WITHOUT PREJUDICE AND SUBJECT TO CONTRACT

FINAL NOTICE

1.
ACTION

1.1.
For the reasons given in this notice, the Authority hereby imposes on YBS a

financial penalty of £4,135,600.

1.2.
YBS agreed to settle at an early stage of the Authority’s investigation. YBS

therefore qualified for a 30% (stage 1) discount under the Authority’s

executive settlement procedures. Were it not for this discount, the Authority

would have imposed a financial penalty of £5,908,100 on YBS.

2.
SUMMARY OF REASONS

2.1.
Between 1 October 2011 and 31 July 2012, YBS breached Principles 6 and 3

of the Authority’s Principles for Businesses and certain of its mortgage and

dispute resolution rules1 in relation to its handling of mortgage customers in

payment difficulties or arrears. These require firms to treat their customers

fairly and to have in place adequate risk management systems.

2.2.
During the Relevant Period, call handlers at YBS frequently failed to probe

into the particular circumstances of individual customers who were in

payment difficulties. They failed to identify the root cause of customers’

difficulties, failed to assess their income and expenditure sufficiently and

failed to establish their future financial prospects. As a consequence, in many

cases, there were significant delays in determining appropriate payment

solutions and this meant that arrears built up and increased fees and

associated interest were incurred by YBS customers.

2.3.
Rather than seek to identify and to agree payment solutions quickly, call

handlers instead often sought ad hoc payments without sufficiently

considering how these may have affected a customer’s debt burden. Call

handlers also failed to consider all payment options. In cases of long-term

unaffordability, this may have included a voluntary sale by the customer or,

in appropriate cases, repossession by YBS.

2.4.
YBS failed to recognise the detrimental effect to customers of delays in

agreeing solutions and they failed to focus on minimising and preventing

delays. While repossession was properly viewed as a last resort for customers

in payment difficulties, management did not take account of the fact that

where repossession is appropriate, if it is delayed this causes further

significant detriment to customers and leaves them in a worse financial

position. Both of these failures meant that call handlers failed to act quickly

to agree longer term solutions which were appropriate to the individual

customer and it meant that systems of management oversight were

ineffective in identifying and preventing the delays and in testing whether the

decisions made were fair to the customer.

1 Rules 13.3.1R(2), 13.3.2A R and 13.3.4A R of the Mortgages and Home Finance:

Conduct of Business Sourcebook, and Rule 1.3.1R of Dispute Resolution: Complaints

3


2.5.
The Authority’s rules require firms to make reasonable efforts to reach

agreement with customers over the repayment of any mortgage repayment

shortfall and allow a reasonable time for repayment, having regard to the

need to establish a payment plan which is practical in the individual

circumstances of the customer. They are also required to identify,

acknowledge and address complaints.

2.6.
Customers suffering difficulties in making mortgage repayments or whose

accounts are in arrears are frequently vulnerable as a result of financial

problems and may be suffering from associated difficulties such as

unemployment, relationship breakdown, bereavement or illness. It is

important that firms proactively engage with these customers to ascertain the

cause of their difficulties and their future financial prospects and to identify

swiftly payment solutions appropriate to customers’ individual circumstances

and which are fair. To do this effectively, staff dealing with customers need to

be adequately trained, sufficiently skilled and provided with appropriate

guidance.

2.7.
YBS failed to provide sufficient procedural guidance or training to call

handling staff on assessing a customer’s circumstances and identifying

appropriate solutions.

2.8.
In addition, weaknesses in its quality assurance monitoring and the provision

of management information meant that unfair outcomes were not identified

when they should have been. YBS should have monitored and identified that

the repeated refusal of customers’ direct debit payments meant that some

customers incurred numerous monthly fees even when it should have been

apparent to YBS that this was not an appropriate payment method and that

continuing to request monthly payments was leading to a build up of fees and

unfairness.

2.9.
Call handlers also failed to identify and acknowledge customer complaints,

which meant that complaints went unresolved. This was unfair to individual

complainants, but it also meant that YBS management was deprived of

information which may have revealed underlying problems.

2.10. The Authority considers YBS’s failings to be serious for the following reasons:

(1)
A large number of customers (approximately 9,000) were potentially

affected by the failings;

(2)
Many of these customers were vulnerable because of financial

difficulties or associated problems;

(3)
YBS failed to identify the failings itself: they were brought to YBS’s

attention by the Authority;

(4)
Despite being made aware of the problems, YBS has been slow to

implement improvements to its systems and processes to prevent

recurrence of the identified failings; and

(5)
On several occasions in the years preceding the Relevant Period, the

Authority had communicated to firms including YBS the importance of

the fair treatment of customers in arrears.

2.11. While the Authority considers the failings to be serious, it recognises that YBS

did not seek to make any profits, nor avoid any losses, as a result of the

breaches. Many of the failures resulted from an approach which gave

customers more time to get themselves out of financial difficulties but which

delayed the agreement of payment solutions. The Authority recognises that

YBS has made improvements to its processes since the Relevant Period and

that some of these improvements were under development before being

notified of the Authority’s concerns.

2.12. YBS took proactive steps to provide redress to affected customers. On 17

February 2014, YBS announced that it would refund all mortgage arrears

fees, and accrued interest, charged to customers since January 2009. It is

expected that approximately 33,900 current and former customers will

receive back an average of £247, at a total cost to YBS of £8.4 million. It has

also ceased charging mortgage arrears fees until the identified issues are

resolved. YBS has conducted this exercise in a transparent manner,

publishing a statement on its website and agreeing for a similar statement to

be published on the Authority’s website.

2.13. The Authority therefore imposes a financial penalty on YBS of £4,135,600

pursuant to section 206 of the Act.

