On Oct. 25, UK FCA issued strategy for lifetime mortgage providers.
FCA wrote to lifetime mortgage providers (LMPs) to set out key priorities for 2025.
For firms providing lifetime mortgages, home reversion, later life lending products.
Follows UK FCA Jun. 2022 sent supervisory strategy letter to providers, see #142141.
External Environment
Recent years have been tumultuous for consumers' financial lives and challenging for firms, cost of living has risen significantly, more pressure on individuals, households.
Also significant regulatory developments e.g. on treatment of borrowers in financial difficulty, customers with vulnerabilities, Consumer Duty, operational resilience.
FCA expects to see higher demand for credit, also wider group of consumers in financial difficulty who will find in harder to pay their debt, some will be in financial difficulty for first time, firms must remain alert to customers' changing situations.
In the lifetime mortgage sector, as a response to challenging conditions, some LMPs are working to develop hybrid products, where consumers service their mortgage interest until a set point (e.g. retirement) and then swap to interest roll-up.
LMPs must give appropriate consideration to design and introduction of new products such as these, to ensure meet needs of intended target market, provide fair value.
FCA is particularly concerned that consumers facing financial stress may be more susceptible to the purchase of unsuitable later life products, firms must meet all FCA standards, give appropriate attention to treatment of vulnerable customers.
The current complex set of challenges puts a premium on LMPs having an effective culture and controls including all staff acting in customer-centric way, strong governance and oversight, risk frameworks for both prudential and conduct risks.
FCA will engage with LMPs on their culture and controls during its work on the five priority areas noted in the letter, and will use a range of tools to achieve this.
Consumer Duty
Duty is cornerstone of strategy to set and test higher standards to 2025 and beyond.
Duty is expected to be a top priority for CEOs personally, should be at heart of firm's strategy and business objectives, the board and senior management should be embedding the interests of retail customers into the culture and purpose of the firm.
Letter lists FCA publications of assistance, having regard to these firms should continue embedding Duty into their culture and full range of mortgage and credit activities.
FCA expects firms to lend responsibly, including by conducting accurate, appropriate affordability assessments where applicable, responsible lending requirements are especially important for later life lending, firms must be aware of signs of vulnerability.
Should ensure poor product design and governance do not lead to consumers buying later life products they do not fully understand and which do not meet their needs.
Must have effective monitoring framework to ensure positive customer outcomes.
Firms should have finished implementation of Duty for closed products and services.
FCA will continue to engage with LMPs on embedding of Duty, actively monitor market to identify poor customer outcomes for closed book borrowers, will act if required.
Financial Resilience
Concerns non-dual regulated firms, these must be aware of interdependencies between risks, which could increase the overall risk profile of the firm, ability to manage these risks can have a material effect on consumer protection and on market integrity.
LMP firms must ensure they have adequate financial resources, proactively monitor prudential position, ensure meet Threshold Conditions, notify FCA asap of any issues.
Keep stress assumptions up to date, and maintain adequate wind-down plans.
Should take care to consider customer outcomes in taking steps to stay financially sustainable, e.g. cost cutting or looking to increase fees, consider consumer outcomes.
FCA will continue regulatory analysis of firms' data, business models, to identify those with outlier prudential positions, prioritize those with greater risk of consumer harm.
Operational Resilience
FCA expects LMPs to have adequate systems and controls, processes and policies, appropriate governance and oversight to mitigate risk of consumer distress and loss.
Should be seeing increasing sophistication and maturity in firm's testing of resilience, and refinement of action plans for remediating weaknesses, remaining in tolerance.
Where firms rely on intermediaries should have clear policies and be able to evidence their use, in relation to the due diligence carried out at the outset of a relationship.
Due diligence should be reviewed on an ongoing basis to ensure risks minimized.
FCA will engage proactively with firms on their resourcing and appetite to invest in technology, reminds of obligations to notify FCA of relevant issues and events.
Financial Crime and Fraud
Though risk of money laundering or fraud against customers inherently lower than for retail banks, LMPs still have significant responsibilities in this space and role to play.
Should pay close attention to outputs of work with banks in recent years, noted in letter, and evolve their own systems and controls in response to evolving crime tactics.
Sustainable Finance
As LMPs develop sustainable finance offerings, should take care to have appropriate governance and controls in place, ensure sustainability-related claims made about products and services are clear, fair and not misleading, allowing informed decisions.
Where firms publish climate transition plans, should be able to show how they are meeting their commitments, with clear communications, and clarify any limitations.
Next Steps
FCA expects CEO and board to discuss the letter, consider the business in light of the risks included and review their firm's approach to mitigating these and driving improved outcomes, including prompt remediation of any issues that are identified.
Firms should be prepared to show and explain to FCA how they are taking reasonable steps in this respect, FCA expects firms to be open and honest, update on any issues.
Notes the particular importance of FCA being notified of: any product, service, or customer journey that is significantly non-compliant with the Consumer Duty.
Any proposed business expansion, change or restructuring which could have a significant impact on a firm's risk profile or resources; and any provision of a new type of product or service or the proposed cessation of regulatory or ancillary activity.
In supervision, FCA will continue to consider carefully whether those holding relevant senior management functions have carried out their responsibilities appropriately.