Green mortgages present consumer vulnerability risk
What has happened?
David Geale, Director of Retail Banking at the FCA, gave a speech on green mortgages and consumer vulnerability at the London Institute of Banking & Finance mortgage conference on 19 April 2023.
What are the key points made in this speech?
These points are quoted below.
A green mortgage is a mortgage that includes an incentive for people to either purchase an energy-efficient property or improve the energy efficiency of an existing property. The incentives vary but typically involve a discount to the fixed rate, or cashback payable after the completion of the improvement. Green mortgages have a growing role to play in decarbonising the UK’s housing stock by helping borrowers to improve the energy efficiency of their homes. This is a systemic issue, and every part of the housing value chain has a role to play – including mortgage lenders and brokers.
Brokers have a key role to play in helping borrowers navigate a complex and nuanced landscape in terms of green home finance.
According to the Green Finance Institute, the green mortgage sector has increased from 3 to over 50 products in recent years, although they are not always the most competitive mortgages on the market, even with the incentives factored in. But we’re now seeing lenders’ targets for green lending which significantly outstrip current volumes, so when lenders set out their strategy for achieving those targets, we can expect to see more innovation and expansion in this space.
However, while there is a massive opportunity here, there are also several inherent risks. I’ve already mentioned how significant emissions from mortgaged homes are to lenders’ decarbonisation strategies, and those lenders could face a variety of issues if they fail to hit those targets – reputational or otherwise. If lenders fail to develop credible plans to meet their stated decarbonisation targets, we are likely to take a very dim view – and it could be perceived by the market as yet another example of greenwashing.
As David Postings, CEO of UK Finance, pointed out last month – lending only to newly-built homes that are already energy efficient may ‘green’ an organisation’s balance sheet. However, it will not help achieve the goal of decarbonising the UK’s housing stock. Lenders adopting a blinkered approach and targeting only the most efficient properties would have the unintended consequence of making it difficult, or very expensive, to secure a mortgage for properties with lower energy efficiency, even if those properties could be significantly upgraded. It would also penalise those homeowners who are not currently able to make those improvements without help and may become – or already be – vulnerable.
There is also a separate risk that innovation in products and incentives could run ahead of consumer demand.
Consumers need help to navigate the landscape. Given the long-standing and trusted relationships mortgage intermediaries have with homebuyers, they have a really important role to play in the decarbonisation of UK homes. But every property is different in terms of what is feasible and viable, while every borrower has different circumstances, knowledge, and abilities to pay. But we know many brokers are new to the opportunities that green mortgages provide. They’re not energy efficiency experts, and we don’t expect them to become so. There is no ‘one-size-fits-all’ answer for energy efficiency. It’s not as simple as saying ‘this measure costs X amount and will deliver Y in reductions to your carbon emissions or energy bills’.
And different lenders offer different types of incentive, depending on a huge range of variables. It’s not easy to compare them, especially when some products require a jump in EPC rating, while others need a specific type of energy efficiency improvement to be carried out.
It’s complexity and nuances like this that make tools like the ‘Broker’s Handbook’ so interesting, published in February by the Green Finance Institute1 in collaboration with many of the organisations who are here today. It’s designed to help brokers identify the opportunities and risks, quality assurance standards, and benefits across the housing value chain, as well as the policy landscape for home energy efficiency.
Tools like this should give intermediaries the confidence and ability to provide additional value in their service to their clients - and the handbook is officially accredited as structured CPD by today’s hosts, The London Institute of Banking and Finance. Complementary to the handbook is AMI’s www.greenmortgageadvice.uk website, which aims to provide a single source of truth for mortgage professionals on what is, and will remain a complex area.
What do we want to see happen in green mortgages? We want to see ongoing innovation from lenders, with compelling incentives that will influence consumer decisions as they seek to improve the energy efficiency of their homes. Our Innovation Sandbox can provide support and guidance for eligible firms seeking to innovate in this way. And we will continue to monitor the sector, making sure that where lenders have set out decarbonisation targets for the homes they provide mortgages for, they have a credible plan to achieve them. We also want brokers to be empowered to support consumers in making appropriate decisions, tailored to their expressed needs and preferences.
And this is where our Consumer Duty impacts green home finance. I know the Consumer Duty has been covered earlier in today’s agenda, but it is hugely important for the FCA – as I’m sure you’re all aware.
While we all want to promote sustainability, we also need to ensure that financial services deliver good outcomes for retail customers. This is where the Consumer Duty is a useful lens though which to view your ESG plans.
Firstly, when making claims that products are ‘ethical’, ‘socially responsible’, or ‘green’, you’ll need to make sure they are genuinely designed and run as such and match up with any claims made in promotions. If not, it is likely to be a breach of the Duty’s cross-cutting rule on acting in good faith. And this is before you consider if it meets the proposed ‘anti-greenwashing’ rule we’ve recently consulted on adding to the ESG sourcebook. So please think hard about your marketing and avoid hype just to join a green bandwagon.
Where your product genuinely has an ESG element, have you correctly determined your target market? What are the needs of that market, and have you designed the product in a way that meets those needs? If your lending is designed to boost energy efficiency improvements, how do you filter those who may already be living in thermally efficient properties that are unlikely to see much benefit?
How will the product be distributed? Do the benefits it offers depend on partnerships with other firms, such as suppliers of energy-efficient products, who may not be regulated financial services firms? If so, how have you satisfied yourself that where they are part of the distribution chain these firms are aligned with your values, in terms of striving for good consumer outcomes?
You should make sure that your relationships with other firms in the distribution chain do not serve your needs over your customers’ needs. For example, we don’t want to see poor customer outcomes driven by commercial arrangements such as commission levels. So, you might need to consider how fee structures might incentivise poor conduct in the distribution chain or poor customer outcomes.
Next, does your target market understand the product? Does the product have any unusual or complex features that customers need extra help understanding?
Do your customers understand any trade-offs being made? For example, if a mortgage product is designed to help consumers raise money to fund home improvements, do they really understand the initial and potentially long-term ongoing costs involved in a mortgage, and the impact it might have on their financial situation and options in the future. Also, do they understand the benefits of the work the mortgage is funding. It may or may not lead to financial benefits, and if it does, this may take time to come to fruition. So, the customer needs to understand this.
Does the product offer fair value? Value can be thought about in the round – it’s not always about the cheapest price. But we will expect the customer to get a reasonable benefit from the product compared to the price they pay.
How can we help you?
Thistle Initiatives has supported mortgage firms for over 10 years as a trusted compliance and regulatory advisor. In addition to assisting you as and when our team of specialists can serve as your right hand in a meeting and complying with regulations. We understand the importance of staying up-to-date and compliant and are dedicated to providing the guidance and support needed to do so.
Are you looking for help with your mortgage lending or intermediary arrangements, or more general regulatory questions? Contact our specialist credit team now to schedule a free consultation. Get in touch with us by calling 020 7436 0630 or sending an email to info@thistleinitiatives.co.uk.