Consumer Duty and fair value: where are you now?
With falling energy prices, economists are forecasting that the UK’s inflation rate will
Whilst this should be a welcome relief to UK consumers, many will still be feeling the pinch from higher prices, particularly from the effect of food price inflation (17.3% in June 2023) and mortgage interest rates; fixed mortgage rates are between 6 and 7%, their highest in 15 years.
The implication for mortgage borrowers is predictable. With the fall in net disposable income, discretionary spend will be squeezed, and for some, mortgage payments on current terms cannot be met.
In March 2023, the FCA issued its Guidance Note, FG23/2: “Guidance for firms supporting existing mortgage borrowers impacted by rising living costs.” This directed lenders to offer customers experiencing, or expected to experience, financial difficulties arising from the cost-of-living crisis “protected forbearance”. The guidance suggests that lenders should consider varying the terms of customers’ mortgages to enable them to “avoid, reduce or manage” any payment shortfall that would otherwise arise. The measures could include:
Notwithstanding these requirements, we anticipate that the repayment challenges for some mortgage holders will not be temporary. An increase in enforcement action is expected. Indeed, in some scenarios, allowing arrears to accumulate and grow will only exasperate customers’ debt position.
As inflation eats into customer’s new disposable income, some may see the consolidation of debt onto the secured mortgage debt as a natural solution. Interest on unsecured loans, particularly credit card debt, can be significant and far higher than mortgage repayment interest and can offer the comfort of immediate relief on net disposable income.
However, there are dangers with such debt consolidation:
There may be a temptation for a mortgage adviser to simply meet a client’s desire and facilitate an increase in net disposable income through debt consolidation. It’s imperative that advisers give customers a comprehensive comparison of potential costs so that they fully understand the true costs of the status quo versus consolidation. In addition, the mortgage adviser must remember that their role is to advise and to ensure a good outcome, even if that means their recommendation going against the client’s desired course of action.
TCC can provide independent review and challenge through:
Learn more about how TCC’s experts are helping financial services firms achieve regulatory compliance in these economically challenging times. Get in touch today.