The Financial Conduct Authority says pressure selling, excessive fees and the quality of advice will be key areas of focus as it monitors mortgage brokers over the next two years.
The City watchdog says its overarching work will be “embedding” its Consumer Duty guidelines, it writes in a Dear CEO letter, dated 30 January.
It adds that it wants “to see an advice market that thrives, and where consumers can make informed decisions about products that meet their needs”.
The body says economic changes over recent years have “resulted in challenges for the sector”.
It adds: “The increase in interest rates has left some borrowers with higher payments and concerns around passing affordability assessments when taking out a new mortgage or switching lenders.”
In the first charge market, it points out: “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, it warns, “we have seen some firms failing to consider whether a secured loan is appropriate for customers in financial difficulty”.
The body adds: “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.”
In the lifetime market, it points out: “Where customers have more complex financial situations, firms should assess their needs and circumstances, ensuring they have adequate processes in place to identify and take account of characteristics of vulnerability.”
The watchdog warns that conflicts of interest can drive a high-pressure sales culture at firms.
It says: “Recent supervisory work has shown some firms have a culture driven by sales targets, with advisors financially incentivised to sell products that attract higher rates of commission or fees.
“The way sales staff are paid can drive misselling and product bias if conflicts are not properly managed.”
It advises that, “firms should regularly review whether incentive schemes which they or their appointed representatives operate could impede staff or the firm from acting in the customer’s best interest”.
The body says it has seen instances of best practice where firms have completed “holistic reviews” of fees charged against their costs and examples where charges for products or services have been reduced or scrapped.
But adds: “However, we have seen instances of less considered approaches, and we remind firms that solely benchmarking against competitors does not go far enough.”
The regulator says that marketing material should feature the risks of secured lending “prominently alongside the promoted benefits”.
It adds: “There is an 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.”
Dormant appointed representatives
The watchdog says to principal firms: “If your appointed representative is not carrying on any regulated activity, you should consider terminating the relationship and submitting an ‘appointed representative – termination’ form to us.
“This reduces the risk of appointed representatives potentially using the ‘halo effect’ of being listed on the Financial Services Register purely to promote their unregulated activities.”
The regulator says it will continue to carry out market studies and will “share the outcomes of this work by publishing good and poor practice”.
MorganAsh managing director Andrew Gething says the watchdog’s latest Dear CEO letter “is once again a call to intermediaries to go beyond just assessing whether a client meets criteria to ensure the advice we provide meets their needs, characteristics and financial objectives.
“However, if we don’t truly know who our customers are and what proportion have characteristics of vulnerability, we cannot achieve this, nor can we prove that the requirements of Consumer Duty are being met.”
Gething adds: “It is no secret that this is one of the biggest challenges across all areas of financial services and one of the regulator’s biggest frustrations.
“Whether it’s the recent CII report, the Financial Conduct Authority’s review of duty board reports or the regulator’s extensive market research, all have shown difficulties in identifying, classifying and recording customers characteristics and reducing potential harm.
“The upcoming vulnerable customer review from the Financial Conduct Authority is likely to continue this theme as it surveyed firms over 2024 on how they have implemented customer vulnerability management.”
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