Posted: 17th June 2013
What a difference a year makes. During an appearance in front of the Treasury Select Committee last year Martin Wheatley, Chief Executive of the Financial Conduct Authority (FCA), stated that the interest only mortgage market was a “ticking time bomb”. This was the precursor to a thematic review which the regulator carried out to understand the size and extent of the interest only market problems.
The research itself engaged with over 1,000 interest only borrowers to discuss the extent to which they understand their own situation and their awareness of the need to make provision for capital repayment of their mortgage at maturity of the loan. Reassuringly for lenders, some 90% of those questioned understood their interest only mortgage and the need to repay the capital at term. However, the remaining 10% still presents a significant minority facing a potential shortfall.
As a result of the thematic review the FCA has stated that lenders need to increase their contact with affected borrowers and make them aware of their individual circumstances. To ensure success, firms must account for behavioural barriers to customers in different segments and design effective policies and contact strategies around their situations.
The challenge for lenders is ensuring that customers engage in this process and take action where necessary. Typically customers are reluctant to engage where an issue has not yet materialised or does not need dealing with today. However, without a high level of engagement today it is likely that lenders will be storing up a balance sheet issue for tomorrow.
Lenders should consider multiple contact strategies based on the perceived risks in different customer segments. For instance, customers with a high financial awareness are likely to be easier to engage with. Less financially sophisticated customers or those with larger IO mortgages may require more intense engagement.
The muted results of the thematic review, although good news on some levels, have predictable consequences. Given that the “time bomb” has in the main been dismantled, media, CMC and consumer group pressure is unlikely to be the driving force behind action in firms. Thus, firms must motivate themselves to make effective customer contact, interpret and follow up on it to truly diffuse future risk.