3.
DEFINITIONS

3.1.
The definitions below are used in this Final Notice.

“the Act” means the Financial Services and Markets Act 2000;

“the Authority” means the body corporate previously known as the Financial
Services Authority and renamed on 1 April 2013 as the Financial Conduct
Authority;

“the Barnsley” means the Barnsley Building Society and the brand name used
by YBS after merging with it;

“the Chelsea” means the Chelsea Building Society and the brand name used
by YBS after merging with it;

“CMI” means Contractual Monthly Instalment, the usual monthly mortgage
repayment to be made by customers, excluding any other payments in
respect of fees, outstanding arrears or other charges (for example PPI
premiums);

“DEPP” means the Authority’s Decision Procedure and Penalties Manual;

“DISP” means the Authority’s Dispute Resolution: Complaints Manual;

“MCOB” means the Authority’s Mortgages and Home Finance: Conduct of
Business Sourcebook;

“MI” means Management Information;

“N&P” means the Norwich and Peterborough Building Society and the brand
name used by YBS after merging with it;

“Principle” means one of the Authority’s Principles for Businesses;

“QA” means Quality Assurance;

“Relevant Period” means 1 October 2011 to 31 July 2012;

“Skilled Person” means the person appointed, pursuant to section 166 of the
Act, to carry out a review of YBS’s mortgage arrears files and to report on
its findings;

“the Tribunal” means the Upper Tribunal (Tax and Chancery Chamber);

“YBS” means the Yorkshire Building Society.

4.
FACTS AND MATTERS

Background to YBS

4.1.
YBS is a building society founded in Yorkshire. It has been authorised by the

Authority since 1 December 2001. Between 2008 and 2012, YBS underwent

significant growth, merging with the Barnsley in 2008, the Chelsea in 2010

and N&P in 2011. It also acquired the mortgage business of the Egg brand in

2011. It is now the UK’s second largest building society.

4.2.
YBS specialises in the provision of residential mortgages. It provides

mortgages using the YBS, the Barnsley, the Chelsea and N&P brand names,

as well as ‘Accord Mortgages’, the brand name of Accord Mortgages Ltd, an

intermediary-only mortgage provider (a lender which deals only through

mortgage brokers) wholly owned by YBS.

4.3.
As of November 2013, YBS had 3.6 million customers and held residential

mortgages to the value of £28.3 billion.

Mortgage arrears

4.4.
The provision of residential mortgages has been regulated by the Authority

since 31 October 2004. Since that date, administering a regulated mortgage

contract has been a regulated activity. This includes dealing with customers

who are suffering payment difficulties or whose mortgage accounts are in

arrears.

4.5.
The fair treatment of customers experiencing difficulties in the payment of

their mortgages is of particular importance. Many such customers are

experiencing financial problems and, consequently, are vulnerable. Some

have associated difficulties such as unemployment, relationship breakdown,

bereavement or illness. The failure of a mortgage agreement may result in

them being rendered homeless.

4.6.
Mortgage lenders may consider a range of potential solutions to customers

experiencing payment difficulties. These may be:

(1)
short-term, such as brief payment holidays, temporary conversion to

interest-only repayment terms or ‘negative’ arrangements to pay

7


(where the agreed monthly repayment is less than the normal

Contractual Monthly Instalment (“CMI”)); or

(2)
longer-term, such as ‘positive’ arrangements to pay (where the

customer agrees to pay a monthly sum above the CMI to pay back

arrears over time), the capitalisation of arrears, the extension of the

mortgage term, supporting and assisting with a sale of the property by

the customer or, in appropriate cases, taking possession of the

property.

4.7.
The suitability of any particular solution depends on the individual

circumstances of a customer and relevant considerations include the

particular reasons for the payment difficulties, whether they are short,

medium or long-term, and the future financial prospects of the customer.

4.8.
It is important that firms engaged in arrears handling activities proactively

engage with their customers who are experiencing payment difficulties,

identify the cause of the problems suffered by each particular customer and

quickly seek to agree solutions which are appropriate to the particular

circumstances of the customer.

4.9.
In the absence of an arrangement to pay or other agreement being in place,

YBS imposed a charge of £35 for every month that a customer had more than

two months’ arrears outstanding. This charge was applied even if payments

of the CMI restarted and continued to be made. Other charges were made if

direct debit payment requests were refused, if home visits were carried out or

if cases were referred for litigation. Interest continued to be charged on

arrears and on any outstanding fees.

4.10. Therefore, delays in the process of identifying and agreeing appropriate

solutions risked a build-up of arrears, fees and associated interest. The

imposition of solutions that were not appropriate to customers’ particular

circumstances risked causing significant extra cost to customers or a failure

to sustain the solution, resulting in a further deterioration in the customer’s

financial position, potentially threatening the possession of their home.

History of YBS’s mortgage arrears handling

4.11. In 2008, worsening economic conditions led to anticipation across the market

of increasing levels of mortgage arrears. In August 2008, the Authority

published a thematic review of mortgage arrears handling which included a

guide to good and poor practices. In November 2008, the Authority published

a ‘Dear CEO letter’ which emphasised the importance of treating customers

fairly.

4.12. In July 2011, the Authority visited YBS to conduct a supervisory risk

assessment. As a result of the risk assessment visit, the Authority wrote to

YBS explaining that their policy on arrears forbearance was unclear and that

there was no qualitative or quantitative MI to assess the effectiveness of

forbearance tools.

4.13. In August 2012, the Authority conducted outcomes testing on mortgage

arrears files. Following the review, the Authority wrote to YBS in September

and October 2012 stating that the review highlighted serious failings within

the monitoring and oversight of arrears cases which produced unfair

outcomes for customers.

4.14. In May 2013, the Authority issued a requirement under section 166 of the Act

for a Skilled Person to conduct a review of arrears handling. One of the

purposes of the review was to test customer outcomes over the course of the

Relevant Period.

4.15. The Skilled Person carried out a review of 100 customer files (of which 87

were regulated mortgages) relating to customers that were in arrears at

some point during the Relevant Period.

4.16. The Skilled Person found that, in 64 of the 87 (74%) regulated mortgage

cases considered, customers were not treated fairly. In 52 of these cases

(60%), actual customer detriment could be identified. As detailed below, the

unfair treatment included:

(1)
failing to consider the individual circumstances of customers;

(2)
failing to consider all payment options;

(3)
seeking inappropriate payments;

(4)
failing to assist with voluntary sales;

(5)
a resistance to taking possession in appropriate circumstances;

(6)
delays in determining solutions; and

(7)
failing to identify and resolve customer complaints.

