mortgage sector.

So where are we now? And more importantly, what can we expect in the forthcoming year?

For the ombudsman service, the past 12 months have been dominated by two stories.

First, the beginning of the end of the long-standing saga that is mortgage endowments. For perhaps the first time in the life of the ombudsman service, complaints about mortgage endowments are no longer the most common cause of customer complaint referred to us.

Indeed, in recent months they account for fewer than 10% of all new cases.

Second, we have seen huge waves of new cases driven by customer dissatisfaction reflected in three recent consumer campaigns - first bank charges, then credit card charges, and most recently payment protection insurance (PPI).

mortgage complaints

Set against these major shifts in our workload, the world of mortgages may at first look quite stable. Since April 2007 the ombudsman service has received around 6,500 complaints relating to mortgages, mostly connected with the administration of the mortgage account. In the main, the issues raised have been about the day-to-day problems that will perhaps inevitably occur in any large customer-facing business. But a closer look suggests a more complex picture.

First, the volume of cases has increased markedly - up some 50% on last year (2006/07) when we received 4,366 mortgage cases (and that was an increase on the previous year). This does not seem tied to any specific theme, but rather covers the broad range of our mortgage-related work. In recent months, in particular, we have seen very high levels of complaints, with volumes running at nearly twice the level of the same period last year.

Second, mortgage intermediaries are now an established part of our jurisdiction. Complaints about brokers account for some - but by no means all - of the increasing caseload of mortgage disputes that we have seen. Indeed, most major lenders appear to have experienced a significant growth in referrals to the ombudsman in the second half of this year.

It is too early to tell whether this is part of a sustained upward trend - or is just a short-term blip. But we are planning for further increases next year.

financial hardship and the mortgage market

So what of the wider environment within which we will be carrying out our work?

I see from the CML's announcement yesterday that house purchase lending in January declined significantly. Your trade body said:

The wholesale funding markets remain largely closed and mortgage funding still remains constrained. This is now having a discernible impact on lending criteria and the ability of first-time buyers to get into the housing market.

The CML is not, of course, the only organisation that has commented on prospects for the market. I don't imagine that most complaint handlers in banks, building societies and other mortgage lenders will spend much of their time reading documents such as the FSA's Financial Risk Outlook for 2008. But I would recommend that you do. Not surprisingly, the FSA highlights the mortgage sector for attention. In particular, it identifies the possibility that a "significant minority of consumers could experience financial problems because of their high levels of borrowing" as one of its priority risk areas.

To illustrate the potential scale of the issue, the FSA highlights three consumer risk indicators: high loan-to-value ratios (90%+); high loan-to-income multiples (3.5x); and terms over 25 years. As the FSA says, taken individually these might not represent significant consumer risks. But in combination, the picture gives a greater cause for concern.

The FSA estimates that nearly a third of all mortgages sold in the last two and a half years (April 2005 to September 2007) fall within at least one of these risk categories. Around half of these mortgages show at least two indicators. And some 150,000 customers have taken out loans which fall into all three risk categories. The FSA also notes that some 1.4 million customers will come to the end of their fixed or discount interest period in the next twelve months.

None of these factors of themselves necessarily give rise to difficulties for customers, let alone to complaints. But for many customers, mortgage payments represent a large portion of their net income - the FSA estimates a median repayment of 27% to 29% of net income. Changes in circumstances can make it extremely difficult for those customers, who may already be facing wider financial problems. Some reports suggest that nearly half a million homeowners missed a mortgage repayment during the second half of last year. And Shelter says that more than a million homeowners resorted to credit card advances in 2007 to make mortgage repayments.

debt collection and repossession

Citizens Advice published an important report late last year on their experience of mortgage and secured loan problems. The report - "Set up to fail" - reported that most Citizens Advice clients had not originally shopped around for their mortgages but had relied on the recommendations of a single adviser. Particularly for those buying council houses, the authors reported "particularly poor advice from the brokers on suitability".

