It is almost two months since the new Consumer Duty regulations came into force – widely seen as one of the biggest regulatory shake-ups to impact the industry for more than a decade.
Most regulations focus on one part of the financial services sector – be it the Mortgage Market Review or specific pension sector reforms. But the Consumer Duty covers all financial firms that deal with members of the public, meaning lenders and brokers working across residential, buy-to-let and later-life lending are all affected.
These new rules essentially underpin previous guidance around treating customers fairly.
The Consumer Duty adds a little more substance to the existing rules
Legal & General Mortgage Club director Clare Beardmore explains: “Customers’ needs are now formally required to come first in all four key areas: products and services, price and value, consumer understanding and consumer support.
“While many mortgage firms were already embodying the spirit of these new rules, the Consumer Duty establishes a set of regulatory guidelines that puts customers at the heart of all financial services and products.”
Connect Mortgages director of compliance Alan Baldwin says the most important part of these regulations is the emphasis now placed on good customer outcomes.
“While this should have already been common practice, the Consumer Duty adds a little more substance to the existing rules.”
A lot of hard work will be needed in the months and years to come to ensure continued compliance
The specific requirements around preventing foreseeable harms are particularly important, adds Baldwin.
“This should ensure firms think about the suitability of their products or services for the lifetime of those products, not just for the day they are being sold,” he says.
Compliance challenges
Many point out that mortgage brokers have been better placed than most to meet these new regulations.
“Mortgages are relatively straightforward when compared to other financial products,” says L&C Mortgages associate director David Hollingworth.
But this doesn’t mean there haven’t been challenges, he adds, particularly in relation to demonstrating compliance with this new regime.
Technology will become more useful in identifying when customers are not receiving the level of service expected
“This has required significant work to put the appropriate analysis and measures into place. We’ve always put customers at the heart of our offering, but the Consumer Duty acts as an opportunity to review processes, fill any gaps and challenge the way you do things.”
Burnside Financial Management adviser Scott Barr agrees there are specific challenges for mortgage intermediaries.
“For brokers, the key area we need to pay careful attention to is around fair value: does the fee we charge represent good value for the service we deliver, and what is the stated service we give as part of that fee?”
He says brokers also need to ensure this fee is fairly charged across all clients, with particular care shown towards potentially vulnerable clients.
We feel we are now competing against our network, which doesn’t seem to be applying common sense to cases
Barr adds: “The other change is around documentation; the new rules require brokers to be much more diligent in recording conversations and actions. For many firms, this won’t be a huge change from what they already do; for others it could seem like a massive culture shift.”
Beardmore agrees it is this administrative hurdle that has been most difficult for intermediaries. But evidence suggests the overwhelming majority have complied with the new requirements, despite recent volatility marked by rising rates and last-minute product withdrawals. She points to a survey conducted by the Financial Conduct Authority before the 31 July implementation, which found that 79% of advisers expected to be fully compliant by the deadline.
Due to their size, larger intermediaries, networks and lenders have needed to dedicate more time and resources to review their systems and processes to ensure compliance.
Our network has been very proactive in getting ready for the Consumer Duty. There has been a lot of work behind the scenes
Baldwin has been impressed by the levels of communication between lenders, networks and brokers, which have contributed to a relatively smooth transition to the new regime.
“For many firms, conducting these large-scale reviews has been a big task,” he says.
Lenders have been extremely focused on this to ensure that not only their own fees but those charged by firms they work with are appropriate and represent fair value.
“Communication has been key. We have been in contact with lenders since the new rules were proposed to find out what changes they were making, and they wanted to know what changes we, as a network, were making. This level of sharing of information is not something I have witnessed in the industry and it has helped ensure a consistent approach.”
The new rules require brokers to be much more diligent in recording conversations and actions
Brokers say support from networks and mortgage clubs has been invaluable in helping them comply with this new regime.
“At JB Mortgages our compliance is dealt with by the TMG Direct network and they have been very proactive in getting ready for the Consumer Duty,” says James Bull, a broker with the firm.
“There has been a lot of work behind the scenes, with our software provider, OMS, making system changes needed to be compliant. We have also attended a number of workshops to get our business up to speed.”
But not all brokers have felt so well supported.
Staton Mortgages director Mike Staton says: “I’ll be honest: our network has gone into complete meltdown, making rushed compliance changes and leaving brokers feeling uninformed and penalised unfairly.”
He does not want to name the network but says this behaviour has been “completely unacceptable”.
We’ve always put customers at the heart of our offering, but the Consumer Duty acts as an opportunity to review processes
Staton adds: “Luckily, our goal has always been to have a fair outcome for our clients so it hasn’t changed the way we work. We just feel we are now competing against our network, which doesn’t seem to be applying common sense to cases.”
Greater digitisation
Looking ahead, many think the Consumer Duty requirements will lead to even greater digitisation across the mortgage sector.
Smart365 head of product Thora Kehoe says: “Digitisation becomes even more crucial in this new regulatory era. Integrating solutions that offer data-driven monitoring of customer outcomes will significantly streamline the process of measurement and evaluation, without comprising the quality of insights. Technology can also support various aspects of client communication, through scheduling or setting reminders for outreach.”
Baldwin adds: “Where technology will become more useful is in identifying when customers are not receiving the level of service expected. Many firms will have enhanced their reporting and management information functionality to do this.”
Many mortgage firms were already embodying the spirit of these new rules
But he adds that, while there will inevitably be greater digitisation, mortgage brokers will always require the human touch.
“I think the answer is not automation, but better cohesion between technology and people.”
Considerable work has already been done across the mortgage sector to meet these new regulations, but industry figures warn it will be an ongoing process. From 31 July 2024 this regime will be extended to cover closed books and services — not just new and existing products.
Standard Life Home Finance sales director Kay Westgarth says: “The scale of work needed to ensure compliance across the whole sector has been almost unprecedented — as has the collaboration between advisers, financial services companies and lenders.
For brokers, the key area we need to pay careful attention to is around fair value
“The sector has been well prepared, but this is not the time to rest on our laurels. This is not a ‘one and done’ initiative; a lot of hard work will be needed in the months and years to come to ensure continued compliance.”
SPF Private Clients chief executive Mark Harris says: “This will be an ongoing issue and will need to be a standing agenda at board level, which is consistently reassessed and challenged. Resource is key to ensure firms have the capacity to review and improve to ensure good customer outcomes.”
Ultimately, he says, these rules should foster better customer protection, leading to higher satisfaction, which is good news for both borrowers and the industry that serves them.
This article featured in the September 2023 edition of MS.
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