Dealing with customers

4.17. YBS administered the mortgages provided by each of its various brands.

During the Relevant Period, YBS dealt with approximately 9,000 customers

whose accounts were in arrears by more than two months.

4.18. Responsibility for dealing with customers in arrears at YBS lay with the

Collections and Recoveries department. As of November 2013, YBS employed

165 full time employees in the Collections and Recoveries Department over

three sites.

4.19. Within this Department, call handlers communicated directly with customers.

They received incoming telephone calls and conducted outbound telephone

calls to customers automatically identified by a computer system. They were

also responsible for issuing letters to customers and arranging home visits if

customers could not otherwise be contacted.

Policy and procedures

4.20. In October 2009, a senior risk committee at YBS approved the arrears

handling policy document. The document was approved annually thereafter.

4.21. The policy document was six pages long and did not contain sufficient detail

to provide meaningful guidance to call handlers as to how they should

approach the consideration of customers’ circumstances and how they should

determine the appropriate course of action.

4.22. The policy was supported by a number of procedural documents which were

made available to arrears handling staff. However, these were agreed at an

operational, rather than committee, level and there was no formal process for

ensuring the consistent presentation and use of procedural documentation.

4.23. The result was that procedural guidance was fragmented, and designed to

address specific issues rather than to consider the overall process of arrears

handling in a holistic manner.

4.24. For example, there was no policy for dealing with non-cooperative customers,

creating a risk that call handlers were unsure what to do when customers

failed to cooperate and that, as a result, cases would be allowed to drift. For

example, Mr and Mrs P entered arrears after they separated and Mr P moved

out of the property. Although YBS maintained contact with Mr P, he stated

that he was unable to make payments and contact could not be established

with Mrs P for seven months. During that time, while Mrs P made some

payments, no solutions were put in place and arrears charges were imposed

in five of the seven months.

4.25. Nor was there any policy for identifying and treating customers in particularly

sensitive positions, such as those with serious, terminal or mental health

illnesses. As a result, staff did not always identify nor deal appropriately with

such customers. Errors with the automated system for contacting customers

led to YBS mistakenly continuing to contact one customer, who was seriously

ill. This customer complained of feeling harassed as a result of these

contacts: this would have been prevented if YBS had identified her case as

sensitive.

4.26. In April 2012, YBS implemented a new, more thorough policy document. This

provided call handlers with more detailed guidance but the policy was not

always followed by arrears handling staff during the Relevant Period.

Assessment of income and expenditure

4.27. In September 2008, YBS made a decision not to follow the Good Practice

published by the Authority which gave an example of completing an income

and expenditure assessment form for customers in arrears. Although

assessment tools were available for staff, it was adjudged that arrears

handlers could ascertain sufficient information to assess appropriate

repayment solutions through their discussions with the customer.

4.28. However, little detailed procedural guidance was given to call handlers as to

how they should assess a customer’s financial circumstances. One guidance

document stated simply: ‘some discussion to assess whether the amount is

reasonable must take place’ before arrangements could be agreed.

4.29. YBS updated its procedures in November and December 2011 to require the

completion of income and expenditure assessments in certain circumstances.

However, this procedure was not always followed during the Relevant Period.

Failure to consider individual circumstances

4.30. The lack of appropriate guidance meant that call handlers did not consistently

probe into individual customers’ circumstances and identify the cause of their

problems to establish whether they were short, medium or long-term. This

was evidenced in the sample of customer cases reviewed by the Skilled

Person in a number of different ways:

(1)
Call handlers failed to identify the root cause of a customer’s financial

difficulties and how this affected the suitability of various solutions. This

included sensitive cases involving customers with serious illness: in the

case of one customer who spent time in hospital, YBS failed to consider

short-term solutions, despite the customer notifying it that he should be

able to return to work shortly;

(2)
Call handlers often did not carry out any meaningful assessment of

customers’ income and expenditure and thus failed to collect a full

picture of customers’ circumstances;

(3)
Call handlers were willing to accept the explanations and assertions of

customers without probing sufficiently into the plausibility of these

explanations or the realism of the assertions: in one case, call handlers

failed, on approximately 30 occasions, to challenge a customer’s

promises to pay the full arrears; in another, a customer’s continued

assertions that he was expecting an insurance payment were not

questioned, evidenced or investigated for three months;

(4)
On occasions, call handlers did not discuss possible means of increasing

the customers’ sources of income, including their eligibility to claim

under payment protection insurance contracts, or to reduce levels of

expenditure;

(5)
In some cases, little or no attempt was made to establish the future

financial prospects of customers and how these may affect their ongoing

ability to maintain mortgage payments. In particular, there was

evidence of a lack of understanding of how to probe into the financial

circumstances of customers who were self-employed and whose income

therefore depended on the future business outlook.

4.31. Because they did not probe sufficiently into customers’ circumstances, call

handlers were unable to demonstrate that the various payment options had

been considered and discussed with customers and that suitable solutions

had been identified at an early stage.

4.32. An example of this concerns Customer B. Customer B missed her first

mortgage payment after losing her job. Over the course of the next eight

months, YBS made a total of 30 calls to her: the customer made various

excuses for the missed payments and there was little attempt to understand

her financial position. Although a one month payment holiday was agreed

during this time, no assessment of income and expenditure was carried out,

and consequently there was no sufficient understanding of how this would

assist the customer. No income and expenditure assessment was undertaken

until a home visit was carried out eight months after the first mortgage

payment was missed. Customer B ultimately redeemed her mortgage.

Failure to consider options

4.33. From the sample of cases, there was frequently limited consideration of

options other than arrangements to pay, even when the customer’s long term

financial outlook was uncertain or when the problems were demonstrably

short-term and other options may have been more appropriate. The Skilled

Person noted this in 25 of the regulated sample cases.

