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Help for borrowers must balance the interests of firms and consumers


Published: 29 June 2011 | Author: Bernard Clarke

The help that lenders offer borrowers when they go through a period of financial difficulty must work in the interests of both the firm and the consumer. This fundamental principle is at the heart of our response to a consultation by the Financial Services Authority (FSA) on provisions for extending forbearance in dealing with mortgage arrears.

In our view, the general tenet of the FSA’s draft guidance, as well as many elements of what it believes to be good and bad practice, represent common sense.

But we are concerned that aspects of the FSA’s guidance appear to be moving firms away from a compromise on which there is mutual agreement on how to deal with financial difficulty, towards a position where a firm is, in effect, imposing a solution on the borrower.

Balancing prudential and conduct requirements in order to deliver both a fair outcome for the consumer while acting in the best interests of the firm will be a key challenge as we move to a regulatory regime overseen by the Prudential Regulation Authority and the Financial Conduct Authority.

In its cost-benefit analysis, the FSA observes that the forbearance practices of firms "have largely developed in the absence of any clear specific strategy." We do not believe, however, that this gives sufficient recognition to the external pressures that the government, the courts and the FSA have all placed on firms to show greater forbearance as borrowers try to cope with a rise in mortgage arrears.

The FSA is concerned about forbearance that puts borrowers "in a worse position than they would have been otherwise." It is not clear, however, whether the FSA is asking firms to consider only the long-term monetary impact of forbearance or whether it believes they also need to take into account other, non-monetary effects. With possession clearly seen as the last resort, and firms under pressure to help borrowers through a period of short-term financial difficulty, lenders are concerned about the risk of retrospective regulatory judgements, made with the benefit of hindsight.

We have asked the FSA to reconsider how its guidance would apply in practice, particularly from a conduct perspective. Lenders want to work with the FSA to ensure its guidance meets the regulator’s policy intentions.