Written by Clare Beardmore, Director, Legal & General Mortgage Club
Since the onset of COVID-19, global financial markets have been in a constant state of flux. Volatility has only been exacerbated by the war in Ukraine, fuelling a cost-of-living crisis, and the fallout from the ‘Mini Budget’ left borrowers with stark choices as lenders pulled deals to stay afloat in a turbulent market.
Against this backdrop of political and financial uncertainty, The Financial Conduct Authority’s (FCA) efforts to provide higher and clearer standards of consumer protection – under the new Consumer Duty – consolidates an essential framework to safeguard consumers.
The Consumer Duty requires firms to put their customers’ needs first, with outcomes relating to four key areas; products and services, price and value, consumer understanding, and consumer support.
There is a lot of good practice already happening across the industry and most advisers are already acting within the spirit of Consumer Duty. Now though, the onus is on the industry to prove this and provide the hard evidence. This is a great opportunity for the mortgage market to lead the way, but there is also a lot of work needed and advisers need to be prepared.
A new regulatory approach
While the changes have been a long time coming, increased economic uncertainty, coupled with heightened pressures from rising living costs, have increased the sense of urgency in introducing these significant safeguards.
As a result, the regulator confirmed its plans to introduce a new Consumer Duty in July 2022, to set what it considers appropriate standards for consumer protection by firms. This was followed by the publication of new rules to enhance the oversight of authorised principal firms for their appointed representatives (ARs) in August 2022.
Impact on the industry
The impact of these new regulatory changes on brokers working in the mortgage market will vary, but as an industry, it is vital that we are prepared to reflect these changes in our practices and help protect the consumers we support.
While it is important that the changes are considered in the context of the FCA’s wider regulatory transformation, one particularly pertinent area that many firms will be grappling with is the FCA’s price and value outcomes, which requires that all customers must receive fair value. This means firms will need to have clear assessments of the intended customer benefits of a product or service when they make a fair value assessment. The FCA’s rules and guidance provide a roadmap to help firms make that assessment.
In terms of the new AR changes, the rules will certainly impose more onerous obligations on principals prior to appointing ARs. However, these measures will enable the FCA to easily identify risks within the principal’s and AR’s relationship.
Implications for brokers
After a short period of volatility, it’s been positive to see activity and mortgages rates begin to stabilise in recent weeks. However, if we learnt anything from this turbulence it’s that we need all the right processes in place to deliver the best outcomes for our clients. As such, it is imperative that firms adequately prepare for the new regulation by prioritising the evaluation of the FCA’s expectations against each element of their business. This will ensure that they are in the best place possible to make these changes in line with the new regulation.
Brokers should be leaning on technology to alleviate some of this pressure. For instance, by automating emails to keep in regular contact with customers, they can help monitor vulnerability concerns and ensure borrowers are well informed of all their financial options. This also ensures that clients wholly understand the products being offered to them, which is a crucial element of the new Consumer Duty.
There are several key Consumer Duty headlines in the immediate future. On April 2023, lenders must share key information on their products to meet the new outcomes with all their brokers. Subsequently, mortgage brokers and lenders have until July 2023 to implement the new rules for all new and existing products and services they offer, with another 12 months given to meet the rules on older, closed-book products.
To help the industry prepare for the implementation of the new regulation, Legal & General Mortgage Club has launched a dedicated Consumer Duty hub, which houses all the latest insights, analysis and policy updates that should be on firms’ radars. Our team is working closely with brokers to help adopt these changes, and we’re also participating in two upcoming webinars with the Association of Mortgage Intermediaries (AMI) to continue to raise awareness.
Considerable work must be done to meet these upcoming deadlines. There is no time like the present to start implementing these measures and if we want to help customers achieve the best possible outcomes, and fully embrace Consumer Duty, we must demonstrate that we’re well-equipped to meet these new standards from the offset.