This requires firms to continually review whether their products offer fair value to customers in respect of their financial objectives.  

 

Compliance

Questions remain on the extent of responsibility for compliance with the Duty in capital markets structures, given that legal and beneficial ownership, as well as servicing, often sit with different parties when it comes to closed books. Whilst the Duty only applies to regulated firms, the final Financial Conduct Authority (FCA) guidance makes clear that potentially unregulated beneficial title holders still have a role to play in assisting the regulated servicer in that role. 

The guidance states that the Duty will only apply ‘proportionately’ to the regulated servicer, given they have no economic interest in the portfolio beyond servicing fees.  

As such, servicers will require input from parties with an economic interest in the portfolio when it comes to requirements to assess product value or to assist mortgage prisoners.  

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Mortgage prisoners

The requirement to demonstrate fair value may be challenging when it comes to purchased and securitised books containing cohorts of mortgage prisoners, which are defined by the FCA as: “a borrower who is up to date with payments and (i) is unable to switch to a new mortgage deal (with a new lender or with their existing lender) and (ii) could potentially benefit from switching depending on their loan and borrower risk characteristics.”.  

The difficulty with securitised books (in particular) is that the owners of the loan portfolio may have no other products to offer.  

It was widely expected that lenders might argue that rates charged represent “vested rights”, which the Duty cannot affect. However, Sheldon Mills, the FCA’s executive director, consumers and competition, indicated in a speech in February that firms may wish to consider giving up “vested rights” to mitigate foreseeable harm, or else “support their customers through clearer communications on what other deals are available [in the market] and support on how to switch”. 

In any event, it is predicted that there will be a heightened regulatory focus on unfair rates, including on the part the Financial Ombudsmen Service, which the Duty throws into sharper relief, although the Duty will not apply to pre-Duty conduct as such.  

 

How can brokers help?

Following the FCA’s mortgage prisoner review, lenders and servicers have been issuing statements to mortgage prisoners indicating that there may be better deals available elsewhere.  

However, that does not assist customers in deciding whether they would be eligible for a mortgage with another lender, especially where the customer has an impaired credit history. It is likely that the FCA will expect firms to take a much more ‘hands on’ approach to this. It may not be sufficient to point to inaction on the part of the customer in response to such communications (which may be a result of consumer disengagement) and that lenders and servicers will be required to more actively assist customers in moving to an alternative solution that supports their financial objectives and avoids foreseeable harm.  

Brokers occupy a unique position where they have access to multiple lenders’ product data, including access to lenders more willing to assist with mortgage prisoners via the Money Helper initiative. 

Their access to the products which might be available and the lenders willing to help mortgage prisoners makes them uniquely placed to assess the options available from the wider market, in a way the individual lenders or servicers may not be able. 

Communicating with lenders – especially through appointed representative networks and mortgage clubs – now will lead to better outcomes when the Duty comes into effect for closed books in July.  

 

Conclusion

Regardless of the uncertainty around where responsibility lies for compliance with the Duty, brokers and others in the industry must be fully prepared for any potential impact of the incoming regime on their business and services, and take action where necessary ahead of the July deadline to deliver the best outcomes for customers.