From the end of July 2023, the Financial Conduct Authority introduced the Consumer Duty which is applicable applicable to all authorised financial services firms across all regulated products and services. The rules introduced in 2023, applied to open and new products and services, and from this July will apply to closed ones.
To recap, the new consumer principle requires firms to act to deliver good outcomes for retail customers. These outcomes relate to: products and services, price and value, consumer understanding, consumer support.
Intermediaries are well aware of their responsibilities to customers – we support our Intermediaries in not only transacting with customers to achieve the best possible outcomes that meet their needs, but also in demonstrating this through tangible evidence. The Consumer Duty rules make this mandatory and, more than that, intermediaries will have to demonstrate and evidence that a customer needs have been considered and discussed with them. Specifically, those needs have been addressed on a personalised basis.
The guidance allows firms some degree of interpretation but there is a clear sense that advice must be consumer-centric. A fact find, product selection and then sale model, whether or not stated as restricted as such, does not fully meet the new consumer duty rules. Given where mortgage rates are now, advisers are increasingly having to pull other levers to make repayments affordable for many borrowers.
This is particularly true for the average first-time buyer whose income is a constraining factor.
Advisers have the i’s dotted and the t’s crossed on the mortgage side when it comes to taking longer terms or opting for a part and part interest-only and repayment mortgage. Now they must consider how this advice plays into wider consumer outcomes – in particular, with reference to the foreseeable possibility that a customer’s financial circumstances could change.
Let’s take the consumer outcomes one by one.
Products and services
When it comes to mortgage advice, this one’s not a gamechanger. Intermediaries are already assessing customer needs and advising on the most appropriate products on that basis. Whether that’s fixing for longer to give monthly payment certainty or taking a shorter-term view based on a customer likelihood of needing to move imminently.
Price and value
Again, the mortgage advice market is already geared towards delivering these outcomes for customers. The advice process takes these aspects firmly into account, with brokers at pains to ensure that borrowers understand the effect that different options could have for them.
Consumer understanding
Within the sphere of mortgage advice, 99.9 per cent of brokers also have this covered. Ensuring customers properly understand what each stage of the mortgage application means for them is a baseline for most firms. Most brokers take on a far broader responsibility for customers understanding than just the mortgage, often taking time to coach less experienced customers through the entire house purchase, conveyancing and mortgage application journey.
Under the new duty rules, there is a strong argument that the scope of consumer understanding of the financial decisions they make must become wider.
For example, a couple buying for the first time with a view to starting a family may be stretching themselves financially in order to set themselves up for a more stable future. The mortgage advice they receive may be the best possible option for them, with full disclosure of the implications of taking, say, a longer term to keep monthly repayments down. To ensure a good outcome in the foreseeable future, the consumer duty extends the scope of understanding those borrowers need when considering the effect this decision has on their wider financial exposure.
There is a risk that one partner’s circumstances change and they cannot afford to keep up their share of repayments. There is a risk that that one partner loses their life, with devastating knock-on consequences for the surviving partner. Customers need to have been made aware of the risks that taking on a mortgage comes with. Under the new consumer duty rules, they also need to have been made aware of the products and services that can help them mitigate those risks.
Whether intermediaries choose to train advisers internally to augment mortgage advice offerings or whether they partner with specialists on a referral basis – it will be hard to justify a decision simply not to cover off protection advice with any mortgage customer under the duty.
Consumer support
The FCA has been very vocal on the fact the consumer duty isn’t a ‘once and done’ piece of regulation. It requires authorised firms to monitor customers, particularly in relation to any potential vulnerabilities. This is interpretable in myriad ways. To illustrate just one, consider an intermediary who has given mortgage advice to a customer in the past and that customer becomes more vulnerable – financially, mentally, situationally or in any other way – thereafter.
When they come to re-mortgage, there must be evidence to show that their adviser considered how to point that customer to the support on offer, that they need or could benefit from. Within this context, there’s really no situation where mortgage advisers can in good conscience bypass the protection conversation with customers anymore.
We are clear that the mortgage broker holds a privileged position with customers, and we are working hard to ensure our members have access to the products and services that can guard against foreseeable harm. We are slowly moving from a world of pure product advice regulation to one of broader financial advice regulation. Borrowers will expect that and we must deliver it.
JOIN PRIMIS NETWORK TODAY