4.34. For example, Mr and Mrs F entered arrears following a short period of

reduced income for Mr F, coupled with maternity leave for Mrs F. Despite the

short-term nature of the issues, no appropriate short-term solutions appear

to have been considered and no arrangements to pay were agreed because

Mr and Mrs F’s short-term income and expenditure assessment showed them

to be in deficit. As a result, although CMI payments recommenced six months

after entering arrears, arrears fees and other charges continued to be

applied. A total of £296 in charges was applied during the Relevant Period.

4.35. As in the above example, this failure to consider the full range of options

meant that opportunities to agree solutions at an early stage were missed. It

also resulted in arrangements to pay being put in place in inappropriate

circumstances, often without any consideration of a customer’s income and

expenditure or even when income and expenditure assessments suggested

they were not affordable.

4.36. As a consequence, arrangements were broken because customers were

unable to keep up with payments. This caused them to incur further charges

and potentially prolonged the time they were in arrears.

Seeking inappropriate payments

4.37. Rather than attempting to find overall solutions, the case sample showed call

handlers seeking to take payments as a ‘contribution’ or ‘commitment’ or

encouraging customers to ‘make any payment’ when its affordability could

not be established or when the customer stated that he could not afford it at

the time.

4.38. Similarly, YBS accepted payments from friends or family, or payment on

credit cards, without sufficient consideration of how that may impact on the

customer’s
debt
burden
or
the
ongoing
sustainability
of
payment

arrangements.

4.39. This may have been done in order to avoid arrears on a customer’s account

falling beyond a limit which would incur a fee or result in an adverse credit

rating report but its effect was to prioritise the collection of ad hoc payments

ahead of the agreement of a long-term, sustainable solution.

4.40. Although this practice was not prescribed by YBS’s policy, it was nonetheless

common practice and accepted by management as such.

Voluntary sales

4.41. If a customer’s financial position means that he or she is unable to afford

mortgage repayments and is realistically unlikely to be able to do so in the

future, a prompt sale of the property may be the best solution. In these

circumstances, delays in effecting the sale may lead to a rapid build-up of

arrears and interest and a significant deterioration in the customer’s financial

position. Yet, because they failed to ascertain customers’ circumstances, call

handlers failed to identify cases in which a voluntary sale may have been the

most appropriate solution.

4.42. Customer J advised YBS that she had been made redundant, that she was

unlikely to find employment at the same salary level and that she would be

unable to afford future mortgage payments. YBS failed to consider the option

of a voluntary sale. No further payments were made and arrears fees were

charged for seven consecutive months. Eventually, litigation began and the

property was sold at a shortfall a further five months later.

Reluctance to Take Possession

4.43. Similarly, there was a general reluctance in the four relevant cases reviewed

to take possession of a property even when the customer had moved out and

the property was empty. While taking possession was properly viewed as a

last resort, in cases where it was the appropriate remedy, delays in taking

action resulted in customers accumulating further interest and fees.

4.44. An example is that of Customer E. Customer E contacted YBS prior to

entering arrears, to inform it of the unaffordability of the mortgage. YBS did

not pro-actively discuss exit strategies with Customer E at that stage, despite

knowing that the position was not going to change. Once her account entered

arrears, because an arrangement to pay was deemed unaffordable and no

other options were considered, YBS charged her arrears fees monthly.

Interest of approximately £2,500 per month continued to accrue. Total

charges of £394 were applied in the Relevant Period and the account was at

one stage almost £20,000 in arrears.

4.45. Despite knowing that Customer E had moved out, YBS failed to take

possession of the property for a further six months. The property was

eventually sold with a shortfall the following year.

4.46. As a result of the failings outlined in the paragraphs above, there was

evidence, in the sample of cases reviewed, of significant and unexplained

delays in determining appropriate actions. Some of these delays lasted

months, with no clear exit strategy and with little review taking place.

Contact with customers often simply involved ‘updates’ or the seeking of a

‘contribution’. For example, between November 2011 and July 2012, 36

telephone calls were conducted with one customer without any assessment of

income and expenditure being made and without any solution being put in

place.

4.47. It was not recognised at a managerial level that delays in the process of

agreeing solutions was detrimental to a customer’s financial position, and

therefore unfair to the customer. One senior manager believed that delay was

detrimental to YBS, which was bearing the risk, rather than to the customer.

As a consequence, there was a lack of focus on minimising and preventing

delays.

Repeated charging of direct debit refusal fees

4.48. A further example of a failure to consider customer circumstances was the

repeated charging to some customers of direct debit refusal fees. YBS

encouraged customers to make mortgage payments by direct debit. These

payments were automatically requested from the customer’s bank account

each month. If there were insufficient funds in a customer’s bank account,

the bank might refuse to make the direct debit payment. On the first occasion

this happened to any customer, YBS did not charge a fee. However, on each

subsequent occasion, YBS charged the customer £25. This charge was in

addition to any charge made for being in arrears.

4.49. Although YBS did not re-present the same direct debit payment request more

than once a month, it did continue to present monthly direct debit payment

requests (and to charge fees for the refusal of such requests) no matter how

many such requests had been declined.

4.50. In 2008, YBS had specifically rejected the possibility of implementing a policy

to limit the presentation of payment requests which were repeatedly refused,

reasoning that it was the responsibility of the customer to cancel a payment

arrangement if it was inappropriate.

4.51. There was no specific procedure in place to monitor the fairness of continuing

to present direct debit payment requests. Because of this, and because of the

delays in determining arrears solutions, there was a risk that some customers

would be charged direct debit refusal fees repeatedly, even when it should

have been apparent to YBS that this means of payment may have been

inappropriate.

4.52. As a result, the direct debit payment requests in respect of some customers

were refused on numerous occasions, often in consecutive months. Although

call handlers were expected to attempt contact with a customer after each

direct debit payment refusal, contact was not always successfully made and,

when it was, call handlers did not always address the suitability of the direct

debit payment method. Consequently, payment requests continued to be

presented and, if refused, fees charged.

