A Financial Conduct Authority (FCA) review into the quality of mortgage advice has found that although most customers receive suitable advice, further work is needed to improve standards.
The report, Embedding the Mortgage Market Review: Advice and Distribution, is part of a long-running programme of work by the regulator looking into the mortgage market and follows last year’s Mortgage Market Review (MMR).
The review of the quality of advice provided by lenders and intermediaries is published in conjunction with independent research into consumer behaviour conducted by ESRO, on behalf of the FCA.
The two studies found that:
- Many lenders have taken significant steps to provide advice for the first time. These firms, and those that have always provided advice, should now focus on delivering consistently good outcomes for customers.
- There was no evidence of systemic customer detriment.
- Some firms were failing to take reasonable steps to obtain sufficient, relevant information about customers’ needs and circumstances before making recommendations. Although 59 percent of advice provided to customers was assessed as suitable (with only a small number of cases assessed as demonstrably unsuitable), the basis for 38 percent 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. This can dictate whether they think a mortgage is a ‘good deal’ or not.
Linda Woodall, acting director of supervision at the FCA, said: “A mortgage is a significant undertaking for anyone. 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.”
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. This often resulted 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 review of advice and distribution forms part of the FCA’s wider programme of mortgages work. Its 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.
Robert Sinclair, chief executive of the Association of Mortgage Intermediaries (AMI), said: “This report is a further important milestone in the MMR journey. It sets out with some clarity the things that the industry needs to improve upon and acknowledges areas where we have made good progress. This document gives us more information on the FCA’s expectations that we have been trying to determine throughout the MMR.
“AMI recognises that it is critical that all lenders and intermediaries focus on all the lessons to improve the total performance across the industry and ensure the best possible results for customers.
“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.
“AMI will be working with the CML and IMLA in partnership with its member firms to fully understand this report and engineer the required changes to processes and practice. We will also continue to ask FCA to give us clarity around their expectations.”