The report also focused on a series of issues facing customers in debt, especially the reported practice of some lenders to take court action before any attempt is made to negotiate settlement.

The Financial Services Consumer Panel has also expressed serious concerns. It has said:

We have heard that some less scrupulous lenders are rushing to repossess properties without the courts considering the FSA rules on repossessions. And despite appalling stories of the mis-selling of mortgages, the sales tactics used are rarely taken into account in the court case. Clearly if a lender or mortgage broker has acted irresponsibly by persuading someone to take out a mortgage they cannot afford, a much more lenient view ought to be taken of the householder's case.

And the panel has asked the courts to consider staying repossession proceedings where there is a credible complaint about mis-selling under consideration.

implications for complaints

So how might these wider issues impact on customer complaints in the sector? Of course, financial difficulty is not in itself a cause for complaint about lenders or brokers. But the impact of the so-called "credit crunch" can be expected to find its way into the complaints received by firms, and hence into the ombudsman's postbag.

In part this will happen simply because customers in financial hardship can be expected to look more critically at the services and charges of lenders. Much as the stockmarket falls earlier in the decade helped expose mis-selling of investment products, so credit restrictions today will expose earlier doubtful lending practices and poor customer service in the lending sector.

Even if the mortgage was appropriate, the way in which the lender responds to debt problems will be an important factor. As you know, the Banking Code requires that a lender must be sympathetic and positive when considering cases involving financial hardship.

And in its mortgage rulebook ("MCOB") the FSA also sets requirements on lenders to deal fairly with customers in arrears - and in particular when considering repossession. The evidence from Citizens Advice suggests that this may not always happen in practice - and may become a significant source of dispute.

So set against that background, it seems necessary for all of us to plan for a further increase in volumes of complaints involving mortgages. Customers will rightly look first to their lender to respond promptly and fairly to their complaint - and in the words of the Banking Code, to look sympathetically and positively to those in hardship.

Of course, the ombudsman will be there to resolve matters if the lender and customer cannot agree the way forward. But I hope that referrals to the ombudsman service can be kept to a minimum. It is not in the interest of either the consumer or the lender for debt-related issues to remain unresolved for lengthy periods.

And clearly, it can only add to the distress, inconvenience and costs incurred by the consumer if a firm rejects a complaint where it should have known that the ombudsman would have been likely to have upheld it. The hardship suffered by consumers in such circumstances can be substantial, and this will inevitably be a factor that the ombudsman will need to take into account in making awards.

So let me cover briefly some of the specific issues that we expect to see in relation to disputes involving mortgages - and how the ombudsman is likely to address those issues.

mis-selling and lending practices

If media comment is any guide, we might expect to see a significant number of consumers raising concerns that their lender (or intermediary) should not have assisted them to borrow so much - so-called unaffordable lending.

I have to say that this is not a conclusion the ombudsman will reach lightly. The consumer knows their own financial circumstances, and if the costs of the mortgage are clearly explained, they should readily be able to assess how affordable that mortgage really is for them.

However, in practice matters are not always as clear-cut as this suggests. We see cases where I find it difficult to imagine how the lender could have considered the customer capable of maintaining the required level of payments. Rather, it seems that the advice has been more about generating commission or fee income than a fair assessment of the interests of the customer. As you know the FSA's rules require the lender to take into account the customer's ability to repay the mortgage - with the presumption being that the customer will need to meet the repayments from income.

In such cases, the ombudsman will seek to put the consumer back into the position they would have been in, if the poor mortgage advice hadn't been given in the first place. That in itself is not always straightforward, given the complexities of the individual circumstances of consumers. But we will engage with the customer and the business to reach an equitable solution.

Of course, the issues raised in complaints are by no means always cut and dried. We recognise that some customers will, however unwisely, seek to maximise their borrowing potential. Any redress we direct a business to pay will reflect the contribution of both parties to the problem.

But in some cases the impact of poor advice can be clear and significant. And we can and do make significant awards, where there is a clear link between poor advice given and losses incurred by the consumer.

