The beginning of any year is often a time to reflect on the past and set goals and targets for the months ahead. The Financial Services Authority (FSA) clearly felt that January 2007 was the time to remind advisers in the mortgage industry of their regulatory responsibilities and the need for a renewed focus on ‘quality advice’ now and in the future.
It did this by announcing the findings of its quality of advice work, which not only looked at the quality of advisers but assessed customer needs such as affordability and looked at the recommendations given to customers, including the level of research carried out to reach recommendations. It also focused on how customers were communicated with, how firms were dealing with post-sale responsibilities and the management controls that were in place to ensure the quality of advice was monitored.
Key actions
The FSA’s work on the quality of advice given to mortgage customers reviewed three sectors – small firms and networks; large firms and networks; and banks and building societies. The work has delivered a number of key actions; highlighted good and bad practice, while also giving the FSA an understanding of how the mortgage industry has responded to statutory regulation.
The FSA has stated that firms need to have ‘robust processes’ in place, which will mean the likelihood of a customer receiving ‘unsuitable advice’ is greatly diminished. Those firms who sit within the large firm and network and banks/building societies sectors were said to generally have these ‘robust processes’ in place, although the FSA did point out these were not always followed, which could potentially mean some customers received ‘unsuitable advice’.
The verdict from its research of small firms and small networks was more severe. The FSA said more than three-quarters of the firms reviewed ‘generally did not have robust processes in place’ – a worryingly large number with an increasing chance therefore that unsuitable advice could be delivered. The result has been a call for firms to check they are doing all they can in certain areas including the quality of advisers, assessing customer needs, research for recommendations, issuing Initial Disclosure Documents at the right time with the correct information regarding the service level offered and ensures the management information is in place to deliver continued compliance and continued quality.
These ‘key actions’ have been formulated from the bad practice viewed by the FSA in a significant number of small network cases. For instance, the FSA found instances where firms were employing advisers who were not appropriately qualified and were not being supervised, yet who were giving advice to customers. Mortgage advice qualifications are a fundamental part of regulation and the FSA has urged firms to ensure every adviser has the appropriate qualifications. If they do not, they should be stopped from giving advice and a sample of their business reviewed to ensure there has been no consumer detriment.
T&C
The importance of a Training and Competence (T&C) scheme has also been marked out as fundamental to a firm’s delivery of advice. A T&C plan is a regulatory requirement and it is a necessity that firms offer their employees a structured career path and a development programme that tests and ensures their ongoing competence. A properly administered T&C scheme will be of benefit to the firm in terms of assessing employees’ T&C needs, the adviser for their own development, and ultimately the customer will gain from an adviser delivering compliant advice. Firms who are unsure if their T&C scheme meets these requirements should take advantage of guides issued by the FSA and the Association of Mortgage Intermediaries.
The process an adviser uses to assess whether a customer can afford the mortgage has also come under scrutiny, not just in this work but other thematic projects including those into the sale of both interest only and self-cert mortgages. The FSA highlights a number of examples of poor practice, including advisers not undertaking a full income and expenditure assessment, instead opting to focus purely on the customer’s income and the cost of servicing the debt. Firms are advised to assess affordability effectively and ensure adequate research is carried out to evidence the recommendation given.
Record-keeping is vital here and firms should ensure their client files provide clear evidence on why the product recommended was ‘the most suitable’.
With these recommendations the FSA is expecting a clear lead from senior management and therefore management information must be made available and used to continually check the quality of advice. Reading between the lines, many believe the FSA is offering firms time to take action but this will not last forever. We should expect follow-up work in this area in the very near future and action if the warning has not been heeded. It may well be that at the start of 2007, and over two years into statutory regulation, the FSA’s intentions have never been clearer.
Mehrdad Yousefi is head of intermediary mortgages at Alliance & Leicester
