Consumer Duty and fair value: where are you now?
Mortgage firms should act now to support ‘challenged’ borrowers who may struggle to repay
The number of borrowers on interest-only mortgages is lower than 1 million, consumer research from the FCA has revealed. This is more than half the number reported in 2015, and now stands at 750,000 on interest only and 245,000 on part-interest only. This demonstrates that both borrowers and some firms are acting proactively to address and reduce this industry risk.
However, despite 78% of those surveyed (who are currently on such mortgages) saying they were aware of the need to have a repayment plan in place at the end of their terms, the reality of meeting these final settlements has been reported as less optimistic. Modelling from the regulator suggests in actual terms 46% of these borrowers will experience a shortfall in repaying their outstanding capital.
Now is the time for firms to proactively consider what additional steps they can take to analyse and work with their customers to address this risk against their Conduct and Consumer Duty obligations.
As the FCA encourages those who are affected to speak with their lender as soon as possible to explore their options, it’s clearly an important time for mortgage firms to implement a lasting compliance strategy for interest-only borrowers too. It’s expected most interest-only loans will mature in 2031 and 2032 with a median balance of £140k being owed and the median borrowers age at 56. Taking these factors into account compounds the expectation that some borrowers will still have a sizeable amount to repay in the years before normal retirement age, with some customers having limited options available.
Lenders should also maximise their efforts to contact customers and consider their ‘in good time’ process.
Mortgage firms will be aware that over the past decade, the FCA has issued guidance and rules to ensure the fair treatment of interest-only borrowers.
The FCA has confirmed that ‘With the Consumer Duty now in effect, the FCA will review its existing guidance on the fair treatment of interest-only borrowers to ensure it is in line with the higher standards set by the Duty. Firms should now be considering how they support their borrowers and meet expectations set out by the Duty’.
The time is now for firms to review if they have met their obligations to borrowers under a Consumer Duty lens – particularly focusing on the consumer understanding and products and services outcomes. It’s an important time to get in front of the issue – and make sure borrowers understand the importance of having a capital repayment plan they can meet.
Historically lenders have reacted to customers vulnerability and processes have focused on latter year customer contact. In our opinion lenders should seek to assess via reasonable prediction their future risks and act with appropriate urgency.
That’s where TCC’s experts can help. Our experienced team of ex-regulators and industry practitioners can review your business’s approach and strategy to help those affected interest-only mortgage customers.
We take into account the myriad of risks lenders typically needs to address, including:
Now that the Consumer Duty is a reality for regulated firms, the time is now to get in touch to discuss your firm’s risks, establish your ‘state of health’ and any change requirements.