Assuring Forbearance in Mortgage Arrears Management: A Regulatory Blind Spot

Article excerpt

INTRODUCTION

If one would have to extract something positive out of economic crises, it must be the hard lessons learnt. Every flaw of the financial system becomes magnified and scrutinised. One can only hope that for the hundreds of thousands of people detrimentally affected, steps are taken in accordance with the lessons learnt. During the 2008-2009 economic crisis, one flaw that has been magnified is the failure of the mortgage market regulator, the Financial Services Authority (FSA), to ensure forbearance in mortgage arrears practices. While these practices were the subject of criticism long before the crisis (1), it is hoped that it will ensure that the calls do not fall on deaf ears. In response to the radical increase of mortgage arrears and repossessions (2), politicians, the housing advice sector, (3) and the FSA itself have scrutinised the mortgage market and recognised inadequacies in its regulatory framework. Responding to these inadequacies, the Pre-Action Protocol for Possessions Claims Based on Mortgage or Home Purchase Plan Arrears in Respect of Residential Property (4) (the Protocol) was implemented in November 2008 to curb the rising number of repossessions and in June 2010, the FSA reformed section 13 (arrears and repossessions) of their Mortgages and Home Finance: Conduct of Business Sourcebook (MCOB). (5) While all parties agreed that reform was needed within the regulatory framework, few have questioned whether the FSA is indeed institutionally and operationally capable of assuring forbearance amongst mortgage lenders to the extent required to protect vulnerable home-owners. This article intends to question exactly why the FSA has failed its regulatory responsibility thus far and whether, in light of the MCOB reforms, the FSA is capable of meeting the demands made of it; or should we put more emphasis on other means, such as the Protocol?

This article argues that the FSA's regulatory approach and operative framework is ill-equipped to ultimately assure forbearance in mortgage arrears management. This is mainly due to what this article labels a regulatory blind spot": an inability of the FSA's operative framework, ARROW, to effectively monitor and assess qualitative measures, such as treating customers fairly. Although the government intends to abolish the FSA and instigate a new regulatory regime, it remains questionable as to the extent the new regime will provide better protection against unscrupulous mortgage arrears practices. In any event, the new regulatory system will not come into effect until the end of 2012. Therefore, this article calls for an approach which will realistically, efficiently and continuously assure forbearance in arrears management. It is argued that an upgraded version of the Protocol has the capabilities necessary to answer these calls.

This article is divided into four parts. The first part aims to briefly introduce the evolution of home-ownership and mortgage regulation in the UK and present the previous and reformed MCOB 13. Part three of this article will analyse why the FSA is ill-equipped in assuring forbearance amongst mortgage lenders, despite the reformed MCOB 13. However, to understand why this is so we must have an understanding of how the FSA is structured and functions, including its regulatory approach and operative framework. This is therefore examined in part two. After illuminating the FSA's limited operative ability to ensure forbearance amongst mortgage lenders, the final part will demonstrate how an upgraded version of the Protocol retains the capabilities of assuring greater protection against unscrupulous mortgage arrears practices.

HOME-OWNERSHIP AND MORTGAGE REGULATION

The home-ownership bubble

The UK housing market has experienced a radical increase in home ownership since the latter half of the 20th century. (6) Governmental encouragement of mortgage finance take-up surged in the 1980s with schemes such as Mortgage Interest Tax Relief (MITR). …