The FCA first published the thematic review on 25th June 2015, but then revised it and republished its findings on 9th July this year.
The MMR made lenders provide advice on mortgage products and this has been a huge challenge, not only having to ensure that their staff passed a suitable mortgage qualification, but also changing the way in which they communicated with customers and transacted mortgage business. It is therefore not surprising that the review revealed cases where suitability could not be demonstrated explicitly. It is likely that the percentage of cases that fall into this category will reduce as lenders continue to adapt to the requirements of the MMR, but illustrates the magnitude of the challenge for lenders - and also for the regulator - in ensuring that the objectives of the MMR are delivered.
The FCA considered customer experience in itsassessment of the quality and suitability of mortgage advice provided by firms, using a range of tools that included mystery shopping, file reviews and on-site visits.
The overall findings from the review were generally positive with 59% of mystery shops and files reviewed resulting in suitable mortgage recommendations to customers with only 3% of cases assessed as unsuitable.
Although there was no evidence of systemic customer detriment, there were a significant proportion of cases, 38%, where the FCA was unable to determine whether the mortgage recommended was suitable. The main cause of this was firms failing to take reasonable steps to obtain sufficient relevant information about a customer’s needs and circumstances before making a recommendation.
Another area of concern for the FCA was that 19% of their mystery shops did not receive advice, although the clients in these cases believed that they had received advice and a recommendation.
The key messages that emerge from the paper are:
• Although customers are responsible for their own decisions, advisers must assess each customer’s needs and circumstances and use their judgement, knowledge and skill to recommend suitable mortgages.
• This may include probing customers’ stated preferences and exploring trade-offs with customers who express contradictory or conflicting needs.
• Advisers must take reasonable steps to try to obtain all information which is likely to be relevant for this purpose.
Other concerns raised within the paper are;
• Some advisers placed too much weight on a customer’s initial preferences and in some cases allowed these to determine the recommendation rather than obtaining all relevant information and assessing suitability in light of the customer’s actual needs and circumstances.
• There was a tendency for intermediaries to source products in the early stages of the sales process before establishing the customer’s needs and circumstances.
• Some advisers steered customers towards short-term fixed rates based on their popularity without first identifying and assessing a customer’s needs and circumstances and assessing whether such products were suitable.
• Some firms were failing to take reasonable steps to obtain sufficient, relevant information about customers’ needs and circumstances before making recommendations.
• Although there is no requirement for advisers to write to a customer explaining the reasons for their recommendations most firms do. The general standard of letters reviewed was poor with an overreliance on scripted text or generic comments and most letters were not tailored to a customer’s individual circumstances.
The overall view of the paper is that mortgage intermediaries have strengthened controls since MMR to check lending criteria and ensure they present well-packaged applications to lenders, but this was sometimes at the expense of demonstrating suitability.
The paper is generally positive towards directly authorised mortgage intermediaries but does state that, based on the sample of firms that were assessed in this review, larger retail intermediary networks had the most work to do to strengthen governance and oversight arrangements.
What can mortgage firms do?
• Avoid customer confusion and the potential for disengagement from the mortgage advice and selection process by explaining the purpose of the questions being asked. Clearly differentiate between those questions that apply to the ‘suitability’ of the mortgage being recommended and to those that relate to the areas of ‘affordability’ and the lending decision.
• When giving advice, firms should avoid bringing both their own biases into the advice discussion, as well as addressing those of the customer by being prepared to test preconceptions, explore preferences and investigate trade-offs with customers who may express contradictory or conflicting needs.
• Ensure the advice process is structured to give firms and mortgage advisers sufficient understanding of customers’ needs and circumstances, but at the same time ensure there is flexibility for advisers to apply judgement and adapt delivery to meet individual customers’ needs.
• Engage fully with customers when providing advice, and when assessing the appropriateness of a mortgage to the customer’s needs and circumstances, consider the factors set out in MCOB 4.7A.6R all together, rather than treating each of the factors in isolation.
Next Steps
In the next phase to find out how firms are implementing MMR, from Autumn 2015 the FCA will begin a wider assessment of barriers to competition, with a view to launching a market study in early 2016 on those aspects of the mortgage market that are not working to the benefit of consumers.
