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Dear Board of Directors | Release Date: 10th August 2021

To read a shorter summary of this Dear Board of Directors, click here.

To access the original FCA document, click here.

Long Summary

This document outlines the Financial Conduct Authority’s (FCA) supervisory strategy and expectations from firms that outsource their mortgage administration to Third Party Administrators (TPAs). This guidance is particularly pertinent in light of the economic challenges exacerbated by the COVID-19 pandemic, which has significantly affected the financial stability of numerous consumers across the UK.

Context and Importance of Oversight

In the dynamic regulatory landscape of 2020, heightened by pandemic-related restrictions, the role of TPAs has become increasingly critical. As financial difficulties mount for many consumers, the potential for harm increases if the relationship between lenders and TPAs is not robustly managed and monitored. Firms are reminded that while they can outsource activities, they cannot outsource their regulatory responsibilities. Effective oversight is crucial to ensuring that TPAs act in accordance with agreed-upon policies and procedures, thereby safeguarding consumer interests.

Key Risks of Harm

The FCA has identified several persistent risks that could detrimentally affect consumers, especially under the ongoing economic strain:

Customer Treatment Risks

Recognition and Support of Vulnerable Consumers: TPAs must proactively identify and cater to the needs of vulnerable consumers to ensure they receive equitable treatment and outcomes.

Appropriate Forbearance Measures: It is essential that consumer assessments are conducted diligently to provide suitable forbearance solutions to those facing financial hardships.

Resolution of Disputes and Complaints: Consumers often encounter inadequate resolutions to their complaints, leading to potential distress and inconvenience. This is exacerbated by inefficient communication strategies requiring consumers to make repeated contact for resolutions.

Operational Resilience Risks

Adequacy of Systems and Controls: There is a critical need for TPAs to have robust technological and procedural systems to prevent operational mishaps, such as incorrect billing or erroneous payment demands, which can cause significant consumer distress and financial loss.

Prudential Resource Risks

Monitoring Financial Health: Firms should consistently monitor their financial health through mechanisms like cash-flow forecasts to mitigate the risk of inadequate liquidity, which could lead to disorderly market exits. Such exits could confuse consumers regarding their mortgage obligations, severely impacting their repayment capabilities.

FCA’s Expectations and Areas of Focus

The FCA’s supervisory approach is designed to ensure that firms maintain rigorous oversight of their TPAs to mitigate risks and promote fair consumer outcomes:

Ensuring Fair Treatment of Consumers

Vulnerable Consumer Strategy: Firms are expected to implement strategies that ensure the fair treatment of all consumers, particularly the vulnerable. This includes adapting TPA processes to better recognise and address the unique challenges faced by these groups.

Effective Complaint Handling: TPAs must resolve disputes fairly and expediently, with clear communication strategies in place to prevent consumer frustration and potential harm.

Governance and Oversight

Robust Management Practices: Firms must ensure that TPAs demonstrate compliance through effective internal governance, systems, and controls. Regular audits and reviews should be conducted to ensure adherence to agreed standards and practices.

Accountability of Senior Managers: The Senior Manager responsible for TPA oversight must include this responsibility within their Statement of Responsibilities. The FCA emphasises that it will hold these managers accountable for any regulatory breaches.

Financial and Operational Resilience

Resource Adequacy: Firms should verify that TPAs have sufficient operational and financial resources to manage their responsibilities effectively. This includes ensuring that TPAs have the capability to offer appropriate forbearance solutions.

Sustainable Repayment Strategies: It is crucial for TPAs to configure repayment arrangements that are sustainable and considerate of consumers’ financial circumstances, especially those in arrears or default.

Conclusion and Call to Action

Firms are encouraged to critically assess and enhance their operational and supervisory frameworks involving TPAs to align with the FCA’s outlined expectations. This proactive approach is vital for managing consumer interactions effectively, particularly in supporting vulnerable groups and ensuring robust operational and financial resilience.

Firms must maintain open lines of communication with the FCA, promptly reporting any significant operational changes or concerns. This ongoing dialogue will ensure that firms and TPAs can effectively adapt to evolving market conditions and regulatory expectations, thereby minimising consumer harm and enhancing overall market integrity.

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