FCA: Base rate rise will hit vulnerable mortgagors

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The Financial Conduct Authority says most lenders are not able to properly protect financially vulnerable customers if Bank of England base rate rises.

The regulator makes the announcement in key findings published today and following its thematic review into financially vulnerable customers.

The FCA says: “Firms are at different stages in developing strategies to treat customers fairly when interest rates rise, with some appearing more prepared than others.

“Most firms have carried out analysis to assess the number of customers and level of impact on those most vulnerable to an interest rate rise. However, it appeared that few firms would be able to implement strategies if interest rates were to rise in the near future.”

An FCA spokeswoman says the regulator started this review in early 2016, at a time when an interest rate rise was expected.

She says: “Since then, interest rates have been cut and we recognise that preparing for interest rate rises may not seem like a high priority. Nevertheless, we have decided to share the results of our review to assist firms and customers to prepare for when interest rates do rise.”

The regulator says most lenders have taken steps to help the financially vulnerable, including pinning down what makes a customer vulnerable to a rate rise and training staff to recognise customers in financial difficulty.

However, the regulator’s review also picked up a lot of areas lenders need to improve in.

One of these is for lenders to stop excluding certain types of customer from their internal reviews into helping the vulnerable.

The FCA paper says: “Some firms have excluded certain customer types from their analysis which could result in poorer outcomes for those customers.”

This include customers currently in arrears and fixed rate borrowers, the FCA says.

Lenders’ communication with customers also needs improvement, the regulator adds.

It says: “Where firms have communicated with customers, we found that most of the communications were generic messages highlighting potential interest rate rises, and weren’t specific to the customer’s personal circumstances.”

Mortgage lenders were also failing to make good use of management information around the effect of a rate rise on their business, the FCA adds: “We 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.”

The regulator is calling on lenders to take action to draw up better strategies to cope with an interest rate rise.

It says: “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.

“This can also help firms to understand the potential impact on their resources if rates do rise (e.g. extra staff needed to deal with financially vulnerable customers and considering the impact on customers currently in arrears).”

The FCA also says that customers have a role to play and should take responsibility for their finances.

The regulator’s latest paper says: “We are encouraging customers to regularly review their mortgage arrangements, consider the impact an interest rate rise could have on them and to take necessary steps, where possible, to budget for an increased monthly payment.”

An FCA spokeswoman says the regulator is also assessing the impact on the financially vulnerable if interest rates stay low.