The FCA published its most recent Dear CEO letter to mortgage intermediaries on 30 January 2025 outlining the regulator’s priorities and strategy for supervision over the forthcoming two years. The letter has set out key areas that will be central when conducting thematic reviews and stimulating enhancements to ensure good consumer outcomes. It is clear that Consumer Duty will remain a key focus area for the FCA, with each of the focus areas outlined within the Dear CEO letter having an overt counterpoint with each of the four Consumer Duty outcomes.
It is vital that Senior Managers of mortgage intermediaries take note of the letter and ensure that appropriate action is taken to embed the regulator’s expectation of firm’s compliance governance and oversight procedures.
In relation to first charge mortgages, the FCA has noted that firms should be doing more to ensure that customers consider their options by discussing their priorities and trade-offs between different product options. The advisory process should therefore be enhanced to not only consider lenders appetite but also the customer’s personal and financial circumstances.
In relation to second charge mortgages, the FCA states that it will be taking action where firms fail to consider whether a secured loan is appropriate for customers in financial difficulty. Specifically, the regulator’s concern focuses on advisors recommending products without expressly requiring the customer to consider the costs or the potential harm associated with increasing the repayment period of their mortgages and securing the additional debt. Further, in relation to lifetime mortgages, the FCA has specifically called on the need to ensure that advisors are adequately equipped with the necessary skills and tools to deal with complex financial situations and identify and manage characteristics of vulnerability. Firms should therefore ensure that training structures remain appropriate considering product alterations and changes to the needs of target market and the development of consumer risks.
The FCA has highlighted its intention to focus on the management and control of conflicts of interest in order to avoid a culture of high-pressure selling in the market. This includes where firms have set sales targets that encourage advisors to sell products that attract higher rates of commission or fees which can result in misleading advice and product bias. Firms should therefore review remuneration structures to identify potential conflicts of interest. Where necessary, this should include enhancing mitigations to avoid sales practices that do not align with the promotion of good customer outcomes and the avoidance of foreseeable harm.
The FCA highlights that when considering fair value, firms should ensure that the total cost to the consumer is considered, including the benefits and limitations of the product. Firms should provide a cost analysis considering contrasting outcomes for different groups of customers, particularly vulnerable persons. Fair value assessments must therefore be appropriately nuanced and bare reference to specific target demographics as well as sub-groups within the target market, for example those with vulnerabilities.
The FCA makes clear that firms need to enhance prominence of risks associated with secured lending alongside the promoted benefits of the product to promote informed decision making. The FCA sees this as a necessary central part of firms’ strategies to avoid exploitation of behavioural biases and to highlight increased risk where products carry increased complexity. Financial promotions that have been issued should therefore be reviewed periodically to ensure that disclosure of risks remain accurate where macroeconomic changes have altered the nature of the product or where changes to the target market have altered the risk profile of the product.
The FCA reminds principal firms that where Appointed Representatives (“ARs”) are not actively undertaking regulated activity they should consider whether it is appropriate to remove the AR, in order to avoid the regulatory status being used to promote non-regulated activity. The FCA also reminds principal firms that conflicts in ARs should be monitored and managed on an ongoing basis. Principal firms must therefore ensure an appropriate level of ongoing oversight of its ARs to manage risks and any conflicts that the AR may have, including any conflicts between the AR and the principal firm.
The Dear CEO letter reiterates that registering a trading name is not equivalent to authorisation and that regulated activity undertaken without appropriate regulation or exemption, it is likely that the activity is being undertaken unlawfully. Further, the regulator will continue to act where it becomes aware of homebuyers being pressured to use in-house mortgage brokers and that persons should take steps to ensure that it mitigates potential conflicts of interest and that partner firms, such as estate agents, do not operate conditional sale policies.
Consumer Duty clearly remains central to the FCA’s strategy to supervise the mortgage intermediary sector, with the areas of focus detailed above having a clear bearing towards the outcomes and cross cutting rules. Firms must ensure that the areas detailed above feature prominently within action plans that inform the ongoing governance of firm’s Consumer Duty framework. Specifically, Senior Managers should take particular care to ensure that relevant management information can be obtained to inform decisions on how to implement good outcomes in these areas.
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