4.53. In respect of some customers, this resulted in the imposition of significant

fees on which interest then accrued. During a 34 month period leading up to,

and including, the Relevant Period, 324 customers were charged direct debit

refusal fees more than four times a year. One customer, Mr R, was charged a

direct debit refusal fee on 32 occasions, the fees totalling £800. Call handlers

at YBS made concerted efforts to contact Mr R, attempting 150 outbound

calls and sending 32 letters during the 34 month period. Yet, despite 16

telephone contacts with the customer during this period, a call handler

identified and addressed the incurring of a direct debit fee on only one

occasion, at which time the date of payment request was changed.

Failure to identify and acknowledge customer complaints

4.54. From the sample, the Skilled Person identified 28 cases in which an

expression of dissatisfaction amounting to a complaint was made by a

customer. In 23 of these cases, complaints were not dealt with appropriately.

4.55. In most of these cases, expressions of dissatisfaction were made during the

course of arrears handling telephone calls, yet often call handlers did not

identify nor acknowledge that a complaint had been made. Consequently,

such complaints were not recorded nor investigated.

4.56. On other occasions, although call handlers acknowledged the customers’

dissatisfaction, nonetheless they failed to log or record it as a complaint and

consequently it was not investigated. Several customers complained on

multiple occasions: one customer from the cases reviewed repeatedly

complained that a sale process was proceeding slowly and causing her

distress and depression. These complaints were not logged nor recorded as

such.

4.57. As a result, not only did individual customers not have their complaints

investigated, but YBS management was not provided with information which

may have indicated a more wide-spread problem.

Failures in oversight

4.58. YBS’s systems of oversight should have identified or prevented the

shortcomings identified above. Instead, the lack of managerial focus on the

detrimental effects to customers of delay created weaknesses in these

systems which, in turn, contributed to the poor treatment of customers.

Training and competence

4.59. The identification and implementation of appropriate payment solutions

requires call handlers to have the requisite skills, knowledge and expertise

and the ability to make reasoned and considered judgements. It is important

that lenders provide call handlers with the necessary training and maintain

appropriate levels of monitoring to ensure standards remain high.

4.60. While YBS’s training of call handlers covered the questioning of customers,

the sessions were not of sufficient breadth or length to provide trainees with

the necessary expertise to ascertain customers’ circumstances in adequate

detail, to consider the range of payment solutions and to make appropriate

judgments based on those circumstances.

Quality assurance

4.61. During the Relevant Period, assurance of the quality of YBS’s call handling

staff was conducted by their team managers, who monitored a specified

number of telephone calls per month conducted by each call handler. No

formal training was provided as to how they should judge the call handlers in

assessing the customers’ individual circumstances and providing advice on

the available options. As a result, it was impossible to assess whether a

consistent approach was used.

4.62. YBS did not conduct an ‘end to end’ assessment of individual mortgage cases

in the collections process. The QA carried out by YBS did not routinely

consider evidence from outside the particular call or work event being

reviewed. It did not generally consider other calls or correspondence with the

same customer. As such, YBS did not test the outcomes experienced by

customers over a period of time, and throughout the collections process. As a

result, the QA process was insufficient to identify issues concerning the

overall fairness of customer outcomes over time.

Management information

4.63. A consequence of the inadequacies of the QA regime was that the information

provided to management was insufficient to allow it to determine whether the

system was producing unfair outcomes.

4.64. The analysis of the information collated as a result of the QA process was

directed towards identifying the performance of each call handler, rather than

to identifying common issues or problems which may lead to unfair customer

outcomes.

4.65. Even when significant numbers of calls failed to adhere to YBS standards (as

in March 2012 when 28% of calls were deemed to have failed to meet the

required standards), no analysis was conducted to identify whether customer

detriment resulted. Throughout the Relevant Period, no common issues were

reported to senior management.

4.66. Because no end-to-end assessment of arrears cases was carried out, little

information was available to enable management to assess outcomes

effectively. While YBS collated and reported data on the numbers of

customers entering various payment solutions, it did not report the numbers

remaining within each solution and did not carry out customer level

monitoring to assess the length of time customers remained within a

particular solution. Consequently, the ability of management to identify

delays in the system and trends in the use or success of various payment

solutions was limited.

Improvements and Redress

4.67. Since
the
Relevant
Period,
YBS
has
developed
and
implemented

improvements to its systems for handling customers in arrears. In June 2014,

the Skilled Person undertook a further review of arrears handling at YBS to

determine whether the changes had resulted in improved customer

outcomes.

4.68. The Skilled Person considered the questioning of customer circumstances and

the consideration of payment solutions to have improved and observed the

elimination or reduction of many of the poor practices identified above. As a

consequence, where contact was made with customers, improved outcomes

resulted. However, the Skilled Person still found that customers were

subjected to some unfair treatment in half of the cases reviewed. The

principal reason was identified as a lack of resourcing in the Collections and

Recoveries department which had led to delays in contacting customers. This

was attributable in part to YBS having moved call handlers from operational

duties to oversight and QA duties, thus reducing the staffing levels available

to handle customer calls. Customer detriment was significantly less because

YBS did not charge customers arrears fees.

4.69. On 17 February 2014, YBS announced that it would refund all mortgage

arrears fees, and accrued interest, charged to customers since January 2009.

These refunds cover charges made in respect of both regulated and

unregulated mortgages. YBS has made the refunds on a proactive basis,

meaning that customers do not have to apply: current customers have

automatically had credits applied to their accounts, while former customers

have been traced and payments sent to them. It is expected that

approximately 33,900 current and former customers will receive back an

average of £247, at a total cost to YBS of £8.4 million. Further, YBS has not

charged mortgage arrears fees since that time and will not do so until the

improvements are sufficiently embedded.

4.70. In undertaking the redress exercise, YBS has been transparent with its

customers throughout. In addition to writing to affected customers, YBS

published a full statement about the redress exercise which it displayed on its

website and agreed with the Authority for the publication of a similar

statement on the Authority’s website.

5.
FAILINGS

5.1.
The regulatory provisions relevant to this Final Notice are referred to in Annex

Breach of Principle 6 and associated rules

5.2.
Principle 6 requires a firm to pay due regard to the interests of its customers

and to treat them fairly.

