Recommend a 2 Year Fix? Don’t shoot the messenger but …

With average two-year fix mortgage rates now above 6%, homeowners who locked in their mortgage deals for two years when interest rates were at their lowest point in history are now considering legal action against their brokers’ advice.

Mortgage brokers and IFAs need to prepare as more as more consumers consider claims for mis-selling, as they face significantly higher borrowing costs. A new 2 year fix will add an additional £526 per month on a 20 year £250,000 mortgage.

Brokers’ Recommendations Under Scrutiny: Mis-Selling Claims on the Rise

Consumers are arguing that they should have been advised to opt for longer-term deals instead. The drop in interest rates to historically low levels in 2021, with some banks offering sub 1% deals and the average two-year fix hovering around 2%, enticed many borrowers into these shorter-term agreements.

Now, nearly two years later, hundreds of thousands of homeowners will experience the pinch as their monthly repayments potentially treble.

Double Commission Dilemma: Short-Term vs. Long-Term Mortgage Recommendations

Complaints consultancy Jencap Partners has reported a surge in enquiries from mortgage brokers whose clients are questioning why they were recommended two-year fixes instead of longer fixed-rate deals. Unlike other types of financial advice, brokers and advisers are permitted to earn commission from lenders who sell mortgages. Intermediaries receive a fee for each loan they assist in writing, with the typical fee amounting to £1,000, or 0.40% of the total loan for a typical residential mortgage of £250,000. This commission is paid by the bank or building society.

GDPR and Mortgage Mis-Selling: Clients Request Personal Information

Due to the shorter duration of two-year fixed-rate deals compared to five-year fixes, claimants are arguing brokers effectively receive double the commission for recommending shorter-term options. In November 2021, two-year fixes were, on average, 0.3 percentage points cheaper than five-year fixes, according to analyst Moneyfacts.

Some industry commentators believe that the marginal cost savings of two-year deals were not worth the increased risk associated with shorter-term agreements. Mortgage brokers and IFAs are now seeing clients requesting access to their personal information under GDPR regulations. This information is sought as part of potential claims for negligent advice.

The Role of Financial Ombudsman Service: Potential Implications for Mis-Selling Scandal

Firms have up to eight weeks to provide a Final Response to any complaint, after which clients can pursue the claim with the Financial Ombudsman Service (FOS). The FOS is yet to adjudicate on these complaints but if it starts to uphold consumer complaints it could lead to a significant mis-selling scandal, potentially affecting a large pool of consumers. In 2021, over half a million borrowers opted for two-year deals, as reported by UK Finance, the banking trade body.

Taking Charge of Complaint Resolution: Jencap Partners’ Comprehensive Services

From the evaluation of the complaint to Final Response and beyond, we can take care of every aspect of the process. Supporting your compliance officer or customer team, we assess the complaint and feed back our recommendations to management.

Our service will ensure your firm takes a pragmatic approach to dispute resolution whilst helping you to maintain compliance with complaint handling rules.