"This is a sector which has always aimed to deliver good outcomes, but Consumer Duty has ensured that best practice and good behaviour is formalised and measured."
Make no mistake: the second charge industry has taken Consumer Duty very seriously.
This is a sector which has always aimed to deliver good outcomes, but Consumer Duty has ensured that best practice and good behaviour is formalised and measured. It has made lenders think carefully about how their products are designed, who their target audience is, and the benefits each product offers to consumers.
This positive change has not only enhanced the customer experience but has also elevated the industry by ensuring that only high-quality products are available. I believe that the industry has embraced this transition with the intended spirit.
Challenges faced
Despite the benefits, the implementation of Consumer Duty has had some challenges.
Consumer Duty has made customer benefits and costs clearer and more transparent, so determining target markets, each with specific needs including vulnerability considerations, has been crucial in ensuring the right customers get the right outcomes.
It's also prudent to point out that there are scenarios where a second charge mortgage might not be the best option, such as borrowing small amounts over a short term with high transaction costs. The implementation of Consumer Duty has served to clarify where such products may be inappropriate, enhancing transparency and providing consumers with greater levels of protection from unsuitable financial decisions.
Another challenge has been gaining a holistic understanding of how the costs of second charge mortgages, including fees, compare with the benefits that consumers gain from the product. Consumer Duty has ensured market participants set pricing strategies that reflect the benefit to the customer, the cost of delivering the product, and the cost of alternative solutions. Fair value assessments, ensuring that products provide consistent value to borrowers, are now visible, and this transparency was needed to ensure best practice and avoid any ambiguity in the sector.
Ensuring the best outcomes for borrowers
Consumer Duty requires a holistic approach to customer needs. The cheapest product isn't always the best option; value for money, speed, convenience, certainty of outcome, and flexible features must all be considered. Some customers might prioritise quick access to funds or the ability to overpay without penalties, even if it means paying a slightly higher rate of interest or a larger fee.
As a new lender in this sector, we have taken steps to ensure borrowers receive the best possible outcomes by leveraging technology and making the process straightforward for customers. Additionally, we engage directly with customers before completion to confirm their understanding of the product and their willingness to proceed. This direct interaction helps ensure that the mortgage is in the customer's best interests and that they fully understand the nature of the financial transaction they are undertaking. Some have challenged the need for this stage of the process, claiming it adds time and possible delay while lenders get hold of customers. But we say it’s vital for us as lenders to ensure the customer is engaged and the product is right for them. Yes, there are many ways technology can help speed up this part of the process, but it remains an important stage.
The modern day second charge market
Today’s second charge market is dynamic and technology-driven, making it simpler and faster to offer customers second charge options. These products can save customers substantial amounts of money or help them avoid early repayment charges on their existing mortgage.
There may still be some outdated views regarding the profile and perception of the second charge market, but I see an industry, lenders and brokers alike, that is very focused on delivering value and fairness. Consumer Duty applies equally to first and second charge mortgage products, so the two sectors operate under a unified standard of best practice.
As the market continues to evolve, brokers must stay informed and open-minded to provide the best advice and outcomes for their customers. In many cases, leveraging the equity in a customer's property through a second charge mortgage can provide the best financial solution, whether for speed, flexibility, or convenience, so the product needs to be given due consideration for people looking to borrow money or restructure their finances. So, I’d challenge any broker that hasn’t recently considered a second charge mortgage for a customer to reflect on whether they are really delivering best advice.
