The regulator said the new set of rules would “fundamentally improve how firms serve consumers. It will set higher and clearer standards of consumer protection across financial services and require firms to put their customers’ needs first.”
One goal of the guidelines is for lenders and brokers to make sure that any communication is clearly understood by the customer and that the services offered actually meet the needs of clients while also offering fair value. The rules also call for providing customer support whenever it’s needed.
The FCA said it would be able to quickly identify practices that didn’t deliver the right outcomes for consumers and take action before the problematic systems became the norm.
Enforcement tools
In terms of any penalties for brokers or lenders failing to follow the rules, the FCA said its existing enforcement tools would also apply in such cases.
Sheldon Mills, executive director of consumers and competition, said: “The current economic climate means it’s more important than ever that consumers are able to make good financial decisions. The financial services industry needs to give people the support and information they need and put their customers first.
“The Consumer Duty will lead to a major shift in financial services and will promote competition and growth based on high standards. As the duty raises the bar for the firms we regulate, it will prevent some harm from happening and will make it easier for us to act quickly and assertively when we spot new problems.”
‘End rip-off charges’
Firms will be required to “end rip-off charges and fees” and make it as easy for people to switch or cancel products as it was to take them out in the first place, the regulator said. Companies will be required to give effective and accessible customer support, “not making people wait so long for an answer that they give up,” the FCA said.
Firms will also need to provide timely and clear information so consumers can make good financial decisions, rather than burying key information in a lengthy terms and conditions section.
The FCA is giving lenders until July 2023 to implement the new rules for all new and existing products and services they are currently selling. Another 12 months will be given to meet the rules on older, closed book products no longer being sold.
The regulator said mortgage lenders, among others, “must be able to demonstrate that their product and any associated charges provide fair value for the target market. This includes making consideration of the overall charges that the customer might pay, including any that might be levied as a result of the firm’s distribution strategy. Firms should factor such average intermediary fees in their value assessments and must also ensure that distributors have the necessary information to carry out their own assessment of value.”
Fair value on fees
For mortgage brokers, the FCA said “The firm must obtain information from the manufacturer such as a high-level summary of the benefits to the target market, information on overall prices or fees and confirmation that the manufacturer considers that total benefits are proportionate to the total costs.” It said the brokerage firm must also “ensure that its own fees and charges are fair value and that payment of these does not result in the product or service ceasing to be fair value overall.”
The regulator also said it had found that some lenders’ practices “have the potential to lead to significant harm to borrowers in financial difficulty. This happens if the ongoing payments a borrower makes are less than the accruing interest, causing the outstanding balance to escalate.”
The issue gets worse, it said, “where firms add unpaid fees or charges to the balance which also accrue interest. Where the customer fails to get back on track for a significant period, they may ultimately lose their home if they are unable to pay the amount owed at the end of the mortgage.”
When rates are higher
Such issues intensify, the FCA added, when interest rates are higher, “for example in parts of the second charge market, and where fees and charges are accounted for separately.”
The regulator said firms must consider “whether their pricing practices result in poor value for any cohort of customers in their target market, including any that may be at a higher risk of further charges or likely to be subject to forbearance. As well as considering the fairness of interest rates charged, firms will need to be able to demonstrate that the total price paid for the product, including any fees and charges that they (or others) may apply, represents fair value.
On the positive side, the regulator said the rules should “lead to more flexibility for firms to compete and innovate in the interests of consumers.”
