‘Dear CEO’ letters have long been a favoured means of communication from the regulator, especially in the mortgage space, outlining the future focus of where the Financial Conduct Authority (FCA) might use its resources, the key activity under scrutiny, the results of such work, conclusions and where it wants to see improvement.
The most recent such letter has been issued to the owners and senior management of mortgage intermediary firms, and all those at the highest level of firms need to be aware of it, read it, digest its contents and review whether they are operating in the way the FCA would like them to.
There is much to take in with this piece of literature, but here is my take on some important points for firms to consider as a result of this letter.
The importance of good-quality mortgage advice
Firstly, of course, are the key areas the FCA is setting out as its priorities for the next couple of years in the mortgage advice space.
It will be no surprise to anyone that Consumer Duty looms large here. How are firms implementing and embedding the duty into their firms? And are they doing so in a way that gets us to those all-important positive consumer outcomes?
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So, from that, the FCA has set out priority areas, including the quality of advice being provided, set against the context of the need for detailed client fact finding, to fully understand the customer’s needs and circumstances.
The regulator breaks that down specifically between the first and second charge markets, with the former being focused on firms providing evidence that all options have been considered. For the latter, it’s clear the regulator is concerned about such products being recommended inappropriately.
Within all of this is the requirement to fully consider those clients who may be having financial difficulties and/or showing vulnerability. It’s key that firms can correctly identify and manage potentially vulnerable clients regardless of product sector, but a specific nod is given to the lifetime mortgage market.
Avoiding putting pressure on clients
The FCA also raises a potential red flag regarding how firms incentivise their workers, suggesting this can lead to a high-pressure sales culture, which doesn’t chime with Consumer Duty, the appropriateness of certain products, etc.
It wants firms to consider the quality of mortgage advice, not just the volume of sales, in terms of how they reward employees.
The potential for charging higher fees is also mentioned and fair value assessments are important here. It recognises that “certain products or customer circumstances can make the advice process longer or more complicated” and this can result in higher fees, but it doesn’t want firms to raise fees “unfairly or without justification”.
Other priorities include financial promotions and the continued need for them to be “fair, clear and not misleading”, while it reminds firms there are new rules regarding the monitoring and supervision of appointed representative (AR) relationships.
Plus – and this has been an issue raised by many in our industry for a very long time – there is the issue of conditional selling, raising the specific example of “homebuyers being pressured to use estate agents’ in-house mortgage brokers”.
I’ve lost count of the number of times advisers have told me of circumstances where their client was pressured to use another firm’s services, often by an agent, with the suggestion that offers wouldn’t be put forward if they didn’t, or homes couldn’t be viewed, or in some circumstances suggesting this was a regulatory requirement.
It would be positive to see this sort of behaviour cracked down on.
No stone left unturned
A further, and notable, consideration is what will follow.
The regulator will conduct thematic work in these areas and, judging by its work in other sectors, suggests it will look at a wide cross-section of firms.
In other words, all firms – regardless of size – need to be prepared to hear from the regulator on the points outlined above. They need to be able to provide evidence to support any claims they make about the way they work, the service they provide, the way they deal with clients, the products they recommend, the outcomes they deliver, and much more.
We believe this is one of the most important missives focused on mortgage advisers by the FCA in some time; it would make perfect sense for owners, directors and senior managers of all firms to be across this, and make their employees aware of it.
A plan is needed for each of the aspects highlighted above. If you need support in that area, or on anything regulatory, then Paradigm can deliver for individuals and/or the firm.
To conclude, while we might not say this is an aggressive ‘shot across the bows’ for firms from the FCA, it certainly highlights some of the areas it believes poor practice might be prevalent. It is going to look into the way firms act in these areas and outline good and bad practices as a result. Where it finds the latter, it’s going to be taking appropriate action.
We should not be fearful of this, but neither can we say we were not warned. I would take heed and make sure you’re on top of all of this.
