The FSA has published a speech by Clive Briault (Managing Director, Retail Markets, FSA) entitled The Risk Outlook for Mortgage Lenders. In his speech Mr Briault covers:

  • Current market conditions.
  • The handling of arrears and possessions.
  • Responsible lending.
  • The consequences of current and prospective market conditions for individual lenders.

In relation to current market conditions Mr Briault states that it would be prudent to assume that market conditions will remain very difficult for a sustained period. He also states that from the FSA’s Product Sales Data there are at least 1.4 million short term fixed rates which will end in 2008. Many of these borrowers are on a relatively high loan-to-value ratios or income multiples and will find it very difficult to refinance their mortgage on favourable terms.

In relation to the handling of arrears and possessions the FSA expects lenders to meet the requirements on the treatment of customers in payment difficulties set out in the FSA’s Mortgages: Conduct of Business sourcebook. Firms must have in place, and operate in accordance with, a written policy and procedures for dealing fairly with customers in arrears. The treatment of customers in arrears was one of the areas that the FSA prioritised in the second stage of its review of the effectiveness of the mortgage regime. The FSA is due to report on this in February 2008. Preliminary results of the FSA’s research indicate that there are a number of firms that are failing to meet the FSA’s requirements. Also it appears that some lenders across the market, in both the prime and sub-prime sectors, appear to be unwilling to consider cases on an individual basis and are using a one size fits all approach to arrears recovery. In response to this the FSA will soon be launching a firm-facing thematic review on the arrears management practices of firms to establish whether there is a problem of non-compliance with the FSA’s rules and with the treating customers fairly principle.

In relation to responsible lending the FSA began a new thematic review last month. The FSA intends to report on its findings in March 2008.

In relation to the consequences of current and prospective market conditions for individual lenders Mr Briault makes the following points:

  • Firms should be assessing their funding and liquidity positions.
  • Firms should undertake robust stress testing.
  • Boards and senior management should be reviewing and assessing their medium and longer term strategies and the options open to them.
  • Firms need to consider contingency plans against the worst outcomes and to review and revise these in light of market conditions.
  • It is essential for lenders to have in place the management expertise to be able to deal with adverse conditions.

In his conclusion Mr Briault states:

  • In light of the current and prospective market conditions firms need to give their full attention to the liquidity and credit risks they face, that they should stress test their ability to survive these risks and that they should consider their contingency plans against these risks crystallising.
  • Despite the liquidity and credit risks firms should maintain their focus on treating customers fairly.

View FSA speech - The Risk Outlook for Mortgage Lenders. 4 December 2007