Since the original version of our Interest-Only Good Practice Guide, the Financial Conduct Authority has published its finalised guidance into interest-only mortgages. This latest version contains the updates between the thematic review and the finalised guidance to help you shape your customer communication strategies.

1. INTEREST-ONLY
DEALING FAIRLY WITH INTEREST-ONLY MORTGAGE
CUSTOMERS: A GOOD PRACTICE GUIDE FROM HML

2. The Financial Conduct Authority (FCA) published its interest-only finalised
guidance on August 29th 2013, which detailed what it views as good
practice from lenders in dealing with borrowers with these types of
mortgages who may be at risk of being unable to repay their loan.
This step-by-step good practice guide details what lenders should be doing
to deliver their interest-only customer communication strategies. HML is
available to support you with interest-only customer servicing, so please feel
free to get in touch to discuss your needs.
Post MMR, HML will continue to refine its
service to ensure it continues to meet
FCA guidelines, mitigates conduct
risk and ensures a quality
customer experience and
appropriate customer outcomes.
Governance
Interest-only
strategy options
A written strategy
Switch to full or part capital
repayment with customer
detailing the procedural
agreement after an
and policy framework
affordability check
for the management of
expired term interest-only
mortgages
Overpayments
Document reasons why
lenders haven’t offered
customers certain options
Mortgage term extension
where appropriate
Waive normal fees and
charges for customers
changing to alternative
products or repayments
Where options are agreed
verbally follow up in writing
Documented
guidance
framework
Management
Information
Communications
prior to maturity
Communications
post maturity
Front-line staff to have
a written policy and
procedural guidance
to ensure a consistent
approach
Communications strategy
responses
Regular and earlier
customer contact
communications strategy,
with more regular
communications as they
approach the end of the
mortgage term
Communications which
encourage customers to
contact lender
Options deployed before
and after term maturity
Give customers (both
before and after maturity) Post-maturity rolling options
appropriate options
Post-maturity arrears,
Assess customer’s ability litigation and repossession
to pay should the mortgage
extend into retirement or
varying the mortgage term Predictive data including
payment behaviours
increases repayments
Collate information to
capture current repayment
strategies for existing
interest-only customers,
A defined criteria is in place which should be used to
for mortgage product and/ develop the firm’s interestonly strategy
or interest rate change
Repossession action is a
last resort
Regular reviews of a
customer’s circumstances
when forbearance
measures are in place
Appropriately trained staff to
deal with customers
Set out options for
customers concerned about
repaying their mortgage
A simple process
A helpline with opening
times noted
Inform customers of free
impartial or independent
advice services
Provide a balanced position
including risks
of inaction
Communications tailored to
individuals
Communications reviews
to improve customer
engagement
Communications followed
by telephone campaigns
Communications which
take into account alternative
repayment strategies, such
as downsizing
REVIEW THE FCA’S GOOD PRACTICE GUIDELINES FROM THE
FINALISED GUIDANCE
The FCA’s finalised guidance is an easy-to-read document that makes clear
exactly what it views as good practice. Using the table on the next page, which
notes the different good practice strategies, lenders can cross-reference this
against their implementation plan to ensure it meets all of the requirements that
are identified in the finalised guidance. In addition, conducting a gap analysis
will identify if and where further work is required to ensure all of the FCA’s good
practice requirements are met.
Requests for proof of
repayment strategies are
proportionate and balanced
Communications adapted
for customers currently in
forbearance arrangements
or arrears
Online access to income
and expenditure tool
Encourage customers to
contact the firm to agree a
resolution after maturity

