Financially Vulnerable Mortgage Customers – mitigating the impact of any increase in payments?

The FCA have published in September 2016 a thematic review into mortgage lenders’ strategies to mitigate the impact of any potential increase in monthly payments on financially vulnerable customers.

In the report, the FCA asked the firms to:

• consider which borrowers are most likely to be affected by potential rate rises
• deal sensitively with borrowers who may have particular vulnerabilities
• take action to identify customers susceptible to falling into arrears
• have appropriate strategies to treat these customers fairly

Most firms who were asked to take part in the FCA review had considered what characteristics may make a customer more vulnerable to a rise in interest rates and had built their analysis around this – however these characteristics varied from firm to firm. Firms carried out a range of work to identify their most financially vulnerable customers, which included:

• identifying customer segments using credit reference agencies to analyse payment profiles, indebtedness, affordability and behavioural measures
• stress testing across different rate rise scenarios to identify the impact on Contractual Monthly Instalments (CMI)

Some firms excluded certain customer types from their analysis which the FCA believe could result in poorer outcomes for those customers. This included:
• customers currently in arrears – some firms view their existing collections procedures as accommodating such customers
• fixed rate customers, in some cases irrespective of the time until product maturity

The FCA found that most firms produced Management Information as part of their analysis to assess the impact of an interest rate rise on the overall mortgage book but only one firm reviewed this regularly.

Firms can take steps now to be better prepared and do not have to wait until an interest rate rise to develop strategies. By understanding the numbers of customers likely to be impacted by a rate rise and developing strategies, firms could reduce the risk of customers entering arrears or arrears positions worsening.