Risks are highest for borrowers already on higher interest rates, such as those in the second charge mortgage sector, according to Jonathan Davidson, the regulator’s executive director of supervision, retail and authorisation.

The FCA found lenders are not always properly assessing whether payment plans for customers in long-term arrears are affordable, which could erode equity in their homes if they are eventually repossessed.

The regulator is particularly worried about the treatment of vulnerable customers who are behind on mortgage repayments.

Growing number of long-term arrears

In 2008 there were around 56,000 people in serious arrears.

Despite low interest rates and economic recovery, the number had increased to 70,000 by 2016.

At the same time, the repossession rate has plunged from 22% to 2.7%.

But when interest rates and mortgage rates rise, the repossession rate could again rise.

And customers who have been in long-term arrears risk with increasing debts could end up with less equity in their homes as a result, Davidson told Mortgage Solutions.

The regulator carried out its review of long-term mortgage arrears – those behind by 12 months or more – and forbearance to check whether customers in these situations were being treated fairly.

Davidson said: “There were a few isolated cases where firms weren’t really doing a proper assessment of whether the payment plan was affordable – the net effect is customer equity is reducing.”

Concerns for vulnerable customers

The sample review of customers from eight lenders across the marketplace showed the industry is largely operating as it should.

However, the regulator was also concerned about the treatment of vulnerable customers.

Davidson said: “We’re talking about huge debts. If thing go wrong for people, for example, those recently bereaved or in hospital, there needs to be understanding on what the impact might be on their ability to service repayments and plan appropriately.”

He added that some lenders weren’t identifying these customers particularly well, while others weren’t particularly empathetic.

The FCA has given feedback to the lenders in the sample and is now considering whether to launch a formal investigation into any of the providers based on wrongdoing uncovered in the review.v