FCA Call for Inputs to Refine Retail Conduct Rules
Written on 23 October 2024 by
The FCA is asking for views by 31st October on how to refine its retail conduct rules, without reducing support and protection for consumers. It specifically says it wants to simplify its retail conduct rules and “address potential areas of complexity, duplication, confusion, or over-prescription, which create regulatory costs with limited or no consumer benefit.”
In respect of the mortgage market my principal suggestion would be to abolish the requirement to quote an APRC, or any other form of APR.
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.
One technical consequence of the APRC being misleading is that it renders all ESIS and mortgage offers non-compliant as the FCA 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, including the regulator, 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.
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 I suggest that few mortgage market participants, let alone borrowers, could explain accurately how it is calculated. However, MCOB helpfully provides an equation to calculate the APRC, which for the benefit of any nerds reading this is as follows:
So, it’s good to know that is clear, although I must confess my knowledge of algebra is rather less now than when I left school!
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. Why?
In June 2023 the FCA said in a statement 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.”
I completely concur with this wise assessment by the FCA. 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 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, or any derivative of it, 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 large 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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