The Financial Services Authority Discussion Paper 06/04 on ‘The responsibilities of providers and distributors for the fair treatment of customers’ is an important document for all of us in the industry. It is relevant from single brokers running their own business to the largest mortgage network. It gives some insight into FSA thinking on joining up the relationships between providers and distributors in their dealings with customers. It does not introduce new requirements but emphasises current thinking. So we should all take note.
The paper is a long way from FSA thinking before M-Day when it had been suggested that lenders were going to have to be responsible for intermediary advice.
But what does it mean for product providers? It means the product is the key issue for the customer. Therefore, providers will generally carry most of the responsibility for products. However, it does not mean that they will be taking over responsibility for intermediary advice.
It is the product that might ultimately cause detriment to the customer, not necessarily the fact that it was bought from a particular distributor. Consider non-financial examples where we could draw parallels. It would not be difficult to think of harmful products, such as those produced by cigarette and gun manufacturers in the US.
Such manufacturers have had legal actions brought against them by former customers, as have toy, food and drug manufacturers around the world. If you buy a bad product you cannot necessarily blame the shop it was bought from, but might be able to seek recourse from the manufacturer.
In the world of financial services, there are some clear requirements for product providers. They must design products for target markets and include stress testing to ensure the products are robust. They must also decide on the most appropriate channel – advised, non-advised, direct offers, the internet, tied sales or IFA. This will depend on the product and the target market. Providers also need to assess the information needs of the distributor, such as the need for training. They are also required to monitor the quality of distribution and act appropriately (although again, this is does “Providers will carry most of the responsibility for products. But it does not mean they will be taking over responsibility for intermediary advice”not mean taking responsibility for intermediary advice). Finally, they must regularly review products to ensure the target audience needs are being met.
Providers must ask themselves whether the product serves customer needs in the marketplace and whether it is being sold to the right people, with the full information given by the intermediary. If the above requirements are being met then mortgage intermediaries should get good quality mortgage products that have been tested properly for volume and servicing. They will be able to recommend products that are designed for a specific market, such as first-time buyers, remortgagors, or those seeking further advances. The intermediary will also have adequate training or sales material.
Intermediaries should receive information from providers assessing their performance and quality as a distributor. Providers must also review how products are selling and adjust where necessary.
It is not all one way, of course, and distributors are by no means off the hook when it comes to the quality of the advice they give. Nor do any of the Mortgage Conduct of Business and Insurance Conduct of Business rule books, or treating customers fairly principles go out of the window. But the FSA paper sets the tone for the interaction between providers and distributors.
The requirements for distributors are to ensure they understand the information supplied to them by providers and to fully consider customer needs and circumstances in the sale. This is nothing new, simply a restatement of MCOB and of best practice.
There is an interesting point made in Section 1.25 Annex 2 of the paper regarding the relationship between lenders and network principals: “Broker network principals will probably want to gather information from the lender about customer churn, customer satisfaction etc., in order to monitor the ongoing fit between broker network principal and the lender.”
I have noticed lenders starting to improve their management information on the quality of business we submit as a network and sharing this with us to help us understand how we’re doing and how we can improve. If we’re performing well based on the significant investments we have made in our network, we might over time start to see some of this hard work reflected in the benefits or service we and our member companies receive.
By John Cupis, mortgages and propositions director, Legal & General Mortgage Club