Last week I wrote about the important findings of the Financial Services Authority’s review of the quality of mortgage advice, with an explanation of the actions expected of mortgage firms across three groupings – banks and building societies, large mortgage networks and advisers, and small mortgage networks and advisers. This week I want to take a look at the examples of good and poor practice in the review.
The examples are repeated across all groups although one would have hoped to see more examples that give insights into the different circumstances that prevail in large and small firms. But having only one set to worry about makes things simpler for those trying to keep up with FSA thinking.
A short paragraph specific to each grouping is included at the start of each set of good and poor practice examples. These follow the same five topics as the key actions – quality of advisers, assessment of customer needs, recommendation including research, communicating with customers and management controls, plus the extra topic of post-sale. For a full overview see the source documents on the FSA’s website. But here are some key points.
Under ‘quality of advisers’, good practice includes advisers being encouraged to take the advanced CeMAP qualification in addition to ensuring the careful induction and monitoring of adviser staff to identify and address development needs. Poor practice includes unqualified staff providing advice to clients when unsupervised, with documented procedures not being implemented.
Under ‘assessment of customer needs’, examples of good practice include a gap analysis to identify weaknesses in the fact-finding process, with advisers highlighting the need to compare overall costs over time rather than simply opting for the cheapest monthly payments.
Poor practice was found in five areas – affordability, lending into retirement, self-cert, interest-only and sub-prime, with the problem often being a lack of proper explanation about why a recommendation had been made.
‘Recommendations including research’ is curiously missing from the small firms document. But in the other two groups examples of good practice include the ability to produce evidence that a wide range of options has been considered, completed needs and preference sections including soft facts such as a borrower’s education plans for their children, using (and documenting) a number of sourcing systems, and noting why the cheapest option was not recommended.
Poor practice includes recommending a capital repayment mortgage when ‘know your customer’ information indicates an interest-only option and vice versa.
The ‘communication with customers’ section shows good practice including enclosing a printout of sourcing system findings with a customer’s suitability letter, a factsheet given to customers explaining the mortgage jargon used and correct disclosure documents issued at the right time.
Poor practice includes irrelevant material in suitability letters and, where debt consolidation is taking place, failure to point out the dangers of borrowers securing on their homes a previously unsecured loan and the added cost of extending the loan term.
‘Post-sale’ good practice includes diarising the expiry dates of fixed and discounted periods to recontact customers, the use of customer satisfaction questionnaires and careful tracking of complaints about advisers. The one example of poor practice cited concerns over an adviser investigating a complaint about themselves.
Finally, under ‘management controls’, good and bad practice centres largely on training and competence, supervision, file checking and adopting a risk-based approach. In good practice, all these matters are discussed, documented, and acted upon at a senior level within the business.
The matter of T&C and supervision is highlighted in the small firms section. Three-quarters of small firms in the sample either had no T&C procedures in place or had procedures that were not being implemented. The FSA’s view on this is simple. “It is essential that senior management has appropriate T&C schemes tailored to the firm’s needs which are regularly reviewed and updated,” it says.
It would be foolish of any mortgage firm to ignore this warning so next week I will return to the subject of T&C and do some revision on the FSA’s T&C guide, as recommended in the small firms quality of advice review.