‘Treating Customers Fairly’ (TCF) is the buzz word of the industry right now, as the Financial Services Authority’s (FSA) deadline for implementing the principle into financial firms looms large over the mortgage market.
As 31 March approaches, much is being said about who is or isn’t complying with TCF and what this could mean for the sector, and lenders are certainly coming in for their fair share of negative TCF press.
Many questions to answer
Be it bank charges – the legality of which is currently being discussed in the courts – or service practices, lenders are having to answer many questions relating to TCF.
Certainly, Brian Murphy, head of lending at the Mortgage Advice Bureau, believes that one area lenders are flouting TCF rules is in failing to pass on cuts in the Bank Base Rate quickly or in full to their customers, while an increase in interest rates is inevitably passed on immediately and in full.
Murphy states: “The letter of the law regarding mortgage rate changes following Base Rate directions appears less than consistent to borrowers.
“Over the past five Base Rate hikes lenders have made increases to their standard variable rates (SVR) almost immediately. However, with a decrease they feel justified in staggering any changes – a practice which surely flies in the face of TCF.”
However, Louise Cuming, head of mortgages at moneysupermarket.com, explains that the situation is more complex than might be initially apparent and Murphy’s statement oversimplifies the matter.
She says: “Lenders are saying, and it’s completely fact, that they do not get all their funding from the Bank of England, so the rates for borrowers are not funded by the Bank.
"Lenders get their funding from securitisation, LIBOR rates at differing terms, or retail funds. There is a whole mix raising money, so conceivably customers are not paying Bank Base Rate.
“The way a mortgage product is costed is hugely complex and what is becoming more apparent is that the decisions of the Monetary Policy Committee (MPC) are becoming more divorced from the mortgage market.
"This must be very worrying for the government, because it has been able to control the housing market through the MPC.”
Currently constrained
Sarah Robson, press officer at the Council of Mortgage Lenders, also rebuts the notion that lenders are not complying with TCF and says: “TCF is not that prescriptive and the FSA has never been a rate setting regulator; in fact it recognises that rate setting is a commercial decision, not a regulatory one.
“The credit crunch is affecting the amount and cost of funding available to lenders. In this complex environment it is incorrect to assume that a Base Rate reduction will – or should – automatically result in a cut in SVRs or discounted rates.
"Tracker rates will automatically change if they track the bank rate, while fixed rates are determined by the market cost of fixed rate funding rather than by the bank rate.
"Lenders do treat customers fairly, but they are currently constrained by funding problems.”
Passing it on regardless
Nevertheless, Cuming points out that, while lenders are not duty bound to pass on rate cuts, the Base Rate really only relates to SVRs – where lenders make most of their money.
She believes, that being the case, that lenders should be able to afford to pass on the whole of the rate cut to customers, regardless of complex costings.
She adds: “I wouldn’t necessarily apply TCF to how products are costed, because how you decide to cost a product is to do with profit and loss and less to do with TCF.
To me, costing implications and how costings are defined shouldn’t come into the TCF regime, but whether it is a lender you should support or not. If lenders choose to make more profit than ever on SVR, that shouldn’t be accepted and should be pointed out as standing outside good practice.”
In the current difficult market, attracting wary consumers is going to be tough, so lenders must reflect on the fine balancing act of profit and keeping customers happy.
Likewise, brokers must keep their eye firmly on which of their clients are up for remortgaging and, therefore, more likely to fall into the SVR trap.
With such intent focus on TCF, everyone should be feeling the pressure to check that their business practises are up to scratch and that the message they are sending to clients through their service and pricing is one they want heard.