5.3.
Additionally, during the Relevant Period:

(1)
MCOB 13.3.2A R required a firm to make reasonable efforts to reach an

agreement with customers over the method of repaying a payment

shortfall and to allow a reasonable time to repay the shortfall, having

particular regard to the need to establish, where feasible, a payment

plan which was practical in terms of the circumstances of the customer;

and

(2)
in complying with this requirement, MCOB 13.3.4A R required a firm to

consider whether a number of potential options were appropriate, given

the individual circumstances of the customer.

5.4.
From the sample of cases, YBS breached these requirements in that:

(1)
By failing to probe sufficiently into individual customer circumstances,

YBS failed to determine whether a particular customer’s financial

problems were short, medium or long-term;

(2)
As a result, it was unable to determine the suitability of payment plans

in the circumstances of individual customers;

(3)
YBS failed to give due consideration to the full range of potential

payment solutions and concentrated on arrangements to pay. This

meant that potentially suitable options were not considered and that

inappropriate arrangements to pay were agreed;

(4)
Rather than seeking overall solutions, YBS call handlers frequently

sought ad hoc payments. As well as contributing to the failure to

address and solve the underlying problems, little consideration was

given to the effect these payments may have had on customers’ overall

debt burden and consequently risked making their financial situations

worse;

(5)
YBS failed to identify circumstances in which a voluntary sale was

appropriate; and

(6)
YBS failed to take possession of properties, even when it was

appropriate.

5.5.
The effect of these failings was that YBS did not identify nor agree

appropriate payment plans at an early stage and, accordingly, customers

remained in arrears for longer periods of time. As a consequence, they were

exposed to higher levels of fees and interest, and arrears were allowed to

build up. Delays in the process worsened customers’ financial positions and

made realistic and appropriate solutions more difficult to obtain.

5.6.
Accordingly, because of these failings, YBS breached not only Principle 6 but

also MCOB 13.3.2A R and 13.3.4A R.

5.7.
DISP 1.3.1R requires firms to maintain effective procedures for complaint

handling. By failing to identify complaints, or to treat them as such, YBS

failed to handle complaints effectively. This meant that customers were

deprived of the right to have their complaints investigated competently,

diligently and impartially and the opportunity to remedy particular problems

experienced in the arrears handling process was missed.

5.8.
Because complaints were not recorded, there was no opportunity for

management to consider and address any root causes which the complaints

might have identified. Accordingly, in addition to breaching Principle 6, YBS

breached DISP 1.3.1R.

Breach of Principle 3 and associated rules

5.9.
Principle 3 requires that a firm take reasonable steps to ensure that it has

organised its affairs responsibly and effectively, with adequate risk

management systems. During the Relevant Period, MCOB 13.3.1R(2)

required a firm to put in place, and operate in accordance with, a written

policy and procedures for dealing fairly with any customer who was in arrears

and which reflected the requirements of MCOB 13.3.2A R and 13.3.4A R.

5.10. YBS failed to take such reasonable steps or to put in place and operate in

accordance with such a policy and procedures in that:

(1)
Prior to April 2012, YBS failed to put in place and maintain an adequate

policy for dealing with customers with payment difficulties or in arrears.

In particular, YBS’s policy was not sufficiently detailed to give

appropriate direction to the call handlers in its collections department as

to how they should assess customers’ financial circumstances;

(2)
There was no formal process for ensuring that the documentation

governing mortgage arrears handling procedures was presented and

maintained in a consistent manner;

(3)
There was no process for monitoring the fairness of repeatedly charging

direct debit refusal fees;

(4)
The training of call handling staff paid insufficient attention to the need

to establish customer circumstances and consequently failed to prepare

call handlers adequately;

(5)
The QA conducted by YBS was inadequate to measure and assess the

quality of customer outcomes; and

(6)
The information provided to management was insufficient to allow

management to determine that unfair customer outcomes were

resulting and to take action to remedy the problems.

5.11
These weaknesses, some of which dated back to before the Relevant Period,

both contributed to the failure by YBS to treat its customers fairly, in the

ways identified above, and to preventing YBS from identifying and remedying

these failures. As such, in addition to breaching Principle 3, YBS also

breached MCOB 13.3.1R(2).

6.
SANCTION

6.1.
The Authority’s policy on the imposition of financial penalties is set out in

DEPP. In determining the financial penalty, the Authority has had regard to

this guidance.

6.2.
The principal purpose of a financial penalty is to promote high standards of

regulatory conduct by deterring firms who have breached regulatory

requirements from committing further contraventions, helping to deter other

firms from committing contraventions and demonstrating generally to firms

the benefits of compliant behaviour.

6.3.
For the reasons set out above, the Authority considers that YBS failed to

comply with Principles 6 and 3 and breached MCOB 13.3.1R(2), 13.3.2A R

and 13.3.4A R and DISP 1.3.1R. In determining that a financial penalty is

appropriate and proportionate in this case, the Authority has considered all

the relevant circumstances.

6.4.
Changes to DEPP were introduced on 6 March 2010. In respect of conduct

occurring on or after 6 March 2010, the Authority applies a five step

framework to determine the appropriate level of financial penalty. DEPP 6.5A

sets out the details of the five step framework that applies in respect of

financial penalties imposed on firms.

Step 1: disgorgement

6.5.
Pursuant to DEPP 6.5A.1G, at Step 1, the Authority seeks to deprive a firm of

the financial benefit derived directly from the breach where it is practicable to

quantify this.

6.6.
It is not practicable for the Authority to quantify any financial benefit that

YBS may have derived directly from its breach. However, as YBS has agreed

to repay all arrears charges and capitalised interest thereon imposed during

the Relevant Period, the Authority is satisfied that this negates any direct

financial benefit that may have accrued to it from its arrears handling

activities.

6.7.
Step 1 is therefore £0.

Step 2: the seriousness of the breach

6.8.
Pursuant to DEPP 6.5A.2G, at Step 2, the Authority determines the figure that

reflects the seriousness of the breach. Where the amount of revenue

generated by a firm from a particular product line or business area is

indicative of the harm or potential harm that its breach may cause, the figure

will be based on a percentage of the firm’s revenue from the relevant product

or business area.

