The FSA (Financial Services Authority) has warned specialist lenders that it has extreme reservations over how they are handling some arrears cases which may ultimately end in repossession. They felt that many lenders were overly ready to take court action against borrowers irrespective of their individual circumstances and that they focused purely on regaining the arrears.
From a lenders perspective this is a concern, if the FSA starts to come out in support of people who don’t repay their loans it can spell disaster for the financial institutions who lent out the money in good faith, if there is a prevailing belief that ‘you dont’ have to repay because the government is behind you’ it will send out the wrong message and creating an ‘unwillingness’ to repay debts and that won’t stop with banks, it can permeate into many aspects of the economy, right down to companies not paying eachother. Thankfully, the FSA stopped short of saying that they would get behind people in arrears and instead tried to keep the focus on treating people fairly, the tone of their statement however was likely not well received by the lending community who are suffering from liquidity shortages, something which is exacerbated by people not repaying their loans.
The FSA however, did uncover some unforgiving elements to lender activity such as specialist lenders having a lower standard of systems and controls to handle mortgage arrears cases. With lenders in general (prime included) they felt that many could have done more to consider an individuals circumstances and offer more options to resolve the position. One can only ponder what the details of this were, normally if you go into arrears a lender will aim to accommodate you to at least some degree as if a point of attrition is reached then it will mean that both parties become emotionally engaged in winning and in fact the end result is both sides losing, so despite a reputation for coming on hard and strong, when it boils down to it the majority of lenders will try to find workable solutions, obviously in the UK the FSA feels that with some banks this is not the case.
An interesting point is that the number of people in arrears is historically low, although the figures are rising. What this may indicate is that while the economy is facing a recession the wealth in general is better than it was in the 80’s. This means that people will perhaps weather a downturn better than expected, it would be fair to say that the money supply twenty years ago was much tighter than today, the primary issue will be with people highly geared because if their cashflow is affected to even a minor degree it may result in arrears.
The main push behind the report by the FSA was that lenders must at all times ‘treat their customers fairly‘ and also use ‘repossession as a last resort’. The question we ask today is what the stance of the Irish Financial Regulator is? We have had no such report in this country nor have we had any direction from the regulator or the Ombudsman as to how they may react to lenders who turn to repossession rather than take the time to consider alternatives, indeed, with the level of borrowing in Ireland at record highs, not only in our own history but in comparison to world levels, it is likely that we will see many people face court orders and if this is done frivolously then the Regulator and Ombudsman should make their opinion on the matter known.
The Ombudsman’s most recent bit of PR was losing a very public case against Davy Stockbrokers, who being wrong or right were not given adequate means with which to set their case, this (at least to the financial community) spells out two things, firstly was that Davy were not dealt with fairly, how can financial firms be expected to treat people fairly when they are not given this example from above? The Ombudsman was not accused of ‘bullying’ but they were highlighted in court as not giving Davy sufficient means with which to state their case and that in effect quashed their ability to prove their innocence. Even though the initial findings of the Ombudsman found that Davy were in the wrong, not getting a fair trial mitigates that.
It is a tough lesson for the Ombudsman, and one which now sends out the wrong message which is ‘if you are found in the wrong, challenge the case’. Ideally financial firms would be scared of engaging the Ombudsman, but now we are seeing that rather that accepting direction on high that they have challenged and won, this means that the Financial Services Ombudsman’s word is not final and they are indeed fallible, something that will only serve to erode their perceived power and influence on the industry.
The fact that the Credit Union at the centre of the case withdrew its complaint mattered little, however the end result was what the Sunday Business Post described as an ‘unflattering High Court judicial review’. We would hope however that this does not dilute the perceived power of the Ombudsman as that would not be good for industry or consumers.
In the mortgage market the slowdown is happening rapidly, in the UK lending is down from £102 bn in the last quarter of 2007 to £75 bn in the first quarter of 2008, the FSA and our own FSO are likely to be flooded with issues soon, one thing that is common in a downturn is for the people who suffer from it to seek blame and for this reason the number of ‘mis-selling’ claims will likely spike over the coming months. It would be vital for the Regulator and Ombudsman to be well prepared to deal with these and to ensure that their judgements are not subject to further judicial reviews.