By Bill Warren, Compliance Director, Complete (CMLS)
If I start this article by mentioning the three words ‘Treating Customers Fairly’ (TCF), please don’t immediately stop reading – because TCF (the Financial Services Authority’s principle number six) is the driving force behind the regulator’s current interest in ensuring customers receive consistently high quality advice. The ongoing extensive exposure of the subject of TCF may tempt readers’ eyes to glaze over, but giving into this instinct would be a bad mistake. This is because keeping the connection between TCF and the quality of advice clearly in mind will help us all to implement simple practical measures to improve the quality of advice given by our firms and to maintain that quality consistently in future.
Help and encouragement
The FSA is committed to helping regulated firms first to understand what is expected of them and then to improve to a satisfactory standard. In order to achieve this, its work is often reported as a series of good practice notes; case studies, etc, that will help firms to improve – rather than a list that condemns firms that have been found wanting. The two recent pieces of FSA work on the quality of advice have been reported in ways that are designed to help and encourage firms to improve their practice.
First, in the latter part of 2005, the FSA visited 36 (mainstream) lending firms – following its earlier investigations into self-certification and non-conforming mortgages – and looked at 204 files to assess the quality and suitability of mortgage advice. The good practice identified in these visits showed that 91 per cent of firms had appropriate resources and systems in place, 61 per cent maintained suitable record-keeping procedures, and 66 per cent retained evidence of discussions regarding confirmation of affordability. However, the record-keeping and affordability percentages clearly showed much room for improvement and it was pointed out that the full potential of sourcing systems was sometimes under-used. Particularly relevant to the key topic of ‘quality of advice’ there was ‘failure to demonstrate the needs and requirements of the client via a record of suitable factfinding and adequate reasons for recommendation’.
The final key point in this mortgage-specific investigation was that, although many firms had made efforts to meet training and competence (T&C) requirements, there were some areas for concern. First, there was a lack of understanding that qualified advisers are not automatically deemed as competent to give advice and that they must be assessed by their employer for their competency to issue advice without supervision. Secondly, many firms were failing to record how ongoing competency was maintained and, thirdly, there was frequently insufficient supervision of advisers who were not yet fully competent. Follow-up work on the quality of advice given by mortgage firms is timetabled for 2006, with publication expected in the third quarter.
Further investigations
In the meantime, more results on investigations into the quality of advice have been published by the FSA, following what it describes as ‘one of the largest pieces of ‘thematic’ work we have ever undertaken’. Here, 50 financial advice firms were visited and a further 50 were mystery-shopped, with the objective of ‘providing firms advising on financial products to consumers with further help on how to improve their advice processes and reduce the risk of mis-selling’.
Although much of the detail contained in the published results is concerned with advice on investment products, it has great relevance for mortgage firms in two key ways. First, the findings echo and reinforce the earlier work with mortgage firms and, second, there is a major shift in the stress that is given to TCF as the driving force behind ensuring that advice quality is consistently good. In fact, the Quality Advice Cluster Report – which gives detailed findings, case studies and recommendations – is sub-titled ‘Considerations for Treating Customers Fairly’, and the two additional and fully detailed case studies refer all points firmly back to the TCF initiative.
The fourth publication arising from this investigation is the factsheet ‘Improving the Quality of Your Financial Advice Process’ and it contains much useful information that, together with findings of the earlier mortgage-specific investigation, provide an excellent basis from which mortgage firms can look at their own quality of advice systems and start to implement improvements. It is divided into five areas: the quality of advisers; assessing customer needs; recommendations and research; communication and suitability letters; and systems and controls. Although some points in the factsheet are not specifically relevant to the mortgage advice market, the majority are.
Regarding the quality of advisers, firms are reminded that their recruitment processes should be robust enough to ensure that they recruit the right staff in the first place. T&C regimes within firms must then adequately identify and address any gaps in the adviser’s knowledge and skill, and their ability to apply these in the workplace. Regular follow-up and review are essential within any effective T&C strategy, and the good-practice example suggests the completion of a training needs analysis every year for every adviser, with regular one-to-one meetings including reviews of the advice given.
Assessing customer’s needs
When assessing customers’ needs prior to giving advice, we are reminded that customers must understand the areas on which they are receiving advice and that their individual needs and objectives must be sought. Risk, affordability and the effect of future changes in their financial circumstances must also be discussed. With regard to recording mortgage recommendations and research and presenting this to clients, there is no ‘suitability’ letter stipulated in the statutory documentation (as there is in the advice and sales process for investment products). However, there can be few mortgage firms that still believe such a document is unnecessary. Even though it is not strictly a requirement, a comprehensive letter setting out the client’s circumstances and needs, and the adviser’s product recommendations to meet those needs, is clearly a key record to prove that high quality advice is being given. It can not only be the basis for internal case/file monitoring, but can also be used as part of management information and proof of advice quality should the firm be subject to an FSA visit. Under the topic of suitability letters, the factsheet suggests clear and plain language is used, with use of bold text to emphasise key risks and changes associated with any recommendation. Letters should be individually tailored to customers and not use chunks of standardised text. There should be a clear explanation of how recommendations meet the customer’s circumstances and needs.
Regarding systems and controls, the factsheet briefly reminds firms to have adequate systems and controls in place with regard to the collating and use of management information to ensure advisers follow a good quality advice process. These will need to include regular file reviews and meetings with advisers to monitor their cases, the quality of their advice and their progress towards learning and development objectives.
The Cluster Report on the recent quality of advice research goes into greater depth on all these points, and senior personnel in mortgage firms that have TCF/compliance responsibilities would do well to understand and apply the examples of good practice cited at the end of the report, grouped under five headings: TCF; quality of advisers; assessment of customer needs; communication; and corporate culture.
Additional emphasis in the more detailed Cluster Report is placed on creating clear and measurable objectives for staff, based on key performance indicators (KPIs), that are regularly reviewed for progress. A training needs analysis of individual advisers should be carried out annually, setting out a programme of continuing professional development, and firms should consider the regular use of external resources to provide relevant technical staff training. In addition, firms are reminded it is not sufficient for file reviews to focus on administrative errors – instead monitoring of quality of advice should be the major objective.
The fact that TCF has such a high profile in this more recent FSA work on the quality of advice should not be taken lightly. The mortgage intermediaries duty to provide high quality advice to clients lies at the heart of the FSA’s statutory objective of consumer protection – which is the very reason mortgage advice and sales were regulated in the first place. Embedding simple good practice on the recruitment/ongoing T&C of advisers; making, communicating and recording suitable product recommendations; and keeping good control of the whole advice process encompasses a firm’s core relationship with its clients. If customers are treated fairly in this process, then firms can be confident that their TCF strategies and implementation are in pretty good shape.
