The FCA has outlined its strategy for mortgage intermediaries over the next two years.
In a letter to chief executives, the regulator laid out its current and future priority areas of supervisory focus over the next two years.
The FCA says it will "select an appropriate cross section of the market and will then share the outcomes of this work by publishing good and poor practice so that everyone can learn from it".
The FCA said its "key focus is on embedding the Consumer Duty", but that it "may need to change [its priorities] if there are other emerging issues".
Quality of advice and unsuitable products
Other areas the FCA is focusing on include ensuring that "customers’ needs and circumstances are at the heart of the advice process, including where intermediaries manufacture their own advice services".
It noted that rising interest rates have led to more customers facing challenging financial circumstances or vulnerability, "which can require more in-depth fact-finding leading to intermediaries having to adapt their approach".
In the first charge market, the FCA says it wants to see firms "do more to ensure customers have considered their options", stating firms must consider customers’ personal and financial circumstances, financial objectives, and provide appropriate information to enable them to make effective decisions. This may include probing customers’ stated preferences and exploring any trade-offs with those who express contradictory or conflicting needs.
In the second charge market, the FCA says it has seen some firms failing to consider whether a secured loan is appropriate for customers in financial difficulty. The FCA explained: "Recommending products without considering the costs associated with increasing the repayment period and whether it is appropriate for the customer to secure those debts could cause harm. The rules under the Consumer Duty, require firms to avoid causing foreseeable harm."
The FCA added: "As part of our supervisory work over this next two-year period we will review whether sufficient assessment of customer circumstances is being carried out, and whether the advice given is suitable. We will assess the extent to which firms are ensuring customers understand the products available to them. We will also review the adequacy of firms’ systems and controls, and quality assurance procedures to ensure there is consistency in the advice given and appropriate oversight to mitigate risks of harm."
High pressure selling and ancillary products
The FCA's recent supervisory work has shown some firms have a culture driven by sales targets, with advisers financially incentivised to sell products that attract higher rates of commission or fees. The regulator said the way sales staff are paid "can drive mis-selling and product bias if conflicts are not properly managed".
It says firms should regularly review whether incentive schemes which they or their appointed representatives (ARs) operate could impede staff or the firm from acting in the customer’s best interest and "whether they are balanced and rewarding the right behaviours".
Excessive fees and fair value
In its letter, the FCA said: "We understand that certain products or customer circumstances can make the advice process longer or more complicated, and this may be reflected in higher fees. However, we would not expect firms to capitalise on this by increasing prices unfairly or without justification.
The FCA says it has seen different approaches, with both positive and "less considered" approaches, reminding firms that "solely benchmarking against competitors does not go far enough".
The regulator said: "We expect firms to be able to demonstrate their products and services offer fair value, and we will continue to monitor this as part of our ongoing supervisory work."
Financial promotions
The FCA reminded firms that it "is imperative that when promoting mortgage services, the risks of secured lending are featured prominently alongside the promoted benefits". It noted there is increased risk when promoting more complex products, such as second charge or lifetime products, if the promotion is unbalanced or biased towards a certain product. "Firms should not be seeking to exploit consumers’ behavioural biases, and communications should be designed in a way that avoids foreseeable harm and aids consumer understanding", the regulator said.
Firms should also consider how they can demonstrate compliance with the consumer understanding retail customer outcome, for example, through testing, monitoring and adapting communications and products or processes to support good consumer outcomes.
Dormant ARs and conditional selling
The FCA has reminded principal firms to monitor the type, volume and source of business being carried out by their ARs and consider terminating the relationship if ARs are not carrying out any regulated activity. The regulator says this reduces the risk of ARs potentially using the ‘halo effect’ of being listed on the Financial Services Register purely to promote their unregulated activities.
Finally, the FCA said it will "continue to act where we receive intelligence and reports of homebuyers being pressured to use estate agents’ in-house mortgage brokers". We encourage any firms to which this applies, to review whether they are adequately identifying and taking appropriate steps to mitigate conflicts of interest
