OpinionMay 9 2023

‘FCA’s new consumer duty will help drive reform in remortgage market’

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‘FCA’s new consumer duty will help drive reform in remortgage market’
‘Meeting new consumer duty communications standards could result in more remortgage business’ (Photo: Luke MacGregor/Bloomberg)
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The Financial Conduct Authority’s new consumer duty aims to raise standards across the financial sector and improve outcomes for consumers.

As of July 31, the new rules will apply to all companies providing financial products or services in the UK, including the £316bn mortgage-lending market. As we approach the key implementation date, mortgage lenders, brokers and law firms alike have a significant opportunity and a collective responsibility to invest in better consumer outcomes.

The new consumer duty has been designed to ensure that companies put the interests of their customers at the heart of their business, based on three main principles: to act in good faith towards retail customers, to avoid causing foreseeable harm to retail customers, and enable and support retail customers to pursue their financial objectives.

If followed, these objectives will prevent harm to customers, improve outcomes and build trust in providers of financial products and services.

What impact will this have on the remortgage market?

While the entire mortgage sector stands to benefit from the new consumer duty, the remortgage market highlights the scale of the challenge given volume trends anticipated this year. UK Finance estimated that around 1.8mn customers who took out a two-year fixed rate mortgage in June 2021, taking advantage of the temporary reduction in stamp duty, will be looking to refinance this year.

Limited options

Due to the cost of living crisis, many borrowers might find remortgaging options more limited, particularly those in lower-income brackets, and will be leaning more heavily on their service providers to lock in cheaper deals quickly.

A combination of more enquiries exacerbated by affordability pressures stands to put significant strain on the sector. A capacity crunch could make it trickier for providers to comply with incoming consumer duty communication requirements.

Brokers and lenders will need to consider how prepared they are to provide customers with more information on products of interest, particularly with the rising interest rate environment impacting the availability of products at short notice. 

The new consumer duty will have a significant impact on the remortgage market by driving reform and increasing competition across the sector

Improvements for customers remortgaging have been on the FCA’s radar for some time, given the regulator’s publicly cited concerns around competition and transparency. Additionally, research from the FCA in 2020 revealed that a significant proportion of customers do not switch to a better mortgage deal when their initial fixed rate comes to an end, even if it could save them money. 

Reasons for lack of movement included limited transparency around pricing and product features, difficulty comparing products across different mortgage lenders, and the way companies communicate with customers to help them make effective, timely and properly informed decisions.

So, meeting new consumer duty communications standards could also result in more remortgage business, while creating better customer outcomes. A win-win scenario. But, companies will need the capacity to do so.

Part of ensuring better outcomes for customers under the new consumer duty principles will therefore mean alleviating the volume pressures that can make it tricky for providers to communicate clearly and effectively with customers. 

Embed processing technology

One way to improve efficiency could be to employ more staff ahead of known influxes. However, difficulty predicting peaks and troughs in service requirements means balancing the capacity to handle high enquiry volumes with being over-staffed in quieter times can be difficult to achieve and make little commercial sense.

A more feasible option for companies to consider would be to embed processing technology that alleviates manual and often time-consuming tasks, freeing up resource for communicating with customers.

The new consumer duty will have a significant impact on the remortgage market by driving reform and increasing competition across the sector. The consumer duty’s emphasis on transparency, suitability, and customer outcomes will lead to more tailored and suitable information for customers, as well as increased competition as customers are better able to compare deals across different lenders, which is vital in the current economic climate.

Companies that are able to demonstrate they are putting the interests of their customers first will gain a competitive advantage as customers increasingly seek out those they can trust to provide them with the best possible outcomes.

Raising the bar across the industry and driving reform is not only in the best interests of customers, but serves to benefit competition and innovation in the sector too.

James Bawa is UK chief executive of Pexa