Conduct Risk, affordability, mandates and customer vulnerability at the doors of the court.
In the recent thematic study on Mortgage Lenders’ arrears management and forbearance, the FCA found that Lenders need to place more emphasis on delivering consistently fair outcomes for Customers based upon their individual circumstances.
The principles of Treating Customers Fairly “TCF” are never more important than at the doors of the court prior to a possession hearing. This is often the first face to face meeting a Customer may have with the Lender’s representative since falling into arrears. Kearns Advocates conduct meetings with Customers at courts throughout the country each day of the week. By offering a consistent approach which can be monitored and recorded in a format which conforms with clients’ policies, we can help our clients satisfy the Regulator that every effort is being made to adhere to principles of TCF in the unusual and testing surroundings of the waiting room before a court hearing.
We also believe a best practice approach can be adopted to some of the more difficult issues which arise at the pre hearing conference in connection with affordability, mandates and customer vulnerability.
The Pre Hearing Conference (“the PHC”)
Conduct Risk, affordability, mandates and customer vulnerability at the doors of the court.
Each day, Kearns Advocates represent Lenders at possession hearings throughout the country. We are often the first face to face meeting a Customer may have with a Lender representative since the Customer fell into arrears. We meet the Customer at the doors of the court prior to the hearing.
In its recent thematic study on Mortgage Lenders’ arrears management and forbearance, the FCA found that Lenders need to place more emphasis on delivering consistently fair outcomes for Customers based upon their individual circumstances.
The purpose of this note is to make suggestions to clients as to how we can work together to help Lenders achieve those FCA objectives with specific reference to the issues which often arise at the PHC. We would like to suggest principles of best practice in key areas of the PHC, together with a means of capturing data which will help address regulatory objectives.
Offers to repay and affordability.
A Customer who faces imminent repossession will often attend court and may make an offer to repay the arrears over a period of time in addition to the Current Monthly Instalments.
The Council of Mortgage Lenders “CML” provides industry guidance on arrears and possessions to help Lenders comply with MCOB 13 and TCF. The guidelines provide for procedure and good practice examples when such offers are made. This provides for an assessment of income and expenditure, for example, by reference to the Common Financial Statement. Income and expenditure information should be checked to see how reasonable it is, for example by using recent payslips/bank statements.
The CML Guidelines assist Lenders to develop policies to address FCA concerns over Conduct Risk. However, the PHC is in something of a twilight zone, caught in the tension which exists between “conduct risk” and section 36 of the Administration of Justice Act 1970 which confers a wide discretion on the Court in connection with offers to repay.
The Court Advocate’s activities are exempted by Part 20 of the Financial Services and Markets Act 2000. We are officers of the Court. As such, our first duty is to uphold the rule of law and the proper administration of Justice. Under CPR 1.3 we are required to assist the court in the furtherance of the overriding objective at CPR 1.1 namely to enable the Court to deal with cases justly and at proportionate cost. Under CPR 1.4 the parties are encouraged to co-operate with one another and reach an alternative dispute resolution through discussion or otherwise. The primary duty of the Advocate is to the Court and this will include taking such details from the Customer regarding offers to pay which will assist the Court in reaching a determination in accordance with section 36.
The potential problem arises because a District Judge will, in practice, be quite happy to reach a decision on affordability based upon very brief evidence of global income and outgoings from the Customer, and very often without any written proof of income and expenditure. This is not what is envisaged by the Regulator nor in the CML Guidelines. Whilst section 36 clearly trumps regulatory requirements in the courtroom, the question is whether it also does so in the waiting room immediately prior to the hearing?
The FCA Thematic Review 14/3 makes no specific mention of the PHC in its assessment of Lenders’ Arrears Management and Forbearance. The CML offers sparse advice on good practice examples for court agents at 7.3 of its guidance notes for compliance with MCOB 13. The guidance suggests that court agents are trained and monitored on TCF issues but the guidance falls short of suggesting good practice examples of an offer to repay which is made at court. This ambiguity acknowledges the uncertainty over how far existing FCA guidelines can be extended to the crucible of the court waiting room.
The CPR and section 36 clearly do not operate to oust the principles surrounding Conduct Risk. Whilst they are not necessarily coterminous they share the same broad objectives. We believe that a hybrid approach is required. Each PHC must be approached with principles of TCF co-existing with duties to the Court. The Court waiting room is a noisy, public and sometimes intimidating environment. There is little time and less privacy. Therefore, the nature of TCF must be adapted to these difficult surroundings.
