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      • Good practice
        • Quality of advice processes
          • Case study 1

Mortgage quality of advice process case study - Firm Z

Firm Z

Firm Z is a small firm of mortgage brokers offering independent mortgage advice. There are three Directors and six other advisers. The firm does not target any particular part of the mortgage market. Instead, it transacts varied business including first time buyers, remortgages, right to buy, buy to let, lifetime and sub prime. It offers whole of market advice and researches the whole market using a sourcing system.

The firm has been in business for 20 years. During this time it has built up a large client bank. Much of its remortgage business is repeat business from existing clients.

The firm was considered to be a good example of a firm complying with principles-based regulation. Our findings included:

Management and Control

(Principle 3 states: A firm must take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems)

When the third director joined the firm in late 2005 the firm undertook a review of responsibilities within the firm. The responsibilities were divided in this way:

• One director to have responsibility for and champion treating customers fairly
• One director to have responsibility for recruitment, compliance oversight and training of advisers
• One director to have operational responsibility.

As a result of these appointments, the firm conducted a gap analysis in these areas. This produced the following action:

Recruitment of advisers

The firm found that some complaints it had received about unsuitable advice involved two advisers. The firm looked further into this and found that in one case some of the issues could have been avoided if it had taken up a better reference from a previous employer. The reference it had received had no details of the range of business conducted by the adviser or of his status of competence. The firm has now improved its procedures and asks for references from employers for the previous five years to include:

• range of business written with approximate business levels of each;
• training and competence status;
• date of starting activity if not competent;
• date of attaining competence;
• number of complaints received, their nature and the number upheld;
• relevant competency. If competent for lifetime mortgages but no specific lifetime mortgage module passed – information on number of cases written and date of the most recent; and
• a test to confirm the validity of the previous employer's assessment of competence.

Training and competence (T&C)

The firm resolved to set a standard above minimum requirements and conducted a training needs analysis for all advisers. It now requires all advisers to:

1. pass Advanced CEMAP;
2. be accompanied on two client visits each year;
3. undertake two role play observations each year; and
4. undertake relevant Continuing Professional Development (CPD).

Accompanied visits and the role plays are alternated so each adviser is observed quarterly. These observations concentrate on the 'soft skills'.

Compliance monitoring

Each adviser is risk rated and the firm then caries out monitoring of their business in line with assessments carried out. New advisers receive a higher level of monitoring until they reach a consistent, agreed standard of compliance. Experienced advisers are subject to a lower level of monitoring. However, this is adjusted when issues are found. These issues can arise from monitoring of the business or are fed in from T&C assessments/observations.

The firm also conducts a trend analysis of compliance issues identified. If appropriate, these are then fed into individual or group training plans.

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Customers' interests

(Principle 6 states: A firm must pay due regard to the interests of its customers and treat them fairly)

The firm completed a review of all areas of its business by using a gap analysis to find out the extent to which it met FSA's TCF requirements. As a result, the firm introduced the following improvements to the sales process:

• Offer first time buyers (FTBs) (especially young ones) the opportunity to bring another adult with them to the appointment. The firm's client base is now well established and many new clients are sons/daughters of previous clients.

• Explain the whole housebuying process to FTBs, including the cost of employing a solicitor, having the house surveyed, and getting advice.

• Provide practical examples to clients to explain how each type of mortgage works (the firm uses a sheet for this).

• Collect 'know your customer' information electronically. This ensures the adviser gets all the information needed, as he cannot continue until each mandatory field has been completed.

• Establish evidence of affordability for all mortgages including self-certification. This can mean getting bank statements for cases where accounts should be, but are not, available. Although not required by our rules, it also requires the adviser to seek evidence of other incomes where more than one employment is held.
  The remuneration strategy now ensures that:

  • no advisers are rewarded by commission only; and

  • bonuses are related to both volume and quality of business.

The firm's remuneration has been reduced to a level which it considers 'fair' for the amount of work carried out in each case. As a result, fewer borrowers are having to increase the size of their mortgage to pay fees.

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Relationships of trust

Principle 9 states: a firm must take reasonable care to ensure the suitability of its advice and discretionary decisions for any customer who is entitled to rely on its judgement.

The firm analysed complaints received over a three year period. Although the level of complaints was low, they highlighted incidences of not using the existing lender and not explaining why consolidation of debt was recommended. The firm has now introduced the following improvements to its sales process:

• Advisers must explain why the lender has been recommended, and advisers must explain why switching lender is recommended.

• Clearly demonstrate why debt consolidation is appropriate. In particular, advisers must show why:

  • an arrangement with existing creditors is not possible or recommended;

  • the additional costs of debts being consolidated over a longer term are recommended;

  • it is recommended that an unsecured debt is secured

The firm issues suitability letters to clients even though this is not a requirement. As part of its treating customers fairly gap analysis the firm found it could improve its suitability letters. These now include:

• a summary of the clients' needs;

• a summary of the recommendation made;

• an explanation of why the recommendation meets the needs of the clients. This always covers:

  • the repayment method;

  • why it is affordable;

  • why the lender;

  • why the product;

  • why the term (especially if into retirement); and

  • why the existing lender (if there is one) has or has not been used; and

• a copy of the top 20 products which the firm's research had identified.

The firm found that many clients wanted the cheapest recommendation available. The firm's sales process has been improved and advisers now fully explain the alternatives. This includes the use of a calculator which highlights the differing costs for differing terms – and how an increased payment could reduce the repayment term. The client is therefore made fully aware of alternatives and is better placed to understand why a more expensive recommendation may be made.

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