As the deadline for the FCA’s Consumer Duty’s application to closed books looms in the new year, it’s a good opportunity to remind potential parties to mortgage portfolios about where the burden for compliance with the Duty lies, in sales occurring pre-31 July 2024, focussing on one of the unresolved issues concerning split completions.

Principle 12  

As readers will know, the Consumer Duty introduced a new Principle 12 into the FCA Handbook, with an overriding objective to produce good outcomes for customers, further elaborated upon in PRIN 2.A, which (amongst other things) sets out the cross-cutting obligations which contain the overarching conduct principles lenders must demonstrate when delivering the new Principle 12, as well as the consumer outcomes which should result.  The Handbook is further supplemented by the FCA’s Final Non-Handbook Guidance (FG22/5, published in July 2022) which contains details of the FCA’s expectations, particularly Section 3 (“Application to products and services sold before the Consumer Duty comes into force”).

FCA expectations

It is clear that the FCA expects firms not to try to avoid dealing with the Duty by simply selling a portfolio (see, for example, para 3.19 of FCA Policy Statement 22/9), which is why the Duty has been applied (on a forward-looking basis only) to products and services sold before the Duty came into force. Put simply, the principles for closed books are as follows:

• Firms who created and sold the products have to review those products and must (if they retain them) ensure that, going forward, they meet the cross-cutting rules, in particular the avoidance of foreseeable harm to consumers, and ensuring that those products continue to offer fair value;
• Firms who purchased products from the original manufacturer must comply with the Duty on a “best endeavours” basis, recognising that purchasers won’t necessarily have all of the relevant information to conduct ongoing reviews; and
• For sales taking place after 31 July 2024, the seller will have to produce sufficient information to the purchaser to allow them to conduct the required reviews on an ongoing basis before the sale completes, save where this is an onward sale of a book purchased pre-Duty, in which case the seller should follow the “best endeavours” approach outlined above.

Where does responsibility lie?

Despite the guidance produced by the FCA, an important unanswered question remains: at what point does the purchaser become responsible for compliance with the Duty?  This is thrown into sharp focus by the likelihood that although a sale agreement may be signed pre-31 July 2024, the completion of reregistration of mortgages into a purchaser’s name at the Land Registry may now straddle the 31 July 2024 implementation date for the Consumer Duty in relation to closed books.  We have attempted to examine the issue and give some guidance below.

The FCA’s Final Guidance doesn’t make the distinction between transfer of legal and beneficial ownership, it simply talks about a “sale” of a book.  In most mortgage portfolio sales, although the beneficial title/ economic interest (and risk) in the portfolio passes to the purchaser on execution of the contract for sale (and payment of the purchase price), legal title in the mortgages (and completion of the assignment by the issue of “goodbye” and “hello” letters to customers) will not take effect until some months afterwards, once registration of the TR4 transferring title to the mortgages has been completed by the Land Registry.  

In the meantime, although the purchaser may “own” the economic interest in the book, in terms of remediation they won’t be able to do anything about it until legal title passes, save through the seller (who will normally agree to service the portfolio in the interim and who will take instructions from the purchaser, which may include remediation measures.  In reality, our experience shows that compliance will fall between two camps.  Purchasers expect provision of due diligence at a level which will allow it to comply with the Duty from 31 July 2024, even though sales may sign ahead of the deadline.  

That means prospective sellers should be prepared to gather together the information required by paras 3.30 of FG22/5 (to the extent possible) as part of the sale process.   It also means that sellers should be prepared to lend assistance with any fair value and fairness assessments and conducting any remedial exercise in the period which straddles completion of the sale agreement and the Duty’s in-force date, to the extent that any steps have to be taken before (if any serious issues are identified) or shortly after the deadline.  

Although in most cases sellers will be happy to be led by the instructions of the purchaser when it comes to remedial measures to be taken before title transfers, it is important that the seller bears in mind its own regulatory obligations (not to mention who covers the cost of doing so), and that nothing should be done which the seller considers not to be in the spirit of the Duty.  Portfolio sale agreements will therefore need to carefully delineate responsibility and the need for the seller to retain a degree of discretion pending legal transfer of the book.  It is also important that agreed frameworks for the fair value and fairness assessments (both of which TLT has produced) are agreed as part of that exercise.

As can be seen, this is an evolving situation.  In the absence of guidance, it is within the spirit of the Duty that parties should come up with a pragmatic and consumer-focussed solution, which (we would suggest) the matters discussed here address.

Find out more

Richard Clark, Partner, Richard.clark@tlt.com - +443330060432

Tom Ward, Partner, Tom.ward@tlt.com - +443330060451