There’s been a perception that if you have a mortgage, you’re less likely to be at risk of financial vulnerability. But this can be far from true.
Financial vulnerability isn’t just about how much money you have access to. The Financial Conduct Authority (FCA) has identified the four key drivers of vulnerability as life events, health events, capability and resilience. As such, a change in circumstance could just as easily leave someone at risk.
The reality is that anyone can be vulnerable, at virtually any time. And while mortgage advisers do move with the times – they’re experts, after all – with rising interest rates increasing the risk further still, it’s important that they are aware of the many different circumstances that could make people vulnerable. More than that though, they need to ensure they’re assessing their customers properly for any signs of vulnerability.
Understanding target markets
With the obligations posed by Consumer Duty, the FCA has mandated that firms need to understand the vulnerabilities in their target markets, and respond to those needs
The problem with this approach is that target markets are a misnomer. Sorting people into groups based on their circumstances, and saying that they’re vulnerable in a particular way because they fit into a certain category, is not the way to conduct an accurate assessment.
Instead, we need advisers to be thinking about vulnerability on an individual level, with target markets used as a starting point to help gauge what vulnerabilities an individual might be at risk of. Not including the 1m+ coming to the end of their fixed rate in the next 12 months which have recently hit the headlines, three of the largest target markets – and three that mortgage advisers should be thinking about in particular – are first-time buyers, homemovers and those who remortgage.
First-time buyers
Often younger and eager simply to get on the housing ladder, first-time buyers are new to the process.
They also tend to have smaller deposits, so contend with higher rates, meaning affordability will be squeezed. But this isn’t necessarily a primary source of vulnerability for this group. Never-ending house price inflation has been squeezing first-time buyers’ affordability for years now. Having just seen the largest dip in house price inflation for 14 years, houses could actually be about to become slightly more affordable.
Given that many of these first-time buyers will be so eager to get on the housing ladder, they may take the enormous gamble of buying a home without organising some kind of financial protection. This is a very real risk, and must be carefully assessed by advisers.
With this in mind, and the lack of familiarity with house purchase advisers need to ensure clients truly understand their options to achieve good customer outcome. This may be a more difficult transaction, but it’s vital they have this conversation.
Homemovers
Advisers don’t often dig into why someone is moving house. But with Consumer Duty requiring them to look through a vulnerability lens, going forward they absolutely should.
Maybe it’s good news – the homeowner has received a promotion that requires them to move. But even that raises questions. Do they have children who will need to change schools? A partner who now needs a new job? If the move requires them to live in a more expensive area, can they afford it?
Alternatively, the homemover could be downsizing to release equity or get hold of some cash. Again, the response in this scenario tends to be a positive one. But why is the customer actually taking this action? Do they have lots of debt? A bankrupt business? A relative needing care?
Other reasons for moving might involve getting divorced or two families coming together. All of these circumstances mentioned are significant lifestyle changes that might be of detriment to mental health… or not. With Consumer Duty firmly on the agenda, there needs to be an understanding of the implications to their circumstances of why someone is moving.
Remortgaging
It’s possible that we might see some fairly radical financial planning taking place in order to ride out the current mortgage squeeze. For instance, someone coming off a 1.99 per cent fixed rate who finds the best they can get now is five per cent or higher might look for ways to reduce the amount their mortgage is increasing.
In the current circumstances, if a customer is looking for capital-raising, their adviser should be asking why, and investigating if there is any underlying vulnerability that could weaken their financial resilience.
The opposite of that scenario is capital reduction – paying off a large chunk of a mortgage in one go. Ordinarily this is seen an aspirational thing to do. Again, though, advisers need to ask why a customer is taking that action. Have they sought financial advice? How are they paying for it? Are they leaving themselves vulnerable in future?
The adviser might not be able to give investment advice themselves, but if they have concerns, they do need to signpost customers to someone who can.
What next?
While the FCA’s regulations might hinge on the idea of target markets, advisers will need to conduct individual assessments and focus on individual circumstances.
This will require a change of attitude and with the rise in interest rates, there are going to be difficult questions for those who haven’t exercised the required due diligence.
Of course, we don’t want to talk people out of getting a mortgage. Nor do we want to turn advisers into social workers. Consumer Duty is simply about making sure a particular outcome is actually going to be good for the end customer. Advisers now have to make sure everything’s documented and that they’ve correctly assessed a customer’s potential vulnerability. If they don’t, it’s going to cause problems down the line.
There’s a sense that advisers can do all of this themselves. But in reality, it’s just too difficult to do everything. Identifying and supporting vulnerable customers has to be as systematic as it is consistent. And for that to be achieved, a third-party specialist platform is the obvious route.
Consumer Duty is now upon us, and advisers need to ensure good outcomes for their vulnerable customers. If you’re struggling, or if you know that you need to bring in additional expertise, don’t delay.