In assessing complaints, I hope that financial businesses will look carefully at whether they have treated the customer fairly. This is not just about considering whether the products have been fairly and clearly described. It is also about considering whether the business did enough to take account of the individual circumstances of the particular customer.

There are some basic steps that firms should have taken that would assist in their handling of complaints. The FSA's rules require firms to put in place a responsible lending policy and to keep an up-to-date record of that policy:

A mortgage lender must put in place, and operate in accordance with, a written policy setting out the factors it will take into account in assessing a customer's ability to repay.

Where is your written policy? Have you retained the copy from the time the mortgage was agreed? Can you demonstrate that the policy was reasonable and that you applied it in the particular case?

handling debt

The report by Citizens Advice highlights a number of areas of poor practice in the handling of mortgage debts. As the Financial Services Consumer Panel says, this suggests some firms at least are ignoring regulatory requirements. The FSA requires firms to have a written statement of policies and procedures in such circumstances. This must include:

  • reasonable efforts to reach repayment agreement;
  • liaising with a third party if requested by the customer;
  • adopting a reasonable approach to the time for repayment with a practical payment plan;
  • agreeing to a change in payment date and/or method, unless there is good reason for the request to be refused (in which case an explanation in writing is required);
  • giving consideration to allowing a customer to remain in possession; and
  • taking possession as a last resort.

These are helpful pointers to the considerations that the ombudsman will bear in mind, when looking at such cases and interpreting the obligation on the lender under the Banking Code. Of course, much will depend on individual circumstances - and frankly on simple commonsense.

One issue for particularly careful consideration is the application of fees in these circumstances. Let me illustrate the point by reference to a simple example. A lender discusses arrears with a customer. Having considered the customer's circumstances, it agrees to suspend possession proceedings, as long as the customer pays £20 a month towards the arrears. It then adds a monthly "arrears fee" - of £20 a month.


This leads me to the subject of charges. Mortgage charges have already raised issues with wider implications. The mortgage exit-fee issue was raised by us with the FSA in response to consumer complaints.

Our initial investigations found that firms had increased these charges where, in fact, they had no clear legal right to do so. In some cases, indeed, we doubted that they either had the right to levy such a charge in the first place or to vary the charge once it was set. And in other cases they needed to be able to demonstrate that any increases reflected the actual changes in their costs.

Some lenders had surprising difficulty with the concept that they could only charge what their contract provided for. It was clear that many had paid scant regard to the legal requirements when setting charges.

I was pleased that having raised this issue, we saw an industry-wide solution that largely avoided the need for individual customer complaints to be brought to the ombudsman. I hope that lenders have considered carefully the implications of these events across their business.

Elsewhere, the present debates about bank charges and the previous action of the OFT on credit-card charges are also relevant. We have already seen some customers raise queries about the level of charges made by lenders when they are in debt. The Citizens Advice report suggests that some lenders' debt-collection practices are distorted by including steps that involve the customer paying additional fees. The range, complexity and level of these charges may all be matters for consideration. But the central question that will no doubt be raised increasingly with the ombudsman is whether or not the charges levied are lawful.

More generally, as my earlier brief example of the mortgage arrears fee shows, the application of extensive fees for customers already experiencing debt problems may not be fair treatment. Certainly it does not always sit well with the sympathetic and positive treatment of those in hardship.

working with businesses and consumer advisers

It is an important part of the ombudsman's role to help avoid complaints being referred to us unnecessarily. Our technical advice desk provides general advice to financial firms and consumer advisers about common case-issues. And as you know, we publish a great deal of information in our regular newsletter, ombudsman news. The responses to the Hunt review show that these efforts are widely welcomed by financial firms and consumer groups.

Of course, we also use events like this seminar to remind people of the approach the ombudsman takes. The ombudsman service will continue to work with businesses and consumer groups, to help tackle common causes of complaint and to help avoid or minimise the need for referrals to the ombudsman.

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