Mortgage firms are hard at work reviewing their operations following the Financial Conduct Authority’s new Consumer Duty guidance — the first major rules to be introduced after the regulator’s three-year strategy promised it would be “tougher” and “more rigorous”, and would “use its powers more actively”.
The 68-page document was published in July after two months of industry consultation. It covers the whole of the UK’s 60,000 regulated financial firms, including the mortgage industry’s roughly 100 lenders and 18,000 brokers and broker firms.
The question of what is ‘fair’ is always open to interpretation
The City watchdog says the guidance will “fundamentally improve how firms serve consumers” by setting out “higher and clearer standards of consumer protection across financial services”.
It says it wants to end “rip-off charges” and make it easier for customers to switch products. It also wants firms to more clearly explain their products “rather than burying key information in lengthy terms and conditions”, and offer more support to vulnerable customers, such as pensioners or those under financial stress.
Key elements
The body has highlighted four “key elements” where it wants to see improvement from firms: products and services, price and value, consumer understanding and consumer support.
The regulator adds that the current cost-of-living crisis, with the Bank of England forecasting that the UK will fall into more than a year of recession at the end of 2022, means that reforms must be introduced quickly.
There is going to be an awful lot of work to carry out
In July, FCA executive director of consumers and competition Sheldon Mills said: “The current economic climate means it’s more important than ever that consumers are able to make good financial decisions.”
The FCA had wanted the industry to adopt this new guidance in nine months but, after industry opposition to this timetable in consultation, the regulator has given firms until July 2023 to make sure existing products comply with the new rules, and until July 2024 for closed products. The industry had warned a short timetable might lead to complex products, such as for customers on lower incomes or in insecure work, being withdrawn.
Boards of financial firms must agree on new working practices by the end of October, but Intermediary Mortgage Lenders Association (Imla) executive director Kate Davies says this deadline will still put pressure on company review teams.
For the financial services industry, this is a paradigm shift
She says: “Most boards don’t sit in August, so that will mean meetings in September and October will look over the work these teams have done. There is going to be an awful lot of work to carry out.”
‘New management’
Association of Mortgage Intermediaries chief executive Robert Sinclair adds: “The FCA is under new management and is keen to show it has made changes. I don’t doubt that the industry would have had more time to make these changes had it not been for the cost-of-living crisis.”
The Treasury announced that Nikhil Rathi would become chief executive of the FCA in June 2020, following a raft of scandals under previous boss Andrew Bailey (who took up his post as Bank of England governor in March 2020), which saw the watchdog accused of being asleep at the wheel.
The FCA already has the tools to move against poor firms, and it should do so
Rathi, the former London Stock Exchange chief executive, was joining a regulator that faced criticism for: not acting in advance of the London Capital & Finance £237m retail mini-bond collapse in 2019; the failure of former star investor Neil Woodford’s £3.7bn flagship fund, also in 2019; the 2020 multi-billion collapse of supply chain finance firm Greensill Capital (that had employed former prime minister David Cameron as a lobbyist), which abused the appointed representative regime; and the Blackmore Bond failure in the same year, which lost around 2,000 retail investors a total of £46m.
Rathi’s response was to replace many of the FCA’s senior leadership team and publish a three-year strategy in April.
He said: “We are being tougher on firms that want authorisation to operate in the UK, using data more systematically to ask the firms we supervise more rigorous questions and using our enforcement and intervention powers more actively, pushing the boundaries where we need to.”
The FCA believes this guidance will make it easier to weed out firms with unacceptable practices
The watchdog believes the financial services industry, including property professionals, should view its businesses in terms of the FCA’s four key outcomes.
Products and services
The FCA wants “all products and services for consumers to be fit for purpose”, adding that they need to be “designed to meet the needs, characteristics and objectives of a target group of customers and distributed appropriately”.
Davies says: “The idea behind this, and indeed all of the guidance, is that customers should understand why they have bought the product they have, other than simply being advised to do so.
“They should understand what risks the product covers, and what risks it does not.”
I am not sure you can, in practice, sit customers down and [put them] through tests to show whether they have understood a product
Paradigm Consulting head of proposition David Ryder adds that the regulator’s drive for tailored products could stifle market innovation.
He says: “We may see the end of a cycle of lenders dipping in and out of the market with limited-time products to gain commercially.”
