Speaking at the British Specialist Lending Senate, Robert Sinclair, chairman of the Association of Mortgage Intermediaries said that upcoming consumer duty was a “fundamental sea change from treating customers fairly”.
The Financial Conduct Authority (FCA) launched a consultation into a new consumer duty at the end of last year, saying at the time that it had seen multiple examples of firms presenting information that exploited the behavioural biases of their customers, sold products or services that were not appropriate, or poor customer support.
He explained that it was about “being able to evidence that the customer got what they expected”.
“How do you evidence that you’ve had that dialogue with the customer to prove that? That they are getting the right product for their needs is what sits at the heart of this and delivering that expectation is a very, very difficult contract to meet,” Sinclair added.
He noted that if companies had to prove when they market and design a product that the receiving customers “actually got the right thing”, it could be “really complicated”.
Sinclair continued that this change could be “much more significant” for the specialist lending market as it potentially had a higher cohort of people who could potentially be deemed as vulnerable.
He said evidencing and measuring vulnerability would be very challenging, adding that the vulnerability assessment will have to become “more tangible”.
Sinclair said key four outcomes of consumer duty were effective communication, assessing products and services, price and value.
He said the crucial element for him was around defining service proposition, stating that the way consumer duty is currently drafted means lenders and brokers are responsible for their own service proposition definitions, not each other’s.
Another key element centres around justifying the price set and how this works for different business models.
Sinclair said the crucial thing is whether the work differential enough to justify the fee, and if it is, are you allowed to add it to loan with the lender, which is something the lender may disagree with.
He said the debates around this would occur over the next two years.
He added there were multiple questions around how you demonstrate the customer has understood the product, how the lender feels comfortable that the broker or intermediary has “sold it in the right way”, and where the responsibility lies between the lender and the broker.
Sinclair this could raise questions about whether lenders may want to “limit and close off their distribution” as they want “assurance that those distributors really understand the product”.
“It becomes a really interesting problem about how we do this in this marketplace, particularly in the specialist marketplace. You have master brokers, instructors, and packagers that are specialists in space and therefore it works well. Is that the world we will have to model more on?”
He added that there were also questions around how feasible the 12-month implementation timeline would be and how the Financial Ombudsman would interpret it.
“They don’t have to think about what the rules are, as in the rules say we’re allowed to do this, so I’ll judge what’s fair and reasonable. That is not a structure that is sustainable in the long term with PII (professional insurance indemnity) cover in the shape it’s in at the moment,” he said.
Appointed representative regime in FCA sights
Sinclair said the regulator decided the current AR regime is “fractured and broken” due to actions in other sectors.
The FCA launched a consultation into the AR regime to address a “wide range of harm” caused to consumers. This includes inadequate due diligence in appointing an AR, as well as insufficient oversight and control post-appointment.
He continued that draft definition for upcoming AR changes centred on the regulatory hosting definition, which allows businesses to carry out regulatory activities without directly being FCA approved.
Sinclair said using this definition could force networks to have something in-house around advice so they can evidence they are doing some of the advice or will there be mortgage market exemptions.
“Not many networks want to start doing the advice themselves because the model is built on the fact that they provide the infrastructure and tools,” he said.
He added that another concern from the regulator was that some ARs are “too big”, with one suggestion being that AR firms over a certain turnover firms may have to become directly appointed.
Sinclair pointed out this could be very damaging if certain ARs with significant income are forced to walk away from networks.
“We have business agreements that keep them tied in. But we have a regulatory contract that says you’ve got to leave. It doesn’t work in any understanding that I have of how regulation should work in the commercial world,” he said.
Sinclair continued that the concept of the self-employed could also change, as the regulator was “saying explicitly” that the principal firm should take total accountability on ARs “for the work they do under your licence, and for anything they do that you should not be allowing them to do”.