So which procedures can Lenders adopt to ensure that Court Advocates deliver on their behalf consistently fair outcomes for Customers by specific reference to offers to repay in the PHC? Our TCF policy and a TCF questionnaire is issued to all our Advocates. Whilst no questionnaire can be a panacea, it can be an aide memoire and also a useful tool to measure compliance with principles of TCF. The questionnaire provides a means by which information can be elicited and recorded within the constraints of the Court waiting room and also provides a means to record reasons why it was not possible to obtain all the information which might otherwise have been obtained.
The completion of a bespoke TCF questionnaire will allow us to report upon the PHC and capture information in a statistical format which will, in turn allow Lenders to demonstrate compliance to their Regulators. Examples of the questionnaire and the statistics are available to our clients.
Whilst we have prepared our own approach, the opportunity exists for our clients to engage with us and develop any additional guidance items they may require. By offering a consistent approach which can be monitored and recorded through the form of the questionnaire, Lenders can, we believe, satisfy the Regulator that every effort is being made to adhere to principles of TCF in the unusual and testing surroundings of the waiting room.
Of course, existing reports contain paragraphs dealing with the PHC which are reported upon at the same time as the outcome of the hearing. However, by being a little more proactive, a targeted questionnaire can reflect best practice and a consistency of approach which is measurable against obligations of TCF. This meeting is too important to be relegated to a couple of paragraphs of an Advocate’s report and needs to form an intrinsic part of Lenders overall policies and approach to repossession.
Mandates
At first blush, a mandate is almost the embodiment of a one size fits all approach. Almost, but not quite. Mandates are perfectly acceptable if used simply to provide a guidance to Advocates of the broad parameters within which a settlement may be agreed, subject to affordability. This caveat should always be stipulated by clients.
Also there should be a proviso in all instructions that if an offer is made outside a mandated period the Advocate is able to take instructions on that offer and it will be considered fairly. Unfortunately, it is the case that on occasion we are informed that an offer should be rejected simply because it is outside the mandate. Clearly, this approach is incorrect and we would urge clients to allow us the facility to contact a decision maker in such circumstances to consider the offer.
Of course, there is a very difficult issue as to whether such offer can be accepted by the decision maker in the absence of documentary evidence which might otherwise be required by Lender Conduct Risk policies. We believe there ought to be some scope for the Advocate to advise upon whether the District Judge is likely to make an award in the terms of the offer. This could be recorded by the decision maker to meet any conduct risk concerns.
Vulnerability
The definition of vulnerability is elusive. We are asked to report upon vulnerability but this is difficult in the absence of a definition.
The recent Thematic Review by the FCA indicated that firms need to engage sensitively with Customers who have specific needs or circumstances which are likely to limit their ability to engage effectively, for example Customers dealing with bereavement or terminal illness, those with physical and mental health issues. Lenders are criticised because these circumstances are not consistently identified even when explicitly referred to by Customers. The result is that Lenders failed to treat some Customers sensitively and failed to provide the benefit of short term leniency set out in their policies.
There is not a universal definition of vulnerability in this context. We understand that the FCA is due to produce an occasional paper in February 2015. In the meantime, we are concerned that we properly report any vulnerability which comes to light at the PHC. This is very difficult because we must be talking about degrees of vulnerability and when and how it should be reported.
We are aware of the dangers of recording opinions on vulnerability which may be outside the competence of all but an expert. However, the issue cannot be ignored. The FCA clearly would wish Lenders to identify vulnerable persons and we should seek to assist wherever possible.
Currently, we always report upon the circumstances of the Customer and report instances which our Advocate (subjectively) believes indicate vulnerability. However, we invite our clients to take a more proactive approach with us and help develop guidance to Advocates to develop a consistent means of reporting vulnerability. Also to help define certain limited circumstances where we report vulnerability before the hearing (rather than after) to allow the Lender to consider the point without subjecting the Defendant to the additional trauma of a court hearing. Those limited circumstances could be added to the TCF questionnaire.
Conclusions
To deliver consistently fair outcomes at the Pre Hearing Conference we recommend:
- As part of best practice, Lender clients use our own or engage with us to develop a specific TCF questionnaire which is completed and reported upon separately to the court outcome and accompanied by such statistical analysis as clients may require to enhance the record of compliance with regulatory objectives.
- Clients make arrangements with Court Advocates to allow court agents a hot line to a suitably trained decision maker on all offers outside mandate limits with some discussion as to likely court outcomes upon such offers to be recorded by both client and agent.
- Determine with clients the nature of the vulnerabilities which they require us to report upon and when.