Our conduct regulator, the FCA, communicates with the industry in a variety of ways. Having set out its three year plan and issuing multiple consultations and policy statements to augment its comprehensive rule book, you would be excused for thinking that would be sufficient to set the parameters under which firms would know to operate. However, to supplement this we get guidance, thematic reviews, speeches and decision notices accompanying enforcement activity. All of this is also added to by our friends at the Ombudsman Service who provide another perspective on firm’s consumer focussed behaviours by delivering judgements on performance.
On top of these, FCA supervision provide their unique perspective via Dear CEO letters. These set out trends they are observing which give them cause for concern and are effectively warnings to change activity or pay closer attention to the principles and rules. This is an early warning to those who want to listen indicating where the FCA may be going next, so those who care can avoid falling foul.
In June 2022, the FCA issued two Dear CEO letters. The first of these on the 16th covered actions the FCA wanted firms and lenders, in particular, to take with regard to the “Cost of Living” crisis. The second issued on the 29th was addressed to lifetime mortgage providers setting out the FCA view of current key aspects of harm they see occurring and what remedies they are looking to see applied.
There has been precious little debate on these matters either in meetings or within the trade press. There are clear warnings in these letters that the FCA expects that where consumers are approaching advisers looking for debt consolidation or expressing concern over their ability to cope with the current or projected levels of price inflation, then there has to be robust income and affordability assessment done and consideration given to referrals for debt advice. Even though the debt charities are overrun, this is not an excuse to step past this. The assessment should also not be as simplistic as “it will reduce the amount the consumer is paying”, but has to ensure that the solutions work in the longer term, not creating later foreseeable harm. Two sectors in particular were highlighted at the trade body round table but not specified in the letter – second charge and lifetime. Those sectors need to up their game when they are asked to assist by those who may be in debt distress and potentially vulnerable.
The letter of the 29th covered similar ground but also expressed concern in three areas which we have not had to address for many years. Under the Mortgage Market Review, the Mortgage Credit Directive and the Mortgages Market Study, attention was directed in all three at conflicts of interests, product bias and provider bias, which might be caused by fees or commission. In all three studies these issues were roundly dismissed. However, the FCA has raised concerns over whether the levels of procuration fess in Lifetime mighty be creating conflicts of interest; where there is a direct adviser/provider relationship this might not be being managed effectively; and whether the levels of fess are excessive. Concern is also expressed as to whether compounding interest is properly understood by consumers.
That this is cited should cause all in the sector to wake up and look at what is happening. It is not enough to hide behind progress on product development, flexibility and better interest rates. The FCA clearly has concerns and we can either wait to be told or we can give them nothing to see. For my part, having spent fifteen years protecting the right to earn commission, the benefits of intermediation and the value of advice, we should ensure that we align the residential and lifetime markets. Consumer Duty will be the best lever to ensure all aspects are working in the customers best interests, we are not creating foreseeable harm and that all parties are delivering fair value.
