Posted: 11th October 2013
Final guidance for the mortgage industry on “Dealing fairly with interest only mortgage customers who risk being unable to repay their loan” has been published. It follows a consultation period in which the Financial Conduct Authority received only nine responses; this suggests lenders largely accept the proposed guidance. The challenge ahead, however, is to communicate the right options for the varied customer base effectively and to respond to individual customers appropriately.
The mortgage industry and, in particular, lenders breathed a sigh of relief when the regulator’s thematic review into interest only made its conclusions: the overwhelming majority of customers were, in fact, aware that their mortgage was taken out on an interest only basis. The regulator concluded that the interest only issue was not really a potential mis-selling issue or one lacking customer understanding. Instead, the challenge is how the industry will ensure customers are actively considering how best to repay the capital at term. Key to this is getting customers to engage, recognise and deal with issues now if they do think they have a problem further down the line.
Lenders have the task of implementing an appropriate strategy for customers. This includes identifying how they will seek to contact customers, what the communication contains and considering which options will be available for customers who may feel they have an issue repaying the capital at the end of the mortgage term. Critical to this is getting appropriate customer engagement.
Learning from the past
The conduct regulator provides useful guidance on conducting customer contact exercises. However, our experience of similar exercises is that customers are unlikely to engage with an issue that may have many years to run. Typically only a small percentage of customers, sometimes only in single figures, actively engages. This figure applies even when chaser cycles are implemented. Firms must consider carefully the types of communication and forms of media that they use for such exercises and test these for effectiveness prior to deploying on a mass scale.
A critical area for firms to get right is providing customers with appropriate options where there is an identified or potential issue repaying capital. Key to this is understanding the personal circumstances and needs of the individual customer now and up to the point the mortgage matures. At the high risk end of the spectrum, firms may wish to consider whether the customer should be given access to independent financial advice to consider their options, in particular if the scope of any financial advice offered by the firm is limited.