Out with the old. In with the new.

How daysrent? plans align with FCA consumer duty rules

In the summer of 2023, the?Financial Conduct Authority ("FCA")?introduced new?Consumer Duty rules to ensure financial services firms put their customers' interests first. Who knew such a fundamental concept required restatement and clarification? Apparently, rules and regulations are not like fine wines that improve with age.

Even the Mortgage Conduct of Business rules ("MCOB") need buttering up occasionally. These new "duties" set higher standards for fairness, transparency, and customer outcomes in the home finance arena. In particular, they require communication in plain English. Jargon and waffle are strictly verboten. Hidden fees are anathema.

I say "home finance" because these rules guide both mortgage banks and home purchase plan providers. And, I say "guidance" as the rules – like others within the FCA's purview – are malleable and open to interpretation.

The home buyer's conundrum:?Everyone believes people should be able to buy homes that are both affordable and suitable to their needs. Nobody doubts that contracts should be fair and transparent. However, the complexity of the mortgage as a product makes it difficult to deliver on these platitudes. We need a fresh perspective. Aspiring owners want to buy the best home they can afford in their neighbourhood. Standard home loans, don't address that need straightforwardly for two reasons. First, banks fail to appreciate that a loan is a means to an end. Secondly, a skein of rules and market practices makes it hard to borrow money. Complexity is a regulatory feature, not a bug. Needless safeguards contribute to the need for the new consumer duty standards.

Our approach addresses these issues head on. Unlike the incumbents, with their mountains of technical debt, we are building affordability, transparent pricing, and fairness into our platform from the outset.

We?like to start with the answer and then work backward.?Our three-step process gives house hunters a straight choice between renting a home they will never own versus buying a similar place with the same rental budget.?To do that, we allow people to acquire homes one daysrent? point at a time. Let's unpack that.

Step one: We know Jane's comfortable paying ￡40 a day because we asked her. That's what we mean by starting with the answer.

Step two: We set the number of days it takes to reach full ownership.

Step three: We calculate the total cost of ownership by multiplying those two numbers.

Affordability: Jane works out (and we verify) how much she can spend given her other priorities. This kitchen table approach ticks the affordability box. Badabing

Suitability: We show her every local property available for sale, excluding those we prefer not to finance. By "show" I mean we plot alternatives on a map. If she picks the best one, we tick the suitability box.?Badaboom.

Transparent pricing: Renting is expensive. In a typical example, Harry pays a 6% annual yield to occupy a place he will never own. After forty years he will have paid 240% of the vendor's asking price. Our pricing is "comparable" except that Harry gets to keep the house. This approach is transparent because Harry set the budget, we showed him options, and he picked the best one. Badabing. Badaboom.

Fun fact: the 40th root of 240% minus one equals 2.2%. In plain English, if his home rises in value by an annual average rate of 2.2% it will be worth 240% of the original asking price. Pointing out the breakeven growth rate might go beyond the call of (consumer) duty.

The price of eggs in China:? Local authorities and housing associations typically raise rents by about CPI plus 1%. Private landlords raise rents at a faster clip when they can get away with it. We index the cost per point to CPI flat, so the daily cost keeps pace with the nutritional value of an egg, regardless of future inflation.

#GCSEmaths: Pegging rent to inflation flat is?materially cheaper than the government approved 1% ratchet. Raise 101% to the power of 40 and you get a number close to 1.5x. ?

Scenario planning:?Banks amortise loans using fearsomely complex formulae. Hence mortgage advisors use vague expressions such as "...early in the life of the loan your payments mainly cover interest costs..." This waffle is wholly inconsistent with the duty to be transparent. Worse, it's meaningless if you refinance the loan multiple times in the ensuing decades.

By contrast, we provide a straight line transfer of the potential sales value of the home to the buyer. So, we can say things like, if you sell halfway through the contract, your share of the value will be at least half.?We say "at least" because you have the option to overpay and shorten the pathway to ownership.

Clarity of communication: Absent changes in the Gregorian calendar, we can be very specific. Using points, Jane can whip out the calculator on her trusty Samsung phone and verify that, should she choose to sell on the 18th of April 2038, she will receive 33% of the net proceeds. Why? because 4,820 days divided by 14,610 days equals 33%.

This share of the potential proceeds is emotionally resonant, even if she doesn't know the future sales value in pounds, shillings, and pence. In fact, it would be hard to forecast her financial position that far in advance without including the future value of her daysrent? points.

For extra points: What will be her share if she hangs on for another year? Seriously, if we didn't use points, it would be our duty to tell her that Sunday the 18th of April 2038 is exactly one-third of the way between today, Tuesday the 4th of February, and full ownership day for a purchase plan that ends on Wednesday the 4th of February in 2065?? Now you get the point.??

Fairness:? Daysrent??plans are not loans. There is no minimum deposit, no stamp duty, no legal, product, survey, or registration fees, and no possibility of negative equity. What you see is what you get. Think about it this way. Zach wants to buy a home worth ￡250,000 and is happy to pay ￡600,000 (+CPI) for the privilege. What earthly purpose would be served by adding fees? Because our plans are simple, we never say APR, LTV, ERC, SVR, LTI, or SDLT.

Our approach is more than an alternative way to buy a home. We want to reshape the homeownership process to make it fair, transparent, intuitive, efficient, and customisable. Indeed, it's our duty to do so.

People affected by these issues should feel free to reach out.

Ike Udechuku | Cofounder | Pathway

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