With the new Consumer Duty coming into play, green mortgages are not just about promoting sustainability. They’re about meeting basic client needs. Lee Coates – Co-founder of ESG Accord – explains how mortgage advisers should approach client conversations to avoid costly mistakes.
The main thing any mortgage adviser needs to know about ‘environmental, social and governance’ (ESG) is that it’s not about being a green advocate. It’s about doing your job properly – and avoiding the penalty for not doing so.
Think of the new Consumer Duty. This is all about delivering good outcomes for clients, but it’s not prescriptive. It doesn’t specify what you have to cover in your client conversations or fact-find.
In fact, the new Consumer Duty is a very detailed piece of work that gives the Financial Conduct Authority (FCA) plenty of room to enforce their rules.
That means mortgage advisers need to think outside the box. You need to work backwards from ‘best outcomes’ for your clients through what they need, and to the questions you should be asking them.
So let’s start with ‘best outcomes’ or, in other words, what’s in your clients’ interests.
Find out what your mortgage clients are planning
It’s reasonable to start by assuming you can serve your clients best interests by finding out what they want.
Let’s illustrate this with an example. Your clients are a couple who are moving from the town to a small house in the country with a bit of land. The conversation would normally cover:
- how lovely it will be to live in the countryside away from the rat race
- how much they want to borrow
- what their earnings are, and
- how you’re going to sort out the mortgage.
But would this conversation have changed if you’d asked why they’re moving to the country? Or if you’d delved more deeply into their plans?
You might have discovered that they’re planning to put up a couple of solar panels and a small wind turbine to go off grid.
And if you’d known that, you could have got them a green mortgage at a lower interest rate.
Why mortgage clients might make a complaint
Now let’s fast-forward a couple of years.
The clients discover they could have had a deal that was a half or a quarter of a percent less interest on £500,000 mortgage. You didn’t suggest that at the time, because you didn’t know. And you didn’t know because you didn’t ask the right questions.
The clients do the maths and make a complaint. They want:
- to be reimbursed for the extra interest in their monthly payment
- a distress payment
- you to pay the penalty charge for them getting out of the ten-year deal you got them into, which is 10% of their outstanding mortgage.
This turns out to have been an expensive mistake, for which you’re paying dearly. And that’s without taking into account the reputational damage this might do to your business.
What you should you be asking mortgage clients
You don’t need to ask directly about a client’s interest in green mortgages, but you should include questions about:
- their plans
- whether they’ll be doing any work in the property, or intend to do it up in anyway, and
- whether they anticipate needing a further advance at some later stage.
Notice that none of that uses the words ‘ESG’ or ‘sustainability’, but will help you discover information they might not volunteer otherwise. They might say they’re planning to install solar panels and go off grid in the long term. Then you know you have to find them a lender with a green mortgage facility.
Nine times out of ten, it will be a bog-standard mortgage. But the one out of ten that it isn’t, is a complaint waiting to happen.
Lee will be talking about lenders, borrowers, ESG and Sustainability at The Mortgage Conference on 3 November.
He’s the Co-founder of ESG Accord, which helps advice firms implement robust compliance procedures to meet sustainability preference requirements. He's also currently part of the Financial Conduct Authority’s (FCA’s) Disclosures and Labels Advisory Group (DLAG).
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