What impact will Consumer Duty have on the secured loan market?

The UK financial services industry is on the brink of a significant transformation with the introduction of Consumer Duty.

The Financial initiative, which comes into force for existing and new products from July 31, and for closed products from July 31 next year, intends to revolutionise the secured loan market, focusing on fairness and value in a customer-centric landscape.

“This game-changer prioritises favourable outcomes for retail customers, emphasising fairness, value, and product suitability,” said Paul McGerrigan (pictured), chief executive of Loan.co.uk.

The value chain and introducer companies

McGerrigan said introducer companies were crucial in connecting clients with appropriate products and services.

“With the implementation of Consumer Duty, these firms are now obligated to prioritise their clients’ best interests when recommending other companies rather than seeking higher commissions,” McGerrigan said.

He added that this shift would drive greater transparency and ethical practices within the value chain.

Redefining secured loan fees and fair value

McGerrigan said there has been a lot of conversation around the fees that were charged in the secured loan, second charge market, for the last seven years since the FCA took over processes.

Historically, secured loan fees had varied significantly, McGerrigan said, with some brokers charging rates as high as 10% or 12%.

With the introduction of Consumer Duty, these exorbitant fees could become a thing of the past, as the FCA mandated companies to prioritise clients’ financial well-being.

“Consequently, firms must re-evaluate their fee structures, ensuring fair value for clients and offering products that align with their financial goals,” he said.

Part of the challenge the industry had, McGerrigan believed, was that a lot of the fees charged were too high and people have not worked to bring these down.

“Consumer Duty coming in is an extension of treating customers fairly; it is an attempt to hold a mirror up to people and ask are you acting in good faith of your customers?” McGerrigan said.

He believed the implementation of Consumer Duty was going to shine a light on the introducer and the partner, and likely result in providing fair value to the client.

Transforming the introducer-broker relationship

McGerrigan said implementing Consumer Duty would also prompt companies to reconsider current relationships within the value chain, seeking more favourable options for customers.

“Introducer firms must carefully consider their recommendations, ensuring that they act in their clients' best interests rather than seeking higher commissions,” he added.

This process, McGerrigan said, might involve negotiating with current providers to lower their fees or exploring alternative providers that offered better value.

“Companies must proactively ensure their value chain relationships align with the principles of fairness and value, to maintain compliance with the Consumer Duty initiative,” McGerrigan said.

The role of technology and data

McGerrigan believed that technology and data would play a pivotal role in enabling firms to deliver better outcomes and reduce costs for their clients in this new landscape.

By leveraging data analytics, artificial intelligence, and other cutting-edge technologies, companies could better understand their clients’ needs, preferences, and financial goals, McGerrigan said.

“This information can then be used to develop tailored products and services, further enhancing the customer experience,” he suggested.

Consumer Duty impacting advisers

McGerrigan said that since Consumer Duty was an extension of treating customers fairly, unless a company had had its head in the sand regarding good customer service, it should not see a significant difference.

“Advisers should be trained and monitored to ensure they have the correct knowledge to provide the best outcomes to their clients,” he commented.

A minimum level of education, McGerrigan said, should be a requirement for advisers so they were capable of offering a solution to customers no matter what the circumstances.

“Clients have come through at a period whereby, with COVID and Brexit and now inflation, there have been more missed payments,” he said.

As such, McGerrigan said people’s income and credit reports were more complex than they would have been three years ago.

“I think an enhanced knowledge of all potential options for clients, given the economic outlook, is even more important with Consumer Duty coming in for advisers to truly say they have acted in the best interest of their client,” he said.

Overview

By championing the principles of fairness, value, and customer-centricity, McGerrigan said Consumer Duty would help drive positive change in the industry, leading to a more transparent, ethical, and client-focused landscape.

Companies embracing this new approach and prioritising their clients’ needs, he believed, would ensure they not only complied with the regulation, but also strengthened relationships with customers and enhanced their reputation within the industry.

“As the financial services sector evolves, firms prioritising customer satisfaction and value will be best positioned to thrive in this new era of consumer-focused financial services,” McGerrigan said.

What impact are you expecting Consumer Duty to have on the market and advisers? Let us know in the comment section below.