Oct 18 – Product risks and advice

For the last four years UK authorities have been working jointly with industry to pursue an alternative and more robust interest rate benchmark to LIBOR.  Although it could be said to have a number of weaknesses, its manipulation resulting in £757m of fines was the final nail in its coffin, leading to it needing proper replacement.  Last month we saw the next step in the move away from LIBOR with financial regulators writing to major banks and insurers asking how they are preparing for its withdrawal in 2021.

Despite the scandals there are still some lenders whose products reference LIBOR.  Firms should be mindful of these changes when recommending a product that tracks or reverts to LIBOR.  Understanding lenders’ transition plans, particularly which rate they will be replacing LIBOR with and any contractual variations proposed is key as well as considering any risks to the consumer.

This isn’t the only rate risk that firms should be accounting for when advising on a product.  Are consumers made aware that some products track the lender’s own ‘base rate’ rather than the Bank of England base rate?  And where the lender’s rate does not guarantee to follow the Bank of England rate, are the implications explained?

There is also a real risk that the mortgage will be securitised away which increases the likelihood of trapped borrowers. The FCA has been looking at this as part of the mortgages market study, in particular how consumers of inactive lenders and firms outside the regulatory perimeter can switch to a new rate.

Whilst price, criteria and service standards are typically seen as the key factors in any adviser’s recommendation, firms should be aware of these potential product risks as part of their ongoing due diligence of lenders, incorporating this into the advice process where necessary.  Brokers could be held liable under their regulatory responsibility to consider financial strength when advising on selection of a provider.  Surprisingly, it might not be all about the cheapest price!

Aileen Lees
Senior Policy Adviser

October 2018