servicers of regulated mortgages are required to give up “vested rights” to assist them. In this article, law firm TLT explores issues raised by mortgage prisoners and Dashly, a provider of mortgage data and technology solutions for brokers and lenders, outlines a potential solution to assist lenders and servicers.

The issues for portfolios of closed regulated mortgages

In the Mortgage Prisoners Review, the FCA defined mortgage prisoners as “a borrower who is up to date with payments and (i) is unable to switch to a new mortgage deal (with a new lender or with their existing lender) and (ii) could potentially benefit from switching depending on their loan and borrower risk characteristics.”

It’s not just borrowers who are up to date with payments who are affected. There remain large cohorts of customers, particularly in loan books, purchased from defunct lenders or securitised, in which the lender of record will have appointed a servicer to manage the portfolio and who will often have no other “live” products or alternative interest rates to which customers can be moved.

Why this is important:

• The duty will apply to closed books from 31 July 2024. Regulated firms will be expected to assess whether their products continue to offer fair value and support customers in pursuing their financial objectives.  A recent speech by Sheldon Mills of the FCA indicates an expectation that where such rights lead to poor consumer outcomes, firms will need to take steps to mitigate foreseeable harm, including considering giving up vested rights or else “support their customers through clearer communications on what other deals are available [in the market] and support on how to switch”.
• The Financial Ombudsman Service (FOS) is increasingly considering whether the rates charged to customers are fair, particularly with Standard Variable Rates (SVR). The upcoming Whistletree litigation will provide pause for thought on whether keeping customers on a higher rate, than they could obtain elsewhere, is sustainable.

Who is responsible for Consumer Duty compliance?

With closed regulated mortgage books, legal and beneficial ownership, as well as servicing and compliance may sit with different parties, with only the servicer having FCA permissions to conduct debt administration and debt collection, but without any economic interest in the portfolio beyond the fees it is paid for servicing.  FCA guidance suggests the duty only falls on the regulated servicer “proportionately”.  Therefore, part of the decision-making must fall on parties with an economic interest in the portfolio.  It is doubtful servicers will be able to uphold duty compliance without input from the beneficial title holders.  If they don’t engage, servicers will question whether they can continue to administer affected portfolios in compliance with Consumer Duty requirements, and whether liability might be faced by their customers if they fail to provide the input necessary to facilitate compliance with the duty.

Dashly, collaborating with a leading mortgage servicer has created a Portfolio Management Tool to address Consumer Duty challenges with closed books, comprising mortgage prisoners.

The tool enriches the mortgage servicers own data with various third-party sources, including live credit and property data and mortgage products, not just available in the market but for which customers may be eligible, such that portfolios of mortgages can be triaged into actionable cohorts based upon each customer’s current circumstances.

The servicer may then communicate with each cohort in terms that more specifically address the needs of those customers, and where appropriate urge and signpost them to seek independent advice about more suitable products in the market for which they may be eligible.

Richard Clark is a legal director specialising in mortgage regulation at LLP and Ross Boyd is the founder and chief executive of Dashly