It might feel a little odd to be talking about known harms when discussing the mortgage market.
We operate within one of the most heavily regulated parts of the entire industry so surely the gremlins have been weeded out by now. But with Consumer Duty asking new questions, it would be arrogant of us to assume nothing needs to change.
Here are my top three areas for review:
NOTE: The need for holistic advice in the later life market and whether Duty creates an obligation to discuss protection don’t feature, but both will also need to be considered.
- Affordability
For younger borrowers, affordability going beyond retirement ages when it’s clear – via the data captured – that there’s no pension saving being made. Is a mortgage at the expense of future retirement income a foreseeable harm? If it’s not discussed and documented, then maybe.
For older borrowers, terms extending beyond retirement age without retirement income being verified and retirement ages being set without viability being assessed. This one is particularly relevant given recent communications on cost of living changes to mortgage terms and repayment methods.
In the equity release market, the issue of affordability assessment during advice processes will surely need to be addressed. Completing on a compounding product without documenting affordability and properly discussing the benefits of making payments screams of a risk of foreseeable harm.
In my view, advisers are going to have to evidence that there’s no ability to pay (via an affordability assessment) hold that on file and review it periodically.
- Product and early redemption charge (ERC) end dates
Borrowers who unintentionally drop onto standard variable rates at the end of a product period. Lenders will need to work more collaboratively with advisers to ensure product maturities are being contacted and borrowers avoid expensive oversights – borrower apathy is now a lender problem, not a commercial upside.
Likewise for equity release. The lender/adviser relationship at the end of an ERC period will have to improve. Those processes are far less mature than in the standard market so what sort of tools are required, how firms decide who has what responsibility, and for what, at ERC end point, and what the new data requirements are between lender and adviser will all need to be discussed and agreed.
- The end of gilt-linked ERCs?
The complexity of explaining how the ERC is calculated on a gilt-linked product means these will always struggle to meet a customer understanding metric – particularly for vulnerable clients. On back books, they then become an unfair barrier to exit for the same reason.
If advisers choose to recommend gilt-linked products then the suitability report is going to have to be watertight to avoid future claims of detriment (and the interests of the claims management companies), especially if lenders don’t get their house in order in terms of producing real-time redemption figures. This feels a big challenge for the back book deadline in 2024.