3. LIST THE OPTIONS YOU OFFER YOUR INTEREST-ONLY
CUSTOMERS TO REPAY THEIR MORTGAGE
The FCA lists several repayment options that are good practice to offer to
customers if appropriate to their circumstances. These include converting to part
or full repayment, extending the mortgage term and accepting overpayments.
Lenders should identify the options that they currently offer or are prepared to
offer and note any additional borrower criteria that need to be considered, such as
whether it is appropriate for the term to be extended beyond normal
retirement age.
DECIDE WHAT INFORMATION YOU NEED FROM
YOUR CUSTOMERS
The tone and quality of customer communications will set the scene for successful
customer engagement. HML has developed call scripts and letter templates for
several client customer contact campaigns, with information currently
collected including:
From April 2014, customer communications must adhere to the MMR advice rules
in relation to contract variations.
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Whether the customer has a repayment plan
What the repayment plan is
Is the repayment plan sufficient to clear the loan – how does the customer
plan to repay any shortfall
Any additional information regarding the plan, including its value and
when it matures
While the FCA lists several repayment options, this step presents the opportunity
to develop innovative products and services, such as improved product rates,
equity release, shared partnership mortgages and assisted voluntary sales.
In circumstances where the customer isn’t able to repay their loan, an affordability
assessment should be carried out to determine the appropriate options
available to them.
DECIDE HOW YOU WILL DEAL WITH CUSTOMERS
POST-MATURITY
Lenders need to be aware that some customers will need to be contacted postmaturity and be encouraged to engage with their loan provider regarding the
repayment of their loan. The outcomes lenders wish to implement for customers
with matured interest-only mortgages need to be defined and procedures
documented. Some of the tasks that may be involved include establishing robust
supplier arrangements, such as with solicitors, asset managers and field agents,
and altering the content of letter templates and call scripts.
DEVELOP A WAY TO CAPTURE DATA
HML has developed a customer repayment strategy screen on its iCONNECT
system to capture information about repayment plans. The majority of information
that is collected is produced in a measurable format to allow for the effective
reporting of a mortgage lender’s portfolio.
It is useful to compare customers’ responses to their risk parameters, such as their
age, LTV, remaining balance and the remaining term. This creates a clearer picture
of each customer and how they should be categorised in terms of communication
priorities and the risk of them not repaying their loan at the end of its term.
HML has also developed analytics that will identify the risks within the firm’s
portfolio, which generates a scorecard at individual account and portfolio level.
This is in-line with the FCA’s guidance, which suggests firms should create
predictive data and probability-to-repay indicators.
The customer’s mortgage file should have a clear audit trail of the deployment of
options which evidences which options have been considered and if any were not
offered to the customer and the reasons why.

4. DECIDE HOW OFTEN YOU NEED TO CONTACT YOUR
CUSTOMERS AND HOW
The FCA has recommended in the first instance that lenders need to contact all of
their interest-only customers with mortgages that mature prior to or in 2020 before
April 2014. However, HML has found through pilot studies and customer contact
campaigns that getting in touch with an entire interest-only portfolio instigates
wider action. In our experience, the greater proportion of customers who instigate
a conversion to part or full repayment have a term expiry of approximately 20 years
remaining.
We have used a combination of letters and phone calls to maximise customer
engagement and have worked with clients to produce a contact timeline based
on the term expiry date. Based on this date, we state within the contact timeline
whether just a letter is required, or also follow-up telephone calls.
If a customer confirms they have a repayment plan in place, our iCONNECT
repayment screen can be updated to ensure these individuals are not
unnecessarily contacted, ensuring a quality experience and favourable
outcomes for the customer.
REVIEW YOUR OVERALL OBJECTIVES AND HOW YOU INTEND
TO DEPLOY THESE
Working back through the steps above, a high-level policy document can now be
created which includes all of a lender’s objectives. Information contained within
this document can include what interest-only repayment options are available, who
these options are available to and when and how customers should be contacted.
This can be shared with front-line staff to ensure communications are tailored
towards a customer’s individual needs.
Lenders need to review the deployment of their interest-only repayment options
and assess whether they have performed as expected.
Consideration should also be given to how lenders manage their existing contract
variation processes, such as waiving the usual fees that would apply when
changing the repayment type.
DECIDE HOW TO TRAIN YOUR STAFF AND MAINTAIN
SERVICE QUALITY
HML has dedicated staff who are trained to respond to interest-only clientspecific needs and who have the required experience and skillset. We also have a
dedicated helpline for customers to access. In addition, process flows, call scripts,
letter templates, quality assurance checks and a training academy have all been
established to ensure a quality customer experience and appropriate
outcomes for borrowers.
Any interest-only communication strategies will continually need refining and
improving to up-skill staff, bolster customer experience and outcomes and to
mitigate conduct risk. This requires time, effort and resources, but plays a central
role in helping to ensure customers are dealt with fairly.

5. HML GOOD PRACTICE - OUR SUCCESS
A 61 per cent customer contact rate
from a letter and three outbound calls
£10 million worth of balances were
converted to full or part repayment
following one letter that highlighted
access to an online repayment calculator
One client HML is working with is now
on its fourth successful
contact strategy
Customer feedback included: “I’m
impressed by your pro-active
approach to contacting your interestonly customers,” and “I’m unsure what
to do and will speak to an adviser.”
BENEFITS OF CUSTOMER CONTACT CAMPAIGNS:
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Early contact instigates customer action and provides them with more
time to consider their repayment options
Engaging with customers earlier could help mitigate the risk of them
facing repossession at the end of term
The cost of running a customer contact campaign is low compared to the
expense of holding the capital associated with interest-only mortgages
Meet expectations set out in the FCA’s finalised guidance
Outsourcing customer contact strategies to a third party can allow
lenders to focus on the core of their business
Start to manage the credit risk within an interest-only portfolio
How much time and effort do you spend managing
a £200 mortgage arrears case compared to a
£200,000 interest-only mortgage?
You can discuss interest-only customer contact campaigns within the HML Interest Only
Mortgages group on LinkedIn.
For more information about good practice and how HML
can help, contact product development manager
Ben Chambers on 07896 683 194 or email ben.chambers@hml.co.uk

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