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No excuses for poor disclosure

Brokers may moan about the FSA’s mystery shopping trips but they would do better to learn from the results and sharpen up their act when it comes to disclosure, says Bill Warren

In my column last week I did not discuss the Financial Services Authority’s mystery shopping exercise on mortgage disclosure documents, as mystery shopping is a topic worthy of a column all to itself.

If you search mystery shopping on Google, the first page of results makes it clear just how widespread this concept is in the field of market research – ranging from the most weighty reports to individual restaurant and product reviews. On the same Google page is the FSA’s media briefing note on the equity release mystery shopper exercise undertaken in May this year. Irrespective of this particular document, looking at the FSA’s mystery shopping in the context of the activity in general helps us to see it as a mainstream research tool rather than a way to snoop on us.

In fact, the activity of mystery shopping is far from being something recently introduced by the FSA. It was first adopted in 1999 by the Personal Investment Authority (PIA), one of the regulatory bodies incorporated into the FSA at its formation. Following a pilot exercise, the PIA concluded mystery shopping would provide it with three valuable tools. First, it would be an effective means of obtaining intelligence about the quality of advice given to consumers. Second, it would provide a way to investigate potential causes for concern in individual firms. Third, it would deter firms from providing poor advice. It would also provide the PIA with evidence for use in disciplinary proceedings. The findings of the 1999 pilot study in the investment sector throws up issues that are still high profile in the FSA’s concerns about mortgage and general insurance firms. For example, status disclosure by advisers was patchy, proper needs analyses were not always carried out and information given to customers was not always accurate.

The mystery shopping exercise on equity release showed up shortcomings and concerns similar to those of the first PIA exercise six years earlier. Although equity release is still a minority activity in the intermediary sector it is poised to grow fast and is regarded as higher risk by the FSA. The equity release exercise undertook 42 mystery shops across 20 firms and used two scenarios to test firms’ advice, both containing an element of investing the equity to provide income. The results make sobering reading. A high percentage – 95% – of advisers did not seek the right information from borrowers. In up to 62% of cases correct information was not being conveyed back to potential borrowers about key elements of the loan and its possible consequences.

The most recent FSA mystery shopping exercise in our own sector investigated a much smaller element than quality of advice, looking only at disclosure documentation. But let’s not forget that the FSA regards correct disclosure as central to the success of its mortgage regime. Sadly, those firms that were mystery shopped fared little better than the 1999 guinea pigs. Across 82 interviews – 62 face-to-face and 20 by telephone – on more than 50% of occasions firms failed to provide appropriate disclosure documentation at the right time. In 17 of the 34 intermediary interviews there was failure to provide an Initial Disclosure Document or Key Facts Illustration.

In light of these serious failures to act compliantly regarding disclosure, is it appropriate to claim it is not fair to do a survey in secret, the sample number was too small to show a proper trend, or that the result could stir up disproportionate consumer concern? These are knee-jerk reactions. It would be more useful to take a more positive attitude. If the FSA believes disclosure is so important and we have the means to provide the documentation, it is within the power of every firm to do this bit of compliance correctly, on time and every time.

A final thought – could calling the exercise mystery shopping be contributing to all the scepticism and resentment among those investigated undercover? Changing to a different name such as ‘independent desk-based market research’ could help to both erase the cloak and dagger image of mystery shopping and better describe its aims and methodology.

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