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FSA gets serious about compliance

The regulator taking action against non-compliant mortgage firms after a sector review should remind us that when the FSA looks into a subject it means business, says Bill Warren

Early in January the Financial Services Authority published the results of the work it had carried out between June and October 2006 on the quality of mortgage advice, with particular focus on processes being in place to ensure the fair treatment of customers.

The concerns set out in this report will have a significant impact on the way we do business and on the level of the FSA’s scrutiny and enforcement action in future.

In its report, the regulator is clear about where it expects to see improvements and what it regards as good and bad practice. The emphasis is on making improvements. The opening of its announcement on the review is a case in point: “The FSA today called on firms giving mortgage advice to improve their processes after new findings showed that only one-third of the firms it sampled had robust processes in place to provide customers with suitable advice.” No beating around the bush – the message is that adviser firms have to shape up or accept the consequences.

But before firms can start to improve their advice processes they need to be clear about the results of the quality of advice review, and the points made in the FSA’s press release of January 8 are a good place to start. The review included 252 firms of which 99 were mystery shopped, 78 were visited and 75 completed questionnaires.

Significant failings in the advice-giving process were found, with some of the poorest areas identified as being the assessment of customer needs including affordability, training and competence, overall systems and controls and record-keeping. On the whole, larger firms were seen to be performing better than smaller ones and where significant failings were found in firms, they were referred to enforcement.

This is a timely reminder that reviewing an area of regulated activity is not just blue sky research by the FSA but an investigation with penalties attached where serious non-compliance is found.

The results are divided into three groupings – banks and building societies, large mortgage networks and advisers and small mortgage networks and advisers. Nevertheless, much material is repeated across all three groupings. The information for each of the three groups falls into three parts – key actions, examples of good and bad practice and case studies. Key actions include instructions across five topics – quality of advisers, assessment of customer needs, recommendation including research, communicating with customers and management controls.

Of the three groups, the smaller firms have been told to improve the quality of their advisers. Advisers must be appropriately qualified and, if not, they should be stopped from giving advice with immediate effect and a review of their past business should be undertaken to ensure there is no customer detriment.

Also, training and competence procedures should be reviewed and firms must ensure these are appropriate and being properly followed. Under ‘assessment of customer needs’, all sizes of firms are told to check how they assess affordability and again review past business.

With regard to recommendations and research, the key actions across all sizes of firms include making sure that adequate research is done to support the lender and product recommendation and that advisers are able to evidence this process from files. Where an adviser recommends switching lenders, existing products and penalties must be considered.

Communication with customers must include an Initial Disclosure Document being provided to customers at the correct point in the sales process and ensuring that this document includes the level of service being provided and how the firm will be rewarded.

Finally, there is the matter of management controls. All firms are told to ensure their systems and controls provide management information that allow them to check whether their advisers are giving quality advice and treating customers fairly. This information should be capable of identifying trends and their causes, which should then be acted upon. Monitoring must be focussed on the quality of advice given, not just the completeness of files.

Next week, I will look at the examples of good and bad practice and the case studies cited in the research. This should help to build on the key actions and increase understanding of what is being expected of advisers.


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