To fulfil their regulatory obligations, lenders and intermediaries need to have robust systems and controls in place to ensure that adequate affordability assessments are carried out and that they act honestly, fairly and professionally in the best interests of their customers with a clear focus on ensuring good customer outcomes.
The Financial Conduct Authority (“FCA”) thematic review 15/9 focuses on the implementation of the Mortgage Market Review (“MMR”) through a large mystery shopping exercise involving consumers seeking advice from larger and smaller banks, building societies and large and small intermediaries. The FCA is concerned that firms are not doing enough to engage with customers and that they are not always delivering suitable recommendations.
The Mortgages Conduct of Business Rules (“MCOB”) were updated in April 2014 with greater focus on a presumption of interactive sales, assessments tailored to individuals needs and circumstances and enhanced professional standards of mortgage advisers.
The FCA carried out 11 on-site visits and assessed the suitability of 34 recommendations (in addition to those provided as part of the 134 mystery shops) of more complex case files in five firms.
High-level findings for the mortgage market review included:
- Advisers are not clear on when they are providing information as opposed to advice- often resulting in customers being turned away from valuable sources of information. This creates the risk that customers are unable to obtain information about mortgages unless they commit to an application. This could result in a lack of shopping around before making a decision. Conversely, some advisers may not appreciate that they are providing regulatory advice and fail to properly assess suitability;
- Establishing a customer’s needs and circumstances is the primary and paramount concern- Unless a customer’s needs and circumstances are fully considered, a firm is unlikely to be able to demonstrate why a particular mortgage contract is suitable;
- Firms must use their judgement, knowledge and skill to recommend suitable mortgages to assist customers in discharging their responsibilities in making their own decisions- Firms should challenge information provided by the customer and remember that some information may not always be provided or downplayed for fear of affecting the lending decision;
- Customer vulnerability in the context of debt consolidation- insufficient evidence of justification for securing unsecured debts against a customer’s property;
- Overly lengthy standard form disclaimers- that failed to result in customers fully understanding the features or risks associated with the recommended mortgages; and
- Process as opposed to outcome driven Management Information (“MI”)- the MI produced by firms lacked the sufficient granularity to identify poor customer outcomes or conduct risk issues associated with mortgage advice. This was exacerbated by the lack of challenge amongst senior management.
The FCA expects:
- Advisers to receive training on the difference between merely providing information to customer and providing advice;
- Firms to assess what changes they need to make to improve communication channels with customers;
- Senior management to ensure the firm has appropriate controls and reporting mechanisms to deliver good customer outcomes;
- Appropriate monitoring activity and MI to be in in place to identify instances where customers may not be treated fairly, and that this information is reviewed appropriately, shared as necessary and acted upon; and
- Lenders and intermediaries to assess the appropriateness of the distribution channel and sales activities, and to exercise appropriate ongoing oversight.
The FCA thematic review raises some interesting points regarding the challenge of meeting regulatory disclosure requirements whilst ensuring that meaningful messages are not only delivered but understood.
The consumer research carried out by ESRO noted:
Consumers also perceive follow up communications (such as letters confirming the recommendation of a particular product) as designed to protect the lender rather than support them –serving to reinforce their belief that lenders cannot provide specific product recommendations.
This accords with the FCA Practitioner Panel’s research on consumer responsibility (released earlier this year) which found that very few consumers- even the most ‘highly motivated’- read the terms and conditions. In this respect, the FCA highlighted the following key themes that evidence an approach of over-disclosure taken by firms:
- Disproportionate emphasis on risk mitigation- contractual disputes, court proceedings, regulatory action; and
- Tone of voice indicating intended readers being third parties e.g. underwriters, indemnity insurers, solicitors and barristers.
This was said to compound consumer misunderstanding and as a result, erode trust.
The ESRO research also identified issues in relation to consumer understanding, in particular, seeking to determine what gaps if any existed between the information/advice given by firms and the information/advice received by the end consumer. Given the relative importance and potentially long-lasting significance of taking out a mortgage, it is concerning to note the often stark divergence in understanding:
Consumers typically have a basic understanding of the mortgage product ultimately recommended, but a number struggle to explain why this particular product was suitable in light of their personal needs and circumstances.
In the case of lenders, consumers do not consider themselves to have received ‘advice’, rather ’support’ to make the application. This is due mainly to…the fact that many consumers switch off during what they perceive to be the ‘legalese’ components of discussions with lenders– thereby failing to engage effectively with the process.
The comments from ESRO reinforce earlier FCA concerns regarding the risks created by information asymmetries i.e. where one party in a relationship has additional or superior information to the other party. The thematic review findings appear to indicate that lenders and intermediaries have used their greater understanding of information to develop advice and sales processes that fail to impart such information resulting in little benefit to the majority of consumers. This risk is heightened by those consumers who inadvertently misrepresent their circumstances or fail to give full information on financial circumstances.
We consider that the key challenges for firms relate to assisting customers in:
- Identifying what their actual financial needs are and what product features would meet these needs;
- Actively deciding whether the product they are being recommended delivers these desired features; and
- Understanding and trusting terms and conditions as being necessary and relevant (perhaps through the use of FAQs, diagrams, audio and video clips) to the overall transaction and financial relationship.
Can your firm answer and evidence the mortgage advice and distribution questions below?
- Is there a clear understanding of the difference between provision of information and regulated advice?
- Do training and systems and controls support suitable advice being provided?
- Do lenders know who is advising on their product(s) and how, and do they exercise any meaningful oversight of this?
- Are significant conduct issues related to the product likely to be promptly identified and acted upon?
- Are terms and conditions written and delivered in a way which is clear, fair and not-misleading?
- Is there appropriate monitoring and MI in place to assess customer outcomes?
- Is it clear that the outputs of any monitoring and MI are reviewed, understood, shared as necessary and acted upon?
Firms should heed the FCA findings not least because activity in this industry will only intensify in coming months with a market study into barriers to effective competition due in Autumn 2015 as well as a wider review in early 2016 on what aspects of the mortgage market might not be working in the best interest of consumers.