Response to FCA Letters – Mortgage Lenders and Administrators

The FCA portfolio letter on Consumer Duty implementation for firms in the Mortgage Lenders and Administrators sector is split in two main parts:

• Annex 1 focuses on the application of the Duty to different businesses in the retail banking and building societies sector.

• Annex 2 provides more detailed feedback on aspects of each of the outcomes, including considerations around monitoring outcomes, data analytics, further considerations around fair value and other general considerations.

• There are two headline points:

1. The need for firms to deliver good outcomes for customers in financial difficulty.

2. The need for firms to provide fair value to retail customers.

The letter also sets out the following:

• Feedback from FCA’s recent review of firms’ implementation plans – the FCA highlights that (i) firms need to focus on effective prioritisation for the implementation work, aiming at reducing risk of poor outcomes; (ii) firms should ensure that existing policies and processes are adequate and (iii) ensure efficient information sharing with other firms.

• The FCA also highlights (i) the importance of firms in the sector not being complacent about the customer outcomes and what the Duty requires, (ii) the importance of firms ensuring that they have adequate resourcing of their work programmes implementing the Duty and (ii) the importance of adequate assessment of the extent of the data needs associated with the Duty.

Further review

The FCA has set several check points when it plans to engage (on the products and services listed in Annex 2) with a sample of firms on:

• From April 2023 – frameworks used for their gap analysis and how they have ensured that the higher requirements of the Duty have been met.
• From September 2023 – specific changes met (or deemed not required) under the gap analysis and the data being used to monitor outcomes.
• From January 2024 – what outcomes are being achieved under the Duty

Annex 1 – How the Duty applies to firms

Whilst this information is a helpful summary, it does not impose new requirements.

The FCA has also provided examples of common distribution chains in the sector to reiterate that the Duty applies widely to products and services which will reach a retail client.

Annex 2 – Key things for Retail banks and Building Societies to consider

The FCA has listed the specific outcomes under the Duty or business areas more generally, where it has sought to give additional guidance to firms.

1. Consumer understanding – the FCA has flagged examples which are of increased importance given the current economic situation: (i) Where customers are experiencing or anticipating mortgage payment difficulties (ii) Where customers are coming towards the end of an incentivised rate (eg a fixed rate) and (iii) Where customers are considering consolidating other debt into a mortgage.

2. Consumer support - the FCA has reiterated that they expect firms to provide support that meets their customers’ needs at the point of sale and throughout the mortgage lifecycle. Firms also need to be aware of the segments of the mortgage market where customers are more likely to be vulnerable, have additional needs and be at great risk of harm.

3. Products and services - Firms should ensure that their relationships with other firms in the distribution chain do not serve the needs of the firms over customers and lead to poor customer outcomes, such as product recommendations or sales that are driven by commercial arrangements eg commission levels. Firms should also consider how fee structures might incentivise poor conduct or poor customer outcomes.

4. Price and value – Lenders must be able to demonstrate that their mortgage products and pricing, including any associated fees and charges, provide fair value to customers in the identified target market. Lenders should ensure that products don't have features which exploit customers by, for example, charging unjustifiably or unreasonably high fees or interest rates to groups such as those with a poor credit history, or older customers. enders should be able to form a view of the value impact of distributor fees from information they already collect (eg for the purpose of calculating the APRC in the mortgage illustration). the current rate environment should be taken into account by firms and the FCA would expect firms to be active in the lifetime mortgage market.

5. Monitoring outcomes – the FCA has flagged that possible sources of data include customer switching and retention records, customer complaints and root cause analysis, customer feedback and survey data, feedback from other firms in the distribution chain regarding the value of the product, the cost of providing the product or service including credit risk, and staff feedback.

Other considerations

The FCA has provided helpful observations on the following aspects of the sector:

6. Data analytics – firms should be mindful of the use of AI, advanced analytics and big data – the use of such tools should be compatible with the crosscutting rules and the outcomes under the Duty.

7. Considerations around fair value – firms should consider a number of factors specific to this sector to ensure they align with the requirements under the Duty – profits must not be disproportionately generated, cross-selling should be examined along with the impact of any cross-subsidies and the use of advanced analytics to achieve personal pricing.

8. Products with special characteristics - products/services which purport to be ‘ethical’, ‘socially responsible’, ‘green’ etc, or ‘Sharia compliant’ (or equivalent) must be genuinely designed and run as such and match the claims made in promotions and distribution.