In response to our findings, and evidence from other supervisory work, in September 2010 we published proposed changes to complaints handling rules in CP10/21.22 We expect to publish a Policy Statement in this area in Q2 2011. As set out in the CP, we propose to:

• abolish the two-stage complaints handling process;

• require firms to identify a senior individual responsible for complaints handling; and

• set out how firms can meet existing requirements to undertake root cause analysis and have regard to decisions made by the ombudsman service.

We also propose increasing the ombudsman service’s award limit to \( \mathcal { E } \) 150,000 to reflect its fall in real terms since the limit was last raised.

Regulated firms currently report to us that they receive around four million complaints from customers each year. New rules now require firms to publish their own complaints data.

We published this firm-specific data for the first time in September 2010, enabling customers to compare and contrast the way firms deal with their complaints.

# 2.2 Unfair terms in mortgage contracts

A number of mortgage lenders have proposed, or taken, action in their standard mortgage contracts which is to the detriment of consumers. While firms may have prudential reasons for taking these actions, and may wish to balance the interests of savers and borrowers, they need to handle the whole process carefully to not breach FSA rules and principles (including Treating Customers Fairly) or the law.

Some firms are seeking to boost their revenues by including terms that move consumers from their discounted initial rate deal to the firms’ Standard Variable Rate (SVR) in particular situations. We have come across firms using terms to change a consumer’s mortgage to the firm’s SVR if the consumer breaches any of the conditions of the mortgage, regardless of the significance of the breach. This could result in the consumer paying a significantly higher interest rate than they had originally expected.

We have seen some lenders use contractual terms including terms that demand immediate repayment of the mortgage if, in their opinion, the consumer’s circumstances have only changed to a minor degree or the consumer has committed a minor breach of the terms and conditions of the mortgage. It would appear that such terms could give firms wide discretion to demand repayment of the mortgage, to the detriment of consumers.

To address these matters, we have published undertakings under the Unfair Terms in Consumer Contracts Regulations 1999 from firms agreeing not to apply such terms unfairly. We have also reminded firms with similar terms in their contracts of the messages contained in these undertakings.

# 2.3 Treatment of mortgage customers in arrears

As we showed in Chapter A, the combination of very low interest rates, an unemployment increase less than feared, and a fall in house prices less than some commentators had predicted has so far limited the impact of the financial crisis on homeowners. This has meant that after rising arrears and repossessions in 2008/9, numbers fell back slightly in the first half of 2010. Regulatory action to require appropriate forbearance has also had an effect.

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22 CP10/21 Consumer complaints: The ombudsman award limit and changes to complaints-handling rules, September 2010, The ombudsman service and FSA.

While most mainstream lenders are treating customers in arrears fairly, we have seen a number of problems, primarily with specialist lenders. These problems include:

• Unfair charges – Information provided to customers on arrears charges is often unclear, charges are sometimes applied in circumstances that do not appear to be compatible with treating customers fairly, and there is little evidence that firms are ensuring arrears charges overall reflect the additional cost of administering these cases.

• Inadequate controls in outsourcing arrangements – Some lenders do not have adequate controls in place to ensure that, where they outsource arrears handling, the third party is treating customers fairly. Frontline staff in third party administrators (TPAs) often lacked the training and competence to deliver the fair customer outcomes required under MCOB 13, and TPAs’ own oversight of their business was inadequate to detect and deal with the detriment customers suffered as a result.

• Impaired credit lenders are much more inclined than mainstream lenders to impose a ‘one size fits all’ policy and move swiftly to take possession, without establishing borrowers’ individual circumstances. Their internal controls and training and competence arrangements are also noticeably less developed than those of mainstream lenders. There is anecdotal evidence that the terms of securitisation covenants are restricting their ability to treat customers in arrears fairly.

We have taken enforcement action against mortgage firms where we identified breaches in our rules or principles. Some of the lenders we visited more recently are taking steps to rectify earlier failings, in particular by collecting more information on customers’ income and expenditure when they fall into arrears, and tailoring their response in each case to the individual’s circumstances. But this is an area that will require continuing vigilance, particularly if there is a deterioration in the general economic environment or interest rates start to rise.

# 2.4 Payment Protection Insurance (PPI)

PPI mis-selling has been a significant issue in recent years, giving rise to consumer detriment, and has been covered in previous FROs.

Since we took over the regulation of PPI we have, amongst other things, carried out three thematic reviews and reports, issued warnings, visited over 200 firms and taken enforcement action against 24 firms. In addition, the PPI market was subject to a Competition Commission enquiry which began in 2007.

In August 2010, we published a Policy Statement, PS10/12, The assessment and redress of PPI complaints. This set out a package of measures designed to ensure that firms handle PPI complaints more fairly and consistently, and deliver fairer outcomes to customers who may have been mis-sold PPI but who have not complained.

The latest development is the judicial review of PS10/12, launched by the British Bankers’ Association (with Nemo Personal Finance subsequently joining as an interested party) on 8 October 2010. This challenge was considered by the Administrative Court in late January 2011 and a decision will follow.