Our work was based around visits to 36 brokers and a review of 204 case files kept by the firms. As with much of our work since regulation began, we found evidence of both good and bad practice.
Firms’ records are the main way they can show us and their customers they are following FSA requirements during the sales and advice processes. We saw good practice in mortgage firms that were well organised with adequate resources available for the job. They had systems designed to help them meet our standards and staff with the right skills, attitude and knowledge. And they made sure their records were maintained to a high standard, with fully completed fact-find documents, clear recommendations and evidence of why the recommended mortgage was the most suitable. But at the other end of the scale some firms showed little understanding of the rules, failing to maintain a record of the information they gathered and the reasons recommendations were made. Firms should be able to show through their file records that a clear process has been followed before making a recommendation. This might include a comprehensive information gathering process such as a fact-finding document recording the client’s current circumstances and future needs, confirmation of the affordability of the proposed mortgage, evidence of product research, the relevant Initial Disclosure Document and Key Facts Illustration, and reasons for recommending the product. Nearly half the files we looked at did not adequately document why the recommended product was the most appropriate taking into account the stated needs and preferences of the customer. A quarter of firms failed to record sufficient customer information and a similar number failed to record recommendations. One of the key elements in recommending a product is to ensure the client is able to afford the monthly repayments both at the time of recommendation and through the duration of the mortgage, allowing for possible interest rate increases. We found a third of firms were not maintaining records of such affordability.
Use of resources
Most of the firms visited had a defined sales process, qualified and competent advisers, a method of sourcing an appropriate product and a system for recording information gathered. Examples of good practice were found where firms had kept a list of products and rates offered to the client, showing the filtering options used to determine the reason for the recommendation. They also indicated on the list the reason why a product was chosen if it was not the cheapest one. But we found some firms that use sourcing systems for product research could not show they were using the system to its full capability. Some, for example, just kept print-outs of lenders in alphabetical order on file rather than print-outs using the filters available on the systems. We found some instances whereby limited panels were used to make a recommendation, with the adviser basing the recommendation on their personal knowledge of the lender. When this happens, the options considered are not always shown on the file. Here, good practice would be to retain a list of lenders and rates on the client file to show how the recommended product was selected. Where suitability letters are issued, we found these are not always tailored to individual circumstances. Where adequate systems are in place, firms should ensure advisers fully understand what should take place and that this is reflected in information retained on the client file.
Advice and non-advice
We were particularly concerned to find that some brokers did not appear to understand the difference between advised and non-advised sales and did not have sufficient evidence to determine whether the process leading up to a particular recommendation had followed the advice requirements. It is important that brokers ensure they can fully describe the two levels of service available to a client when issuing an Initial Disclosure Document even if the firm only offers one service level itself. And, if a client rejects a recommendation a firm should be aware of the process to follow to offer a non-advised sale instead.
Training and competence
While a number of firms we visited maintained adequate training and competence records, we found that some did not fully understand the FSA rules. Examples of good practice were found where firms could show records of reviews between managers and advisers, reviews by the firms of the advisers’ recommendations and their interviews with clients, and continuing professional development. Such firms were able to show how their advisers met our competency requirements and how they kept their advisers’ skills up to date. There also seemed to be a lack of understanding of the timescale within which an adviser should become qualified and the actions to be taken by the firm if this deadline is not met. Firms with trainee advisers can review the websites of the Institute of Financial Services or the Financial Services Skills Council to ensure they understand these timescales and take steps to put contingency plans in place in the case of advisers failing to qualify.
What the FSA can do to help
We are placing a fact sheet on our website describing the good and bad practice we identified during the review and are planning to produce a guide for firms on training and competence procedures. There could be more for us to do to clarify the difference between advised and non-advised sales. We are planning a more thorough assessment of the quality and suitability of advice in the mortgage market next year, possibly through mystery shopping and further visits to firms. We hope we will see an improving picture of firms ensuring that their customers get the products and advice that best meet their needs and that this will be clearly demonstrated in records kept. Andy Watson is head of mortgage supervision, small firms division, at the Financial Services Authority