6.9.
The Authority considers that the total level of fees and interest payments

received from customers only while their accounts were in arrears during the

Relevant Period is indicative of the harm or potential harm which may have

been caused by the breaches. The Relevant Period is only a ten month period

therefore, in accordance with DEPP 6.5.A.2G(2), revenue figures have been

taken for the 12 month period prior to the end of the Relevant Period.

6.10. Over the course of the 12 month period prior to 31 July 2012, this figure

amounted to £47,264,890.

6.11. In deciding on the percentage of the relevant revenue that forms the basis of

the Step 2 figure, the Authority considers the seriousness of the breach and

chooses a percentage between 0% and 20%. The range is divided into five

fixed levels which represent, on a sliding scale, the seriousness of the breach;

the more serious the breach, the higher the level. For penalties imposed on

firms, there are the following five levels:

Level 1 – 0%

Level 2 – 5%

Level 3 – 10%

Level 5 – 20%

6.12. In assessing the seriousness level, the Authority takes into account various

factors which reflect the impact and nature of the breach, which include:

(1)
The loss or risk of loss caused to individual consumers (DEPP

6.5A.2G(6)(c));

(2)
Whether the breach had an effect on particularly vulnerable people,

whether intentionally or otherwise (DEPP 6.5A.2G(6)(d));

(3)
The
inconvenience
or
distress
caused
to
consumers
(DEPP

6.5A.2G(6)(e));

(4)
The nature of the rules, requirements or provisions breached (DEPP

6.5A.2G(7)(a));

(5)
The frequency of the breach (DEPP 6.5A.2G(7)(b));

(6)
Whether the firm, in committing the breach, took any steps to comply

with the Authority’s rules, and the adequacy of those steps (DEPP

6.13. DEPP 6.5A.2G(11) lists factors likely to be considered ‘level 4 factors’ or ‘level

5 factors’. The Authority considers the following factors to be relevant:

(1)
The breach caused a significant loss or risk of loss to individual

consumers (DEPP 6.5A.2G(11)(a)). The extent of individual losses is

difficult to quantify, the potential impact (both in monetary terms and

the potential loss of a home) to individual consumers through poor

arrears handling is considerable, particularly given the vulnerability of

many such customers; and

(2)
The breach revealed serious weaknesses in the firm’s procedures

relating to all or part of the firm’s business (DEPP 6.5A.2G(11)(b)).

6.14. DEPP 6.5A.2G(12) lists factors likely to be considered ‘level 1 factors’, ‘level 2

factors’ or ‘level 3 factors’. Of these, the Authority considers the following

factors to be relevant:

(1) Little, or no profits were made or losses avoided as a result of the breach,

either directly or indirectly (DEPP 6.5A.2G(12)(a)); and

(2) The
breach
was
committed
negligently
or
inadvertently
(DEPP

6.5A.2G(12)(e)).

6.15. Taking all these factors into account, the Authority considers the seriousness

of the breach to be level 3 and so the Step 2 figure is 10% of £47,264,890.

6.16. The figure at Step 2 is therefore £4,726,489.

Step 3: mitigating and aggravating factors

6.17. Pursuant to DEPP 6.5A.3G, at Step 3 the Authority may increase or decrease

the amount of the financial penalty arrived at after Step 2, but not including

the amount to be disgorged as set out in Step 1, to take into account factors

which aggravate or mitigate the breach.

6.18. The Authority considers that the following factors aggravate the breach:

(1)
YBS did not identify the breaches itself. The breaches were brought to

YBS’s attention by the Authority and by the Skilled Person;

(2)
Despite having designed and developed improved systems and controls,

YBS has been slow to implement some of the improvements and to

devote sufficient resources to ensure the resolution of all the identified

issues, as noted in the findings of the review by the Skilled Person in

June 2014;

(3)
The Authority issued published guidance on arrears handling on several

occasions in the years prior to the Relevant Period. In respect of the

failure to complete income and expenditure assessments and the

repeated presentation of direct debit payment requests, YBS made

deliberate decisions not to follow this guidance but failed to implement

sufficient alternative safeguards;

(4)
In June 2014, the Authority imposed a financial penalty of £1,429,000

on YBS for failing to ensure that financial promotions for a structured

product were clear, fair and not misleading.

6.19. The Authority considers that the following factors mitigate the breach:

(1)
YBS acknowledged the failings raised by the Authority and voluntarily

embarked on an extensive and pro-active redress exercise prior to the

Enforcement referral, refunding all arrears fees and related interest

applied to any customer’s account from 1 January 2009 to February

2014;

(2)
In undertaking this redress exercise, YBS has been transparent with its

customers throughout: YBS published a statement on its website with

details of the exercise and agreed for a similar statement to be

published on the Authority’s website;

(3)
In addition, YBS has voluntarily suspended charging mortgage arrears

fees for customers until improvements to procedures and controls are

sufficiently embedded.

6.20. The Authority has considered the various aggravating and mitigating factors

and, having done so, considers that the Step 2 figure should be subject to a

25% uplift at Step 3.

6.21. Therefore, the Step 3 figure is £5,908,111.

Step 4: adjustment for deterrence

6.22. Pursuant to DEPP 6.5A.4G, if the Authority considers the figure arrived at

after Step 3 is insufficient to deter the firm who committed the breach, or

others, from committing further or similar breaches, then the Authority may

increase the penalty.

6.23. The Authority considers that the Step 3 figure represents a sufficient

deterrent to YBS and others, and so has not increased the penalty at Step 4.

6.24. The figure at Step 4 therefore remains £5,908,111.

Step 5: settlement discount

6.25. Pursuant to DEPP 6.5A.5G, if the Authority and the firm on whom a penalty is

to be imposed agree the amount of the financial penalty and other terms,

DEPP 6.7 provides that the amount of the financial penalty which might

otherwise have been payable will be reduced to reflect the stage at which the

Authority and the firm reached an agreement. The settlement discount does

not apply to the disgorgement of any benefit calculated at Step 1.

