Adam Oldfield, chief revenue officer, Phoebus

The impact of Consumer Duty on loan originations is well documented. However, the impact of Consumer Duty on lenders’ closed books (or ‘back books’) – while some have considered it, many have not fully reviewed it or thought it through. Yet with the looming July 2024 deadline for Consumer Duty compliance on closed books, the risks to lenders are now very real.

For some firms, this second stage of Consumer Duty could be even tougher. Especially for lenders managing large closed books of legacy business efficiently and profitably. We’re seeing quite a disparity between lenders who have put the work in to prepare for Consumer Duty, and those who have yet to fully realise the implications on servicing existing mortgage holders.

For lenders that don’t have good servicing capabilities and systems, this could well lead to more lenders looking to sell on their mortgage back books over the next year or so or needing to bring in third party administrators.

The challenge that Consumer Duty brings lenders is that there is likely to be an amount of foreseeable or actual harm in lenders’ back books. Accessing the data – assuming they hold it in some legacy cases – so that they can put the required actions in place will be a challenge for many lenders, especially those with legacy systems.

If a customer falls into arrears, for example, lenders need to dramatically change the way they communicate with them compared to before.

The crux of the matter is that, while there is a lot of scope for interpretation of the Consumer Duty rules, lenders need to evidence case reviews, monitoring and assessments – and tailor communications on the back of that. To support customer engagement and ensure good outcomes, lenders will want to optimise operations and support IT enablement. They will also want to think about how they’re meeting the needs of those customers that require additional support at every step of their journey.

While innovative, specialist servicing software can easily segment customer groups and tailor communications accordingly, lenders with legacy systems will have a lot of hard work to do to achieve the same result. As a result, and to avoid business risk, we may well see an increase in the number of lenders selling their back books or bringing in third-party administrators to administer the books for them. The majority of third-party administrators have the most up-to-date servicing systems. They will be better placed to comply with the regular communications demands, and record-keeping that Consumer Duty requires in order to establish and cater for the additional needs of different customers.

By July 2024, lenders must know which borrowers are on which mortgage products, and how susceptible each borrower is. They then need to monitor them on an ongoing basis and communicate appropriately. Sending a client a detailed PDF for them simply to view, no longer works under Consumer Duty. The communication has to be simple, understandable and easy to read on any device. Lenders need to close the feedback loop on communication. This may mean opening up completely different communication channels that a customer prefers to use but which the lender has never before considered.

Lenders must ask themselves three critical questions. ‘Am I communicating often enough and using an appropriate medium?’, ‘Am I saying the right thing to this customer?’, and ‘Do I have the systems in place to be able to do that?’.