In a thematic review following the implementation of the Mortgage Market Review last year, the Financial Conduct Authority has criticised advisers for failing to deliver clarity to customers taking a mortgage and relying too heavily on clients’ preferences.
The paper, Embedding the Mortgage Market Review: Advice and Distribution, said: “Appointed representatives of many large retail intermediary networks are delivering advice with little or no structure.
“This, coupled with limited oversight and controls in many of these networks, resulted in variable and inconsistent quality of advice and a higher propensity for unclear or unsuitable recommendations.
“Needs and circumstances were often assumed or missed. The quality of advice and recommendations depended on the skill, knowledge and approach of individual advisers, with mixed results arising from advisers adopting different approaches.”
The review was published in conjunction with independent research into consumer behaviour conducted by ESRO on behalf of the FCA.
The two studies found that while many lenders have taken significant steps to provide advice for the first time, they and those that have always provided advice should now “focus on delivering consistently good outcomes for customers”.
Although the report found no evidence of systemic customer detriment it highlighted that some firms were “failing to take reasonable steps to obtain sufficient, relevant information about customers’ needs and circumstances before making recommendations”.
Although 59% of advice provided to customers was assessed as suitable, with only a small number of cases assessed as demonstrably unsuitable, the basis for 38 % of recommendations was “unclear”.
The consumer research highlighted that some customers place the greatest importance on the initial monthly payment to the detriment of other factors, influencing whether they think a mortgage is a “good deal” or not.
The FCA added that networks have also not “adequately considered the potential risks of poor outcomes posed by their advice models”.
The paper said: “We recognise the challenges posed when delivering advice through a network of appointed representative firms, and the advantages of allowing advisers flexibility in the way they provide advice.
“However, we are concerned that weaknesses in oversight and controls may prevent these firms from identifying and mitigating the risks of poor customer outcomes arising from this business model.”
Linda Woodall, acting director of supervision at the FCA, said: "It is vital that customers are able to get suitable advice and a positive experience when deciding on their options. Some firms were able to provide this, but not all.
“Although we welcome the considerable work of those firms delivering advice for the first time, and particularly those that have proactively identified issues within their own processes, there is still scope for improvement. We’ll continue working with firms to ensure they deliver good outcomes for consumers.”
Robert Sinclair, chief executive of the Association of Mortgage Intermediaries, said: “We have long advocated greater clarity in the process between fact finding, advice, making an application, underwriting and all the related administration activities.
“Sign-posting this to advisers and consumers may improve things. It is also clear that work needs to be done to ensure more understanding that advice is not just about the best price, but is about defining the most appropriate criteria then finding the cheapest within the agreed criteria.”
Following the review, the FCA will continue to work with industry to address the issues identified.
Individual feedback to firms visited as part of the study has already been given, together with actions required as a result of the findings.
Some firms assessed had already independently identified issues with their advice processes and were making changes to improve their service to consumers.
The review also found that many lenders had made significant efforts to deliver advice for the first time by investing in systems, front-line staff and operational capability.
Some firms were relying on highly structured processes resulting in lengthy, stilted and repetitive conversations with consumers which limited the adviser’s ability to engage effectively and properly assess needs and circumstances.
By contrast, other firms delivered advice with little or no structure, resulting in “inconsistent quality of advice and a higher chance of unsuitable recommendations”.
The best performing firms have demonstrated that it is possible to strike an appropriate balance.
The FCA’s thematic review into responsible lending commenced in April 2015 and from autumn this year, 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 in consumers’ interests.
Peter Williams, executive director of the Intermediary Mortgage Lenders Association, said: “Fully adopting the principles of MMR was always likely to involve an extended period of adjustment, with both lenders and brokers under pressure to adapt their ways of working while simultaneously staying open for business.
“The long-term success of MMR hinges on lenders, brokers and regulators working together to best serve consumers’ interests and ensure consistently good outcomes. There is a learning curve for all involved and the publication today of the FCA’s review provides more insight that will help to take this to the next stage.
“Clearly there are areas of advice and distribution that need to be strengthened. Efforts have already been initiated by lender and broker trade bodies to improve working relationships under the new regime.
“IMLA’s own research since the introduction of MMR on 26 April last year shows both parties getting to grips with the initial challenges of implementation, but it remains a work-in-progress.
“The principles of customer focus underpinning the MMR are widely supported by the industry and it is the right time to ask what more needs to be done to improve its delivery.
“IMLA will continue to use its influence to help these efforts and support lenders at a time when the upcoming EU Mortgage Credit Directive is putting even more pressure on their shoulders.”
IMLA will discuss the findings with the Association of Mortgage Intermediaries and work with them and the Council of Mortgage Lenders to update the trade bodies’ joint guidance.
