FCA Call for Inputs Submission
Written on 5 November 2024 by
We note that the Call for Inputs specifically highlights a desire to simplify the retail conduct rules and “address potential areas of complexity, duplication, confusion, or over-prescription, which create regulatory costs with limited or no consumer benefit.”
We will comment solely on the mortgage market and our principal suggestion is to abolish the requirement to quote an APRC, or any other form of APR.
We recognise that an APR is helpful in comparing the cost of some types of borrowing, such as unsecured loans, where the interest rate is normally fixed for term and any fees are known up front. However, for mortgages, except perhaps for fixed for life mortgages, including Lifetime Mortgages, the APRC is not only not helpful, but positively misleading.
The majority of mortgages have an initial fixed rate for only 2 - 5 years but the average length of mortgages has increased significantly over recent years. The shorter the initial term and the longer the mortgage term the more misleading is the APRC.
One technical consequence of the APRC being misleading is that it renders all ESIS and mortgage offers non-compliant as MCOB requires all communications to be “fair, clear and not misleading”!
The basic problem with the APRC of course is that is makes assumptions which everyone knows will be wrong. If borrowers generally simply reverted to a lender’s SVR for the remainder of the term after an initial deal the APR could be a useful way of highlighting a high revert to rate.
The second APRC required to be quoted in an ESIS and mortgage offer is equally unhelpful and even more difficult to understand. Taking a sample of a few 5 year fixed rate mortgage offers from different lenders the second APRC calculated on the assumption of an increase of 0.75% in the revert to rate is between 2.6% and 3.2% higher the the basic APRC.
In the real world even the small proportion of borrowers who haven’t historically chosen a product transfer or remortgage at the end of their initial deal (or to move home) is likely to be even smaller in a Consumer Duty world, where lenders have a regulatory requirement to deliver good outcomes for retail customers at every stage of the customer journey.
Despite the APRC becoming a mandatory requirement over 8 years ago few mortgage market participants, let alone borrowers, could explain accurately how it is calculated, which unnecessarily complicates the advice process, despite MCOB helpfully providing an equation to calculate the APRC:
Even if one believes APRCs have some value the basis of calculation has other defects in addition to the interest rate assumptions. For example, whilst costs are rightly factored into the calculation cashbacks are ignored, as are refunds of any fees.
In June 2023 an FCA statement said that “we consider that, in general, an APRC calculated on incorrect assumptions is unlikely by itself to deprive borrowers of the ability to make informed choices.”
We completely concur with this wise assessment. The admission from the FCA that an incorrect APRC doesn’t prevent borrowers from making an informed choice is confirmation that the APRC has little or no value.
Advisers often need to explain to clients that although the FCA requires an APRC to be stated it is misleading and can be ignored unless the borrower intends on retaining the same mortgage until maturity. The need for such an explanation does not enhance the FCA’s reputation in consumer eyes!
The APRC was introduced, replacing the APR, as a result of the EU Mortgage Credit Directive. Now we have left the EU and mortgage regulations can be designed to suit just the UK, the APRC should be consigned to regulatory history.
Consumers will benefit by no longer risking being misled by an irrelevant figure; advisers will benefit by being able to focus their advice on what really matters, depending on individual clients’ requirements and preferences; and lenders will benefit by no longer needing to produce meaningless figures.
As a very substantial majority of borrowers choose another deal when their initial mortgage deal ends, and nearly all have the option to, the FCA could mandate an alternative to the APRC based on the rate and term of the initial rate (assuming no rate changes if a tracker rate), plus known fees and factoring in the benefit of any cashbacks and/or fee refunds.
Category:Ray Boulger
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