Price and value
The regulator says: “Value is about more than just price, and we want firms to assess their products and services in the round to ensure there is a reasonable relationship between the price paid for a product or service and the overall benefit a consumer receives from it.”
Some in the property industry say this may be the most contentious part of the guidance, fearing that the watchdog may fall into the area of price controls, which it has previously steered away from.
Mortgage firms shouldn’t dismiss these changes as small; they will take up a lot of senior management time
Ryder says: “The question of what is ‘fair’ is always open to interpretation.
“Over time, we believe the industry will drift away from a percentage fee approach based on mortgage amount or investment premium and, in its place, a flat rate or fixed price will better reflect the actual work involved. This is much easier to quantify and thus demonstrate as ‘fair’.”
But in the meantime, he adds: “Advisers are more likely to challenge price and value within their lender and provider relationships.
“Where products don’t meet requirements, the manufacturer might have to consider withdrawing the product, or the distributor may have to consider whether or not to offer those products to their clients.”
Consumer understanding
The regulator says it wants consumers to be able to “make informed decisions about financial products and services”, which means that they should “be given the information they need, at the right time, and presented in a way they can understand”.
Ryder says: “We believe lenders and providers will really have to think about how they get their products across to consumers. Evidence suggests products are sometimes opaque and difficult to understand.
We may see the end of a cycle of lenders dipping in and out of the market with limited-time products to gain commercially
“The Consumer Duty will address this, with lenders and providers possibly conducting more market research, possibly including more, clear case studies and Q&As in marketing literature, and road-testing products much more vigorously.”
But Davies adds: “This will be tricky. I am not sure you can, in practice, sit customers down and [put them] through tests to show whether they have understood a product.”
Consumer support
The watchdog says it wants “firms to provide a level of support that meets consumers’ needs throughout their relationship with the firm”.
It adds that firms should consider using a range of channels to reach customers, ranging from in-person consultations to webchats and video calls.
Sinclair says: “Social media is a really good way to educate customers. But, because of the regulations around financial services, I am less comfortable using this to capture and sell on customers. And, for smaller firms, the costs and expertise needed for social media might be out of reach.”
For the financial services industry, this is a paradigm shift
The mortgage industry has undergone a range of tightening restrictions over the past 20 years, starting with the Mortgage Code in 1997 and including the Mortgage Conduct of Business Sourcebook in 2003, as well as the Mortgage Credit Directive in 2014. It remains a competitive industry with a good consumer complaints record, according to many property professionals. They say it is now having to adapt, again, to further rules largely aimed at capital and wholesale market firms.
The Financial Ombudsman Service received 282,035 new consumer complaints in 2020/21, with the mortgage industry accounting for 9,280, or 3.3%, of them.
“We have been here before,” says Davies. “The FCA has introduced a lot of guidance over the past two decades. It already has the tools to move against poor firms, and should do so.
“We will need to see heads on spikes to see if this guidance is any different. In the past, the FCA has set the rules and waited for someone to break them.”
The FCA is under new management and is keen to show it has made changes
But Sinclair adds: “For the financial services industry, this is a paradigm shift. And mortgage firms shouldn’t dismiss these changes as small; they will take up a lot of senior management time to document their good behaviour.
“The FCA believes this guidance will make it easier to weed out firms with unacceptable practices.”
Over the coming year the industry will discover if it is business as usual at the regulator — or whether the FCA indeed intends to put “heads on spikes”.
Consumer Duty – Checklist
End of October 2022
Boards should “agree implementation plans and maintain oversight of their delivery”, to make sure they will be able to meet the new rules.
End of April 2023
Firms that issue products should “aim to complete” the reviews of their existing open products and share this information with distributors covering “price and value, and products and service”.
End of July 2023
Companies that issue products should have identified where changes need to be made to existing products and services, and made these changes.
End of July 2024
Firms should have identified where changes need to be made to existing products and services, and made these changes.
FCA list of ‘do’s’
- Contact the FCA if firms “are considering withdrawing any products or services due to the Consumer Duty”, so that the body can identify “any potentially significant impact on consumers”.
- If companies can release “products and services up to Consumer Duty standards” ahead of FCA deadlines, they “should consider doing so, to improve outcomes for consumers more quickly”.
- Contact the FCA if firms “believe that they will not be able to complete all work necessary to be compliant with the Consumer Duty before the implementation deadlines”.
Source: FCA Consumer Duty final rules