We now have the results of the Financial Services Authority’s (FSA) 2006 work on the quality of mortgage advice. I can foresee a large number of reader queries being raised in this column over 2007, so this is a good place to summarise what the quality of advice review contains.
The FSA is calling on firms giving mortgage advice to improve their processes after the review findings showed that only one third of the firms it sampled had robust processes in place to provide customers with suitable advice. The areas of poor performance identified were: assessment of customer needs, including affordability; Training and Competence (T&C); systems and controls; and record-keeping. Larger firms were seen to be performing better than smaller ones and where significant failings were found, firms have been referred to enforcement.
The results are reported in three groups: banks and building societies; large networks and advisers; and small networks and advisers, and the information across the groups falls into three parts: key actions; examples of good and bad practice; and case studies. It is in the key actions that we find the clearest indication of what needs to be improved. The five main topics are: quality of advisers; assessment of customer needs; recommendation including research; communicating with customers; and management controls
Under the first of these headings, small firms must improve the quality of their advisers. Advisers must be qualified and, if not, they should be stopped from giving advice and a review of their past business should be undertaken to ensure there is no customer detriment. T&C procedures should also be reviewed. Under ‘assessment of customer needs’ all sizes of firms must check how they assess affordability and review past business for customer detriment if necessary. Regarding ‘recommendations and research’ the key actions include ensuring adequate research is done to support the lender and product recommendation and that advisers are able to evidence this process. Where a switch of lender is advised, consideration must be given to existing products and penalties.
Communications with customers must include an Initial Disclosure Document (IDD) being provided to customers at the correct point in the sales process and it must include the level of service being provided and how the firm will be rewarded. Finally, under ‘management controls’, all firms must ensure their systems and controls provide management information that enables them to check whether their advisers are giving quality advice and can identify trends and their root causes, which should then be acted upon. Monitoring must be focused on the quality of advice given.
The concerns set out in this report will have a significant impact on the way we do business and on the severity of the FSA’s scrutiny and enforcement action in future. If there is one clear message from this review it is that you must act right now to ensure the quality of advice your firm is giving – or face the consequences.
Looking at record-keeping
Q1: I have read and heard so much in recent months about accurate record-keeping, being able to evidence recommendations to clients and the need for a technological approach. For a small firm like ours who cannot afford expensive systems what do you recommend?
Bill answers: If you want a good sales process that can be easily used sitting in front of the client, plus the ability to source lenders and products quickly, a large record-keeping ability plus compliance monitoring all in one system, the Home Buyer System is the one for you. Not being the biggest gives it the flexibility to respond quickly and positively to client needs and to the demands from the regulator. It is constantly making improvements to reflect the focus of attention by the FSA to assist clients wherever possible to seek best practice and is internet-based so the risks are lower in terms of data security.
TCF expectations
Q2: With the FSA’s deadline for implementing ‘Treating Customers Fairly’ (TCF) near, can you say what the FSA is expecting and how it plans to check up on us?
Bill answers: I don’t know exactly what the FSA will do if firms haven’t implemented TCF in their businesses, other than what it has stated publicly – which is to take enforcement action.
The FSA has provided a lot of guidance relating to the ‘outcomes’ from TCF implementation it expects. By reading the TCF pages on the FSA website, you will be able to get a clear picture of what you need to do. The important point to remember is that TCF is not just about being nice to clients – it is the total integration of the TCF principles into your business.
T&C guidance
Q3:The FSA’s quality of advice review highlighted the need to have an effective T&C scheme and actively develop the knowledge and skills of advisers. Where can I get more detailed guidance to check that what we are doing is right?
Bill answers: You don’t say if you are directly authorised but I assume from your comments you are, so the FSA website can help you. You might also consider a health check from a quality compliance consultancy firm.
