Treating Customers Fairly (TCF) will continue to be a key priority for the Financial Services Authority (FSA) in 2009. All firms were set a deadline of the end of December 2008 for being able to demonstrate to the FSA (and satisfy themselves) that they are consistently treating their customers fairly. This has recently been reinforced in the mortgage arrears and repossessions context by the FSA’s ‘Dear CEO’ letter (published on 27 November 2008), which states that mortgage firms must have policies and practices that achieve the outcome of fair treatment for customers in arrears or facing repossession and that are consistent with the Principles for Businesses and the Mortgages and Home Finance: Conduct of Business (MCOB) Rules.  

The FSA has made it clear that it intends to use its full range of powers if weaknesses are identified in the way that lenders are handling arrears and repossessions, particularly if it involves customers in vulnerable financial situations or with impaired credit ratings. The Dear CEO letter followed the FSA’s publication (in August 2008) of the results of its review into mortgage arrears practices and repossession handling, which revealed that firms:  

  • were failing to consider the individual circumstances of its customers;
  • were imposing unfair charges;
  • were too willing to institute court proceedings; and
  • did not have adequate systems, controls and training arrangements in place.

The FSA also outlined a number of examples of good and bad practices and it will expect firms to have considered them now. It will also expect firms to have made appropriate changes to their procedures where necessary.  

The need for firms to have written policies and procedures in place to ensure that customers are treated fairly is a clear regulatory requirement. The Dear CEO letter is the ‘second warning to lenders from the FSA in recent months’ and clearly highlights the importance that firms and senior management should be giving to this issue. The FSA expects firms to review their policies and procedures to ensure they are compatible with MCOB and the TCF requirements and to identify and address any weaknesses as a matter of urgency. Firms should:

  • critically review their current arrears policy;
  • critically review current management practices and procedures; and
  • assess if, in practice, customers in arrears are being treated fairly by initiating a review.  

The conclusions reached and any proposed action to deal with any weaknesses must be communicated, by senior management, to the FSA by 31 January 2009.  

Although the Dear CEO letter does not amount to formal guidance from the FSA, failure to comply with its requirements is highly likely to result in enforcement action. The FSA has stated that ‘where we find lenders are not complying with our requirements we will make appropriate and properly targeted use of our existing regulatory tools, which may include enforcement action’.

In light of this, firms and senior management will come under greater scrutiny to demonstrate that their arrears and repossession practices and procedures are TCF and MCOB compliant. Firms should:

  • undertake a close examination of ?? the level of their
  • arrears charges and the circumstances in which they are applied;
  • ensure adequate records are retained of contact with customers facing difficulties;
  • assess that the information provided to and collated about their customers is adequate; and
  • ensure their staff remuneration structures are TCF friendly.  

Firms will also need to have robust and rigorous systems and controls in place to ensure adherence to their arrears and repossession-handling procedures and undertake regular reviews to assess and make sure that customers are, in practice, being treated fairly. Many lenders will have already implemented TCF procedures. However, the increase in the number of customers facing repossession means that firms should be reassessing such practices to guarantee they are flexible, explore alternative repayment solutions and not be overly zealous when starting court proceedings. The nature of TCF means that firms must continue to reassess their policies and practices to ensure they meet the needs of their customers in the current economic climate.  

The Dear CEO letter clearly emphasises that senior management will need to consider, and be able to demonstrate that they have considered, the issues raised. If the firm is found not to have critically reviewed its arrears and repossession practices, senior management are likely to find themselves under intense scrutiny from the FSA. In each of the areas the FSA has asked firms to review, senior management need to make sure that appropriate action has been taken. This is particularly important given that the FSA has stated that firms will suffer ‘meaningful consequences’ if they fail to improve standards of conduct. In light of recent increases in the level of fines that firms in enforcement action have been subject to, firms choosing to ignore weaknesses in their arrears and repossession practices, or failing to act promptly to address those weaknesses, do so at their peril. There is also a real risk of enforcement action against individual members of senior management if they have been associated in a serious failing by the firm.

Given that the assessment of TCF outcomes should be firmly embedded within the ARROW framework (advanced, risk-responsive operating framework) with effect from January 2009, FSA supervisory teams will be keen to explore the practical steps firms have taken to tackle TCF issues. The FSA is also likely to undertake further mortgage-related thematic work and themed visits during 2009 to identify the scale and nature of any remaining risks.  

As Sarah Wilson (FSA director, TCF and insurance sector leader) stated on 18 November 2008:  

‘The TCF initiative covers not just our Principle 6 (a firm must pay due regard to the interests of customers and treat them fairly) but it is also related to Principle 2 (on conducting business with due skill, care and diligence), Principle 3 (taking reasonable care to organise and control affairs responsibly and effectively with adequate risk management systems), Principle 7 (on client information needs) and Principle 9 (on suitability of its advice and discretionary decisions for customers). Moreover, we have made clear our view that difficult market conditions pose particular risks to the fair outcomes for customers. The FSA therefore must and will continue to take decisive action where we find (actual or potential) customer detriment’.  

In the current economic climate, the fair treatment of customers in mortgage arrears or facing repossessions is likely to be a key focus for FSA supervisory and enforcement activity in 2009. Reviewing arrears and repossessions policies, procedures and current practices to ensure that customers are being treated fairly should now be a matter of utmost urgency for firms and their senior management.