FCA sets out key supervision priorities for lifetime mortgage providers
On 24 October 2024, the FCA issued a Dear CEO Letter to providers of lifetime mortgages. The letter sets out some key concerns and areas of focus for supervision of the sector in 2025 but as always with these letters, some of the messages are relevant for firms beyond the target firms. Recipients of the letter are expected to discuss the contents at a Board or senior management level and consider the risks outlined and how the firm can work to mitigate those risks and deliver improved outcomes to customers. Firms should expect follow up work from the FCA, which could include multi-firm surveys as well as supervisory visits to some firms. The FCA will expect firms to be able to explain the action they’ve taken on the back of the letter, so it’s essential for firms to act now.
The letter comes in the context of challenging circumstances, with the rising cost of living, changing regulatory landscape and higher funding costs impacting firms and customers. Firms are responding to these challenges by developing new products, with the aim of being able to offer products to a wider market. The FCA acknowledges the need for firms to be able to adapt to changing markets but it is keen to emphasise the need for products to meet the needs of the intended target market and to provide fair value to customers. It also emphasises the need for firms to pay particular attention to how customers in vulnerable circumstances are treated.
The letter outlines the need for effective culture and controls to underpin evolving business models, with specific need for leadership and people management that delivers healthy, purposeful cultures and staff that act with integrity and in a customer-centric way. It emphasises that governance and oversight arrangements should balance planning and executing major change with safeguarding customer interests. Risk management frameworks should also take account of delivery of good customer outcomes alongside management of prudential and conduct risks.
The FCA has set out the following five key priority areas in its letter.
1. The Consumer Duty
The Consumer Duty is central to the FCA’s strategy and the regulator uses the letter to re-emphasise the need for LMPs to act to deliver good outcomes for retail customers. Chief Executives are expected to personally treat the Duty as a top priority and the Board and senior management of firms should embed it in the culture and purpose of the firm. The letter refers to various other useful publications on this topic and outlines some priorities for LMPs to focus on:
- Embedding the duty in the corporate culture and in all mortgage and credit activities.
- Ensuring that products are appropriately designed for their target market.
- Evidencing the delivery of fair value throughout the product lifecycle and distribution chain. Firms can find more on this in the FCA’s update on good and poor practices.
- Providing support that meets consumer needs and communicating in a way that supports consumer understanding and decision making.
- Information sharing throughout the value or distribution chain to ensure products meet customer needs and objectives.
- Maintaining management information to monitor and evidence the delivery of good customer outcomes and spot poor outcomes promptly.
Firms should be ready to provide the FCA with the report detailing the Board’s annual assessment of the delivery of good customer outcomes and the key MI used in the assessment.
The FCA specifically calls out the need for firms to lend responsibly, taking account of signs of vulnerability and with monitoring of customer outcomes. Particular care is needed for firms with closed products where client records may be incomplete or where customers are less engaged.
2. Financial Resilience
The FCA notes the need to understand interdependencies between risks and how a non-financial risk can impact liquidity, solvency and financial resilience. Particular attention should be paid to the prudential rules in MIPRU and firms should carry out appropriate stress testing to assess financial resilience. Board approved wind down plans must be maintained, including assessing the liquid resources needed to complete an orderly wind down. Some firms may need to take steps to ensure financial resilience, whether changing fee structures, product or service offerings or even market consolidation. In the case of any such changes, care is needed to ensure that the action does not impact the firm’s ability to deliver good outcomes to customers.
The FCA will continue to monitor the financial resilience of firms, prioritising engagement with those firms most at risk of disorderly failure. The FCA expects firms to notify it of any financial concerns of which it would reasonably expect notice.
3. Operational Resilience
The FCA highlights the risk that firms fail to maintain systems, controls, policies and procedures with appropriate governance and oversight to mitigate the risk of operational events and failures. Scenario testing is expected from firms, taking account of the operational risks the firm is exposed to. This should include consideration of concentration risk, supply chain risk and technological risk. Specific consideration should be given to intermediary relationships and their impact on the firm’s ability to manage operational risk.
The FCA will continue to proactively engage with firms on resourcing, technology investment and transformation projects.
4. Financial Crime & Fraud
The FCA acknowledge that the less transactional business model of LMPs brings a lower inherent risk of money laundering and fraud than for some other types of firm. However, the FCA still expects LMPs to take action to manage this risk and specifically references the need for firms to consider the 4 areas of focus highlighted in the its update on Reducing and preventing financial crime | FCA.
The FCA will continue a data-led approach to supervision in this area, enabling it to identify outliers whether further engagement may be needed.
5. Sustainable Finance
The FCA highlights the role LMPs have in the wider effort to transition the economy to a more sustainable footing. Governance and controls need to be in place to ensure that any sustainability claims are fair, clear and not misleading and aligned with the anti-greenwashing rule that came into force in May 2024. The FCA will be paying closer attention to firm’s claims and controls in this area.
Next Steps
The letter notes firm’s obligations to notify the FCA of anything of which they would expect notice, including matters relating to unregulated activities and the activities of other parts of a group of companies. The FCA particularly expects notice of:
- Any areas of non-compliance with the Consumer Duty.
- Any proposed business change that could impact the firm’s risk profile or resources.
- New services or products, ceasing a regulated activity or ancillary activity or the purchase, sale or transfer of legal title to a book of business.
How Square 4 can help
At Square 4, we have deep expertise supporting firms to help them achieve compliance and meet regulatory expectations. Our work on Consumer Duty includes developing and implementing Price and Value Assessments, Governance and Control Frameworks, Outcomes Monitoring, and other conduct-related processes. We’re working with firms on Operational Resilience, mapping relationships and risk, supporting scenario testing and providing input on change projects. We also regularly work with firms on financial crime compliance, helping them to implement and maintain processes and controls that are appropriate in the context of the financial crime risks the business faces. If you need support in any of these areas, just let us know.
