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Dear CEO | Release Date: 11th March 2022

To read a shorter summary of this Dear CEO letter, click here.

To access the original FCA document, click here.

Long Summary

The Financial Conduct Authority (FCA) has issued a comprehensive “Dear CEO Letter” to Retail Mortgage Lenders (RMLs), addressing the challenges and strategic responses following the significant disruptions caused by the COVID-19 pandemic. This letter outlines the FCA’s adaptative and assertive strategies to effectively manage the rapidly evolving financial landscape, focusing on innovation, digitalisation, and tailored consumer needs.

Purpose of the Letter

The letter serves to inform and guide CEOs of firms grouped under the RMLs portfolio, which involves firms offering regulated mortgage contracts and taking deposits. It emphasises the need for these firms to reflect on their business practices in light of the ongoing and post-pandemic regulatory environment. The letter recaps the coordinated efforts during the pandemic and sets the stage for continued collaboration and compliance, highlighting the dual focus on current challenges and future risks.

Key Risks and Regulatory Expectations

Supporting Customers in Financial Difficulty

The FCA highlights the cessation of temporary support measures like furlough schemes and the Universal Credit uplift, noting the potential increase in financial difficulties among consumers. The Tailored Support Guidance (TSG) is recommended as a framework for RMLs to provide both short and long-term support to these customers. Key outcomes include appropriate forbearance, consideration of customers’ broader financial situations, and effective responses to vulnerability.

Managing Maturing Interest-Only Mortgages

With approximately 1.42 million interest-only and part-capital repayment mortgage accounts in the UK, the FCA stresses the importance of strategic communication to ensure that customers are prepared for repayment, particularly as many mortgages are set to mature by 2032.

Responsible Lending

The FCA continues to emphasise the importance of responsible lending, especially in light of rising interest rates and inflation impacting consumers’ disposable income. RMLs are urged to maintain stringent affordability assessments and to consider the financial sustainability of customers, particularly in the later stages of life.

LIBOR Transition

Post-2021, the transition from LIBOR to fair replacement rates remains a critical area, with firms expected to have moved away from LIBOR-linked contracts. The FCA will monitor compliance and the ongoing transition efforts, especially concerning synthetic LIBOR, which is not intended to be a permanent solution.

Treating Vulnerable Customers Fairly

The FCA calls for a deep integration of fair treatment practices for vulnerable customers within firms’ business models, cultures, policies, and processes. This includes the ability to demonstrate proactive management of the potential harms to these customers.

Diversity & Inclusion

The FCA highlights the importance of diversity and inclusion in understanding and responding to customer needs. A diverse workforce is seen as essential to fostering a responsive and flexible service environment, which is particularly significant in the context of financial services.

Updates and Strategic Focus Areas

Mortgage Prisoners

The FCA addresses the plight of ‘mortgage prisoners’ and outlines efforts to provide data to the government to assist in finding solutions for these borrowers. RMLs are encouraged to consider flexible lending criteria that might accommodate these individuals.

Environmental, Social, and Governance (ESG) Strategy

Acknowledging the critical role of financial services in the transition to a low-carbon and sustainable future, the FCA expects RMLs to actively participate in this shift. This includes the adoption of practices that support environmental goals, such as offering green mortgages and integrating broader ESG considerations into their business operations.

Brexit and Transitional Powers

With the end of the Temporary Transitional Powers (TTP), the FCA expects full compliance with the on-shored regulatory obligations by March 2022, reflecting adjustments made to EU legislation to fit the UK context.

FCA Regulatory Strategy

The FCA’s approach, detailed in its 2019 “Approach to Supervision,” continues to inform its oversight of approximately 50,000 firms. This includes the forthcoming introduction of a ‘Consumer Duty’ which aims to elevate the standards of care that firms provide to consumers. The FCA is actively engaging in consultations to refine this duty and embed it within regulatory expectations.

Conclusion and Actions for CEOs

Reflect and Act

CEOs are urged to reflect on the issues raised within the letter and to evaluate how their firms operate against the backdrop of these regulatory expectations. They are expected to ensure their activities align with FCA principles and to engage in proactive measures to address any deficiencies.

Ongoing Communication and Supervision

Firms are encouraged to maintain open lines of communication with the FCA, using designated contacts for regular interactions and updates. The next update from the FCA, expected in 2024, will provide further insights into the evolving risks and supervisory plans.

In conclusion, this letter serves as both a directive and a resource for RMLs to navigate the post-pandemic regulatory landscape, with a strong emphasis on consumer protection, responsible lending, and the integration of sustainability into financial practices.

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