Consumer Duty

The introduction of Consumer Duty by the FCA in 2021 put in place a formal duty of care between financial services firms and their customers. Firms are now required to ensure their customers’ needs are central to their business and are considered at each stage.

Consumer Duty is outcomes-based and firms need to be able to demonstrate that their customers actually have good experiences. This is an ongoing obligation and requires firms to constantly review and enhance their products and procedures.

From 31 July 2024, the Consumer Duty was further extended to closed books. The Consumer Duty directly impacts portfolio purchase decisions,  as the buyer will need to ensure that their due diligence sufficiently covers Consumer Duty compliance for both open and closed books. Additional challenges will be where legal and beneficial title to a portfolio are held separately and in deciding which party is responsible for ensuring compliance.

Consumer Duty remains crucial in loan portfolio transactions as it requires acquirers to review how the duty has been and will be adhered to and to have a plan in place for any non-compliant books.

Including unfair terms in contracts or the failure to deliver fair value or effective customer support may result in firms breaching their obligations. Through regular reviews, auditing, and consumer feedback, the FCA seeks to ensure that firms are Consumer Duty compliant. Non-compliant firms can risk financial penalties, a ban on offering certain products or legal proceedings in more serious breaches.

Building Safety Act 2022

The Building Safety Act 2022, has brought significant changes to building safety regulations. Whilst the act aims to achieve higher building safety standards, it presents a new set of challenges for lenders whether they are financing construction, the purchase of completed buildings or the purchase of individual units within them.

Lenders may be designated as “duty-holders” under the act therefore becoming responsible for ensuring that funding and resources are allocated to compliance with building safety requirements. The act also introduced additional safety requirements for higher risk buildings (buildings containing at least two residential units and which are at least 18 metres high or with at least seven storeys), including a safety case report.

Lenders (and ultimately portfolio buyers) will need to analyse the reports to evaluate the risks involved.

LIBOR

FCA concerns in 2017 over the reliability of the London Interbank Offered Rate (LIBOR) as the benchmark in financial products led to its winding down since September 2024. It has been replaced by alternative risk-free rates (RFRs) such as the Sterling Overnight Index Average (SONIA) or by the Bank of England base rate (BBR). Where loans previously referenced LIBOR, the transition has required lenders and servicers to update systems and documents to accommodate the application of alternative rates.

Unclear fallback provisions in contracts have added further complexities, particularly if the language is inadequate and disputes can arise between parties regarding applicable rates or adjustments.  Recent cases have shown that the courts are unwilling to accept that, of itself, the cessation of LIBOR can be used as a basis for parties to try avoid their obligations under agreements which refer to LIBOR.

Buyers of loan portfolios should evaluate whether loans require a transition, whether they include robust fallback provisions and how sellers have dealt with LIBOR transition prior to the sale.

The above issues highlight the importance of carrying out thorough due diligence and taking legal advice on your regulatory obligations. Any issues revealed during your due diligence should be factored into the price of your bid, reflecting the potential costs that may be incurred in resolving those issues. They may also need to be addressed in the drafting of the relevant sale agreement.

The article was written by experts in national law firm TLT’s structured finance team: Tom Ward, partner; Anum Sajjad, associate; Lorna McWilliams, senior associate.