Five opportunities for lenders to harness Consumer Duty regulation to deliver better consumer experiences

Empowering consumers to understand property risk pre-offer

Consumer Duty is designed to empower consumers, stating that they can only be expected to take responsibility for their financial decisions where financial services communications enable them to understand the risks and implications of any decision.

At Hometrack, and more broadly our parent company Houseful, we are all about using data to make informed decisions.

Whether it is searching for a new home, viewing, making an offer or transaction we believe in giving consumers, agents, brokers and lenders the information they need, at the right time and presented in a way they can understand and use it.

Hometrack’s Property Risk platform gathers and obtains a comprehensive view of a property’s risk at decision-in-principle, before a lender makes an offer.

Today lenders use this insight to determine a property’s value now and check for risks that could impact its future value.

By combining it with individual affordability, lenders can responsibly decide if a borrower can bear the cost of the property over the term of their loan – a compelling way to demonstrate consumer care.

Fostering transparency and making this information available to consumers in the form of a report will help borrowers understand property risks and make the right decision, not to mention protect them from future financial losses.

Welcome news to the industry and consumers is open data architecture: to ensure fair and good customer outcomes, Property Risk Hub provides data that is property specific, accurate, tested and up-to-date and we are collaborating closely with the emerging ecosystems to ensure data integrity and quality meets the necessary standards.

Raising the bar on relevance and accuracy of valuations to improve product fit 

Automated Valuation Models (AVMs), like Hometrack’s AVM, are proven to be more accurate and reliable than property indices.

Yet many lenders still rely on property indices to value properties on their back book for customer management, and to produce pre-approved product transfer mortgages.

At Hometrack, our comparative tests show concerning flaws in the performance of indices. Compared to the use of granular property data in AVMs, the national or regional data (used by indices) fail to take the depth and diversity of the market into account and accuracy is compromised when a property has not transacted recently.

Simply, indexation is a poor tool for accurately valuing individual properties, resulting in significant amounts of under and over valuation. Nearly half of index generated estimates are wrong by 10% or more.

At best this can encourage churn, driving valued consumers to consider a new lender, who, whether using an AVM, desktop or physical valuation will produce a more accurate representative answer.

At worst, those who don’t churn can end up overpaying due to the index inaccuracies assigning them to unfairly high LTV products, potentially resulting in the lender breaching their duty to treat consumers fairly.

Lenders must therefore assess whether their processes are fit for purpose and lean towards approaches that provide property and consumer specific mortgage offers.

Personalised risk based mortgage decisions and pricing

To deliver better outcomes for consumers, lenders will need to take a more strategic view of where and how they lend, moving beyond product and price to individualised offers.

Today, lending decisions are reached based on whether a home meets lending criteria and credit policies for the type and value of the home, and if the customer has the right credit score for the size and loan to value of the mortgage.

With Consumer Duty this ‘one size fits all’ approach could result in more conservative policies, impacting mortgage business profitability and reducing choice for consumers.

To evolve, pre-screening and scoring every home in real time for all the key risks and enabling this data to be used in individual credit risk decisions would enable dynamic policies and decisions.

Where property and a borrower have a standard risk profile then a higher loan-to-value ratio could be confidently accepted.

If a property presents a very low risk, lenders could accept a borrower with a weaker credit score or conversely accept a borrower with a strong credit score and low risk of default with a higher-risk property.

Going one step further, lenders might choose to employ automated, dynamic calculations of loan-to-value (LTV) ratios and rates that adjust over the term of a borrower’s loan.

A borrower’s rate is determined by the LTV ratio at origination and remains fixed until they fall into a lower LTV bracket.

A first-time buyer purchasing at 95% LTV on a 2-year fixed rate may find themselves shopping for a new deal two years on at 91% LTV.

They’re not yet able to unlock lower LTV rates and so they must choose from another set of 95% rates or sit on a costly Standard Variable Rate (SVR) for a year until their LTV falls.

However taking a five-year deal will mean they drop into the 90% bracket part-way through the term, thus overpaying for around 60% of their deal.

Flexible and dynamic calculations of LTV could consider the borrower’s improved position. As consumers pay down their loan they become eligible for better rates and in turn, lenders reduce borrower churn.

Responding to changing consumer needs beyond origination

By introducing fairness in product and service design – Consumer Duty holds financial services to account for consumer harm throughout the lifetime of a product or service.

We might not consider this a radical change; personalised offers and services have now become expected.

But, to be successful lenders need to be ready to shift from point-in-time policy checks at origination to continuous monitoring throughout the mortgage lifecycle to enable end-to-end consumer engagement and care.

Protecting borrowers from financial misselling alone won’t be adequate.

In response, lenders are investing heavily in digital journeys. By purchasing listing and comparables data from Hometrack’s Data Services lenders are replicating experiences like My Home on Zoopla on their own consumer applications.

They are empowering borrowers with on-demand valuations, LTV tracking, understanding equity and purchasing power, the energy efficiency rating and the cost of enhancements to their home.

Consumer app mortgage repayment tracking features and current property valuations will improve consumer understanding and awareness of their financial commitments and give them the tools such as easy, one-off payments, to proactively manage their debt and property investments.

Lenders can act on changing financial circumstances to identify vulnerable customers before they default or to offer the right product as soon as they become eligible.

In addition, regular or live portfolio monitoring and property risk scanning to identify property or climate risk means lenders and consumers can be alerted earlier of any potential impact on the value of their property, such as EPC ratings or flood risk and support borrowers to budget and finance retrofit projects. 

Engaging with every consumer outside of the traditional product cycles

The days of minimal communication with the consumer outside the countdown to their product’s expiration are behind us.

But if the mobile is the device of choice and the app the medium of focus, what happens with consumers who don’t use those channels when Consumer Duty requires equal access?

The challenge lenders now face is how to make the same tools available across all channels; particularly important where a consumer’s chosen channel is driven by an aspect of vulnerability.

Unquestionably lenders will need to utilise Application Programming Interfaces (APIs) such as Hometrack’s property listings and comparables data services for real-time, up to date data and cross-channel integration.

Equally important, if points of access to lender information and engagement tools do multiply, service level agreements could get tighter and delivery windows become smaller and shorter.

Commercial models must adapt to make the rollout of services across multiple channels affordable; supporting all consumers through all stages of buying and owning their home.

Hometrack is the market leader in AVMs, delivering 50m valuations a year.

This is alongside a wide range of property data and insight that powers mortgage decisions and the management of risk across mortgage acquisition and loan portfolios.

Sarah Guha is director of product at Hometrack