The FSA has unveiled a package of measures aimed to help ensure that mortgage holders in arrears are treated fairly and to combat mortgage fraud.

The regulator says the proposals strengthen existing rules on arrears handling – one of the urgent issues flagged in the Mortgage Market Review discussion paper last October.

The proposals seek to make plain that firms must not add early repayment charges on arrears charges and interest levied on those charges and clarify that firms must not apply a monthly arrears charge where the firm and the customer have agreed an arrangement to repay the arrears.

The regulator’s plans also include the compelling of firms to consider all options for borrowers, with repossession being the last resort.

The proposals also confirm that payments by customers in financial difficulties must first be allocated to clearing the missed monthly payments, rather than to arrears charges, which can be repaid later and oblige firms to record all arrears handling telephone calls and to keep all records for three years.

New proposals will also mean all mortgage advisers and those who arrange non-advised sales will be individually accountable to the FSA, and need to demonstrate they are ‘fit and proper’ for their role.

Lesley Titcomb, FSA director responsible for the mortgage sector, said: “Today’s proposals underline the standards that firms must meet and will help to ensure that homeowners in financial difficulties are treated fairly. Lenders need to be in no doubt of their obligations to customers who fall behind with payments and must realise that such circumstances are not an opportunity to create further profits.””