RegulationJul 9 2015

Five things I learned about the Mortgage Market Review

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Five things I learned about the Mortgage Market Review

1) The key statistics

The work appears to have been mostly qualitative in nature, although some statistics were garnered.

Crucially, 59 per cent of mystery shops and files reviewed resulted in suitable mortgage recommendations to customers – with only 3 per cent of cases assessed as demonstrably unsuitable.

However, many firms failed to take reasonable steps to obtain sufficient relevant information about customers’ needs and circumstances before making recommendations, resulting in 38 per cent of cases where the regulator was unable to determine whether the mortgage recommended was suitable.

Shoppers did not receive advice in 19 per cent of mystery shops, despite the shopper believing they had received a recommendation.

The ESRO research found that in the case of lenders, consumers do not consider themselves to have received ‘advice’, rather ‘support’ to make the application.

This was due mainly to their lack of expectation surrounding advice from the lender and the fact that many consumers switch off during what they perceive to be the ‘legalese’ components of discussions.

Consumers also perceive follow up communications as designed to protect the lender rather than support them, reinforcing their belief that lenders cannot provide specific product recommendations.

2) What advisers could do better

The quality of advice in the mortgage market was mixed, according to the FCA, with some firms delivering advice with little or no structure, meaning advisers failed to ensure they had sufficient understanding of customers’ needs and circumstances on which to base recommendations.

Other firms placed heavy reliance on completion of point-of-sale application systems, allowing little flexibility for advisers to apply judgement or adapt delivery to meet individual customers’ needs.

“Both approaches resulted in unintended consequences which impacted on the customer experience or the suitability of recommendations provided,” the regulator added.

Firms had adopted contrasting approaches to dealing with initial customer enquiries, with some having strict controls on the boundaries between providing advice or information – in some cases making it difficult for customers to obtain mortgage information without advice – while others were more receptive to the information needs of customers, although advisers were often unclear as to whether or not they were providing advice.

Some lenders adopted a cautious approach to providing information to mitigate risks of unqualified staff providing regulated advice.

In some cases this prevented customers from accessing information about products unless they spoke to an adviser or accessed information online.

Mystery shoppers said they thought they had received advice and a recommendation, but reviews indicated advisers had only provided information.

In other cases advisers made specific product recommendations without first establishing the customer’s needs and circumstances, in breach of FCA rules.

3) ‘A time consuming process’

The research showed that consumers found the mortgage application process to be time consuming and unnecessarily convoluted.

Many who went direct to lender had to wait for an appointment, while others who had used alternative methods also mentioned the delay in getting to speak to an adviser, with these ranging between a week to three or four.

“Furthermore, it was felt by many who went direct to lender that they were expected to attend numerous meetings, often with different members of staff,” read the report. “A frequent complaint focussed on initial meetings being taken by less qualified members of staff, meaning customers were then repeating themselves throughout further consultations.”

ESRO found that the flexibility of intermediaries and the speed with which customers can book an initial appointment, contrasts sharply with those who go direct to lender.

“Intermediaries are appreciated for their perceived flexibility and ability to work to the customer’s schedule. In particular the possibility of evening appointments at their own houses, was seen as an important plus point.”

4) Intermediaries, lenders and execution-only

According to the independent consumer report, many consumers mistakenly believe that lenders are not able to provide mortgage advice or give personal recommendations in the same way an intermediary can, although they struggled to articulate exactly why this view was formed.

A general lack of trust in financial institutions means that mortgage borrowers do not enter into the application process feeling the lender will ‘be on their side’ or interested in helping them make the best decision.

“There is a distinct sense that lenders do not act in the interests of their customers, but are rather more concerned with profit,” the paper added.

Meanwhile, intermediaries’ perceived expertise and independence brings trust.

Their supposed access to the best range of products is seen as a great benefit, while they can also facilitate a speedy application, with a ‘lighter touch’ on documentation and increased likelihood of acceptance by the lender.

Finally, the idea of non advised applications is ‘too high risk’ for many – mostly because they are worried about making practical mistakes, such as when completing forms online or misinterpreting certain terminology. “Some assume that because a mortgage is such an important purchase, you wouldn’t be able to buy one in this way,” the research noted.

5) Misleading disclosures

The FCA also identified isolated instances of advisers making misleading disclosures.

These included references to the regulator in terms of protection insurance and confusing descriptions of adviser fee structures.

“These practices are not acceptable,” the review warned. “We will take action where we identify firms that encourage advisers to make misleading statements to maximise sales, or do not take reasonable steps to manage the risk of advisers systematically misleading or pressurising customers to cross-sell products at the expense of customers’ best interests.”

peter.walker@ft.com