Article originally published in Mortgage Introducer September 2022 – page 10
For more than two decades, the evolution of financial services has been shaped by regulation. M-Day, the Consumer Credit Act, Mortgage Market Review, Mortgage Credit Directive, Basel regimes, Solvency II, Retail Distribution Review and most recently, the Financial Conduct Authority’s consumer duty legislation.
Firms have a year to adopt processes that allow checks and balances to be put in place to ensure customers are at the heart of everything for regulated firms. More on this later.
First, let’s talk about the next wave of regulation coming our way – for once, it’s not about protecting customers or consumers and it’s not coming from our friends in Stratford. The green agenda has been top priority for successive governments since Theresa May signed the UK’s net zero agreement, committing the country to cutting carbon emissions dramatically by 2050.
Boris Johnson’s government oversaw the Glasgow-hosted COP26 climate change conference in November last year and, with energy and fuel prices the number one anxiety for the vast majority of British households – whoever wins the Conservative party leadership contest will find themselves facing the unenviable choice of whether to pursue net zero targets aggressively or bow to the public’s need for financial respite.
Even if the green levy on household energy bills is suspended, as many are calling for, the country is nevertheless bent on cutting carbon. After the hottest day on record this summer, whole streets destroyed in wildfires and flash flooding (august – definite bet), Britain will find it hard to ignore the threat climate change poses to everyday life.
Late last year the government published updated rules for the residential property sector in England (devolved governments have separate proposals), confirming that CO2 emissions from new build homes must be around 30% lower than current standards and emissions from other new buildings, including offices and shops, must be reduced by 27% by June 2022.
The Future Homes and Buildings Standard, set for implementation in 2025, will bring emissions targets down further for new homes, while in the private rented sector, minimum energy performance band ratings will come mandatory on all properties where a new tenancy begins after that date.
Heating and powering buildings currently makes up 40% of the UK’s total energy use and the latest government figures show 54% of the homes in England are still rated D or below for energy efficiency.
Installing low carbon technology, such as solar panels and heat pumps, and using materials in a more energy efficient way to keep in heat will help cut emissions, while the new rules also include legislation for all new residential buildings, including homes, care homes, student accommodation and children’s homes to be designed to reduce overheating.
All these new standards spell considerable change for lenders, which will have a legal duty to withhold finance on properties not complying with rules. When net zero targets start to hit existing homeowners housing stock, refinancing responsibly will become harder still.
Not only does this present new carbon-related compliance risk for lenders, that risk will also affect balance sheets and provoke risk reviews which could expose financial implications.
Coming back to the new consumer duty now – when you add this requirement into the pea soup, getting the green compliance transition as accurate as possible is vital for lenders not wishing to fall foul of regulators.
The obvious question is how? Ultimately the answer to this has to start with data. Knowledge about both the property and borrower is the only way to bake in green compliance and consumer duty rules to lending policy and practice. Access to this data is also going to be necessary to compile financial results and performance assessments, making funding availability contingent on evidence of compliance.
The problem facing the majority of mortgage lenders – both residential and buy-to-let – is that legacy IT systems, coupled with historical cobbling together of different approaches to data records and storage, make this critical knowledge virtually impossible to get at in a meaningful way.
For the best part of the two decades of regulation this market has lived through, I do not think nearly enough investment has been made into creating IT knowledge bases fit for the present, let alone the future.
Opting for yet another hack and fix job at this stage in the net zero journey will not just rapidly become an obvious false economy, it also risks accusations of board negligence. Given the pace of new legislation implementation across our market, not to mention the near-constant introduction of yet more rules, investing in technology that can cope is now mission critical.
It’s time to make systems work for us all: and data relating to your duty of care to your customers as well as to the built environment and planet, needs to be in the right format and in the right hands to achieve that if we are to get the balance right.