What could be the "death knell" for maligned Gilt-linked ERCs?

There is one year for firms to implement the new rules

What could be the "death knell" for maligned Gilt-linked ERCs?

The Financial Conduct Authority (FCA) has affirmed plans to introduce a new Consumer Duty, which is made up of an overarching principle and new rules firms will have to follow.

One year has been granted for firms to implement the rules for all new and existing products and services.

Under the new Consumer Duty, the regulator believes consumers will be offered products and services that meet their needs and offer fair value.

Steve Wilkie (pictured), executive chairman of Responsible Life, believes the new Consumer Duty could be the “death knell” for much maligned Gilt-linked Early Repayment Charges (ERCs) in the equity release market. 

“Gilt-linked ERCs have always been the subject of debate because they are overly complicated, and were originally written by lenders with lenders in mind,” Wilkie said. He believes that Gilt-linked ERCs have always been a bone of contention because of their complexity.

“How many older relatives would you really expect to grasp the significance and potential consequences of a variable ERC linked to the yield on 10-year government bonds?” Wilkie questioned.

Some lifetime products still have Gilt-linked ERCs, but Wilkie acknowledged that their numbers have been dropping.

“They are not consumer friendly and one of the big wins for the FCA Consumer Duty could well turn out to be the final demise of this way of pricing redemption penalties, which would understandably bamboozle many customers,” he added.

Read more: FCA to enforce new Consumer Duty

Wilkie explained that the number of customers out there for whom such a complex way of pricing early redemptions was appropriate was always relatively small. 

“Most people will go through their entire lives never knowing how Gilts really work. Their use was merely a consequence of interest rates in the lifetime mortgage space being set in comparison with the yields on 10-year government bonds,” he added.

According to Wilkie, Responsible Life has preferred fixed and defined ERCs to Gilt-linked ERCs, and he believes the industry would benefit if they were removed from the market.

He said that this is where the FCA’s new Consumer Duty comes in, and noted that while it is still possible that sophisticated borrowers would opt for a Gilt-linked ERC, he explained that it is very hard to see how they can continue to sit on the shelf next to products which are far easier for all homeowners to understand. 

“The Consumer Duty is also going to shake up the rebroking landscape,” he said. “It will encourage more brokers to get back in touch with homeowners who could benefit from switching, as it is going to shine a spotlight, not just on the robustness of advice when products are taken out, but outcomes much further down the line.”

Wilkie noted that the issue of switching had become a massive opportunity for lifetime mortgage holders over the past decade. He explained that interest rates on loans dropped so steeply, many customers could suddenly save £10,000+ by rebroking.

Read more: What challenges do mortgage brokers face for the remainder of 2022?

While Wilkie acknowledged that many brokers are already on the front foot in encouraging borrowers to consider switching, he said not all brokers are being proactive enough. Overall, he believes it is an important step for consumers that will also encourage brokers to remain engaged and find more opportunities to assist them over the lifetime of these loans.

“The Consumer Duty will lead to a renewed focus on switching across the board and ensure that those who could benefit from switching are alerted in a timely manner, no matter which broker they use,” Wilkie said.

Andy Jukes, head of customer engagement at The Cambridge, said that the society welcomes the initiative and is already working towards meeting all the requirements and implementing the new rules.

“We welcome this initiative with open arms. We have always tried to put our members at the forefront of everything we do, and we see Consumer Duty as underlining that,” Jukes said.

Jukes went on to question who could criticise a programme of rules aimed at setting higher and clearer standards of consumer protection in financial services, as well as putting customer needs first. He explained that The Cambridge is currently looking at how it operates now and if there is any scope for tweaks to ensure the society more than meets the requirements and is able to evidence it.