6.26. The Authority and YBS reached agreement at Stage 1 and so a 30% discount

applies to the Step 4 figure.

6.27. The figure at Step 5 is therefore £4,135,678 which has been rounded down to

£4,135,600.

6.28. The Authority therefore imposes a total financial penalty of £4,135,600 on

YBS for breaching Principles 6 and 3, MCOB Rules 13.3.1R(2), 13.3.2A R and

13.3.4A R and DISP Rule 1.3.1R.

7.
PROCEDURAL MATTERS

Decision maker

7.1.
The decision which gave rise to the obligation to give this Final Notice was

made by the Settlement Decision Makers.

7.2.
This Final Notice is given under, and in accordance with, section 390 of the

Act.

Manner of and time for payment

7.3
The financial penalty must be paid in full by YBS to the Authority by no later

than 11 November 2014, 14 days from the date of the Final Notice.

If the financial penalty is not paid

7.4
If all or any of the financial penalty is outstanding on 12 November 2014, the

Authority may recover the outstanding amount as a debt owed by YBS and

due to the Authority.

7.5
Sections 391(4), 391(6) and 391(7) of the Act apply to the publication of

information about the matter to which this Final Notice relates. Under those

provisions, the Authority must publish such information about the matter to

which this Final Notice relates as the Authority considers appropriate. The

information may be published in such manner as the Authority considers

appropriate. However, the Authority may not publish information if such

publication would, in the opinion of the Authority, be unfair to YBS or

prejudicial to the interests of consumers or detrimental to the stability of the

UK financial system.

7.6
The Authority intends to publish such information about the matter to which

this Final Notice relates as it considers appropriate.

Authority contacts

7.7
For more information concerning this matter generally, contact Stephen

Robinson at the Authority (direct line: 020 7066 1338).

Financial Conduct Authority, Enforcement and Financial Crime Division

ANNEX A

RELEVANT STATUTORY AND REGULATORY PROVISIONS

1. RELEVANT STATUTORY PROVISIONS

1.1
Pursuant to sections 1B and 1C of the Act, one of the Authority’s operational

objectives is securing an appropriate degree of protection for consumers.

1.2
Pursuant to section 206 of the Act, if the Authority considers that an

authorised person has contravened a requirement imposed on it by the Act, it

may impose on that person a penalty in respect of the contravention of such

amount as it considers appropriate.

2. RELEVANT REGULATORY PROVISIONS

2.1
In exercising its power to impose a financial penalty, the Authority has had

regard to the relevant regulatory provisions published in the Authority’s

Handbook. The main provisions that the Authority considers relevant are set

out below.

Principles for Business (“Principles”)

2.2
Principle 6 provides:

“A firm must pay due regard to the interests of its customers and treat them

fairly.”

2.3
Principle 3 provides:

“A firm must take reasonable care to organise and control its affairs

responsibly and effectively, with adequate risk management systems.”

2.4
During the Relevant Period, the following rules applied:

Mortgages and Home Finance: Conduct of Business Sourcebook (“MCOB”)

2.5
MCOB 13.3.1R provides:

(1)
A firm must deal fairly with any customer who:

(a)
is in arrears on a regulated mortgage contract or home purchase

plan;

(b)
has a sale shortfall; or

(c)
is otherwise in breach of a home purchase plan.

(2)
A firm must put in place, and operate in accordance with, a written

policy (agreed by its respective governing body) and procedures for

complying with (1). Such policy and procedures must reflect the

requirements of MCOB 13.3.2AR and MCOB 13.3.4AR.

2.6
MCOB 13.3.2A R provides:

A firm must, when dealing with any customer in payment difficulties:

(1)
make reasonable efforts to reach an agreement with a customer over

the method of repaying any payment shortfall or sale shortfall, in the

case of the former having regard to the desirability of agreeing with the

customer an alternative to taking possession of the property;

(2)
liaise, if the customer makes arrangements for this, with a third party

source of advice regarding the payment shortfall or sale shortfall;

(3)
allow a reasonable time over which the payment shortfall or sale

shortfall should be repaid, having particular regard to the need to

establish, where feasible, a payment plan which is practical in terms of

the circumstances of the customer;

(4)
grant, unless it has good reason not to do so, a customer's request for a

change to:

(a)
the date on which the payment is due (providing it is within the

same payment period); or

(b) the method by which payment is made;

and give the customer a written explanation of its reasons if it refuses

the request;

(5)
where no reasonable payment arrangement can be made, allow the

customer to remain in possession for a reasonable period to effect a

sale; and

(6)
not repossess the property unless all other reasonable attempts to

resolve the position have failed.

2.7
MCOB 13.3.4A R provides:

(1)
In complying with MCOB 13.3.2AR(6):a firm must consider whether,

given the individual circumstances of the customer, it is appropriate to

do one or more of the following in relation to the regulated mortgage

contract or home purchase plan with the agreement of the customer:

(a)
extend its term; or

(b)
change its type; or

(c)
defer payment of interest due on the regulated mortgage contract

or of sums due under the home purchase plan (including, in either

case, on any sale shortfall); or

(d)
treat the payment shortfall as if it was part of the original amount

provided (but a firm must not automatically capitalise a payment

shortfall); or

(e)
make use of any Government forbearance initiatives in which the

firm chooses to participate;

(2)
a firm must give customers adequate information to understand the

implications of any proposed arrangement; one approach may be to

provide information on the new terms in line with the annual statement

provisions.

Dispute Resolution: Complaints (“DISP”)

2.8
DISP 1.3.1R provides:

Effective and transparent procedures for the reasonable and prompt handling

of complaints must be established, implemented and maintained by:

(1) a respondent; and

(2) a branch of a UK firm in another EEA State.

Decision Procedure and Penalties Manual (“DEPP”)

2.9
Chapter 6 of DEPP, which forms part of the Authority’s Handbook, sets out the

Authority’s statement of policy with respect to the imposition and amount of

financial penalties under the Act.

2.10
The Enforcement Guide sets out the Authority’s approach to taking disciplinary

action. The Authority’s approach to financial penalties is set out in Chapter 7

of the Enforcement Guide.