The first Quality of Advice project in 2007 found weaknesses in key areas of firms' advice processes.  This second review was carried out at the start of 2008 to determine whether firms had made improvements in these areas.  It also aimed to evaluate the effectiveness of the communication from the first project in educating firms and raising standards to ensure they have robust advice processes in place.

Around 250 firms, of which 220 were smaller firms, were reviewed through a range of telephone assessments, visits or mystery shops. The reviews were carried out between January and March 2008 but looked at business stretching back to as far as April 2007.

The project focused on 6 key areas:

• management controls
• assessment of customer needs and affordability
• recommendations including product research
• communications with customers
• quality of advisers (training and competence)
• post sale

At the end of this document, you will find links to the good practice and case studies which we published after the first project about advice processes and after project work concluded in December 2007.  We have also included new information about the treatment of interest only mortgages. 

Key messages

• the overall findings in this sample are disappointing considering this is our second review of the quality of firms' mortgage advice processes
• many areas identified during our first review remain a concern as firms have not made sufficient progress in key areas

Key findings from the project

Management controls

• around a quarter of small firms had adequate processes in all areas of their business and good management controls 
• very few unsatisfactory files were found at firms with good management controls and processes in place
• around a half of all small firms visited were making proper use of Management Information (MI) by collecting, analysing and acting on the information (although not all had adequate processes in place). The other half either were not making proper use of MI or were not gathering appropriate MI.

Assessment of customer needs and affordability

• almost half of the small firms visited and three quarters of firms that received a mystery shop  did not adequately assess both income and expenditure because they did not consider information about customers' outgoings and their general expenditure 
• poor affordability assessments were also seen where the mortgage term ran past the customers' stated retirement age. On some occasions firms also did not consider the plausibility of the customer's stated retirement age in relation to their occupation.

Recommendations including product research

• a high number of files relating to higher risk products such as interest only, sub-prime and self certification did not demonstrate suitability
• the majority of firms involved in selling these products also failed to adequately monitor the quality of the advice provided
• for interest only cases, in just over half of cases there was no planned repayment strategy in place to repay the outstanding capital
• for sub-prime cases, in around a third of cases  firms were still failing to gather sufficient information about the customer's credit history to support the recommendation of a sub-prime product and were unable to explain why the product was appropriate
• for self-certification cases, in just over half of cases it had not been made clear why a self-certification mortgage was appropriate compared to a full status product.

Communications with customers

• adequate processes were in place in the majority of firms to ensure initial disclosure and key facts illustrations were accurate and issued in a timely manner
• in the majority of firms visited, other written communications such as suitability letters were not well tailored to individual customers, limiting their overall benefit. 

Action taken

Seven small mortgage firms have been referred to our enforcement team which may take further action.  There was evidence of systemic poor processes in all, and in three firms we uncovered evidence of possible mortgage fraud.

Also, 23 small firms have been instructed to review one or more of their customer files to consider whether the sales were suitable as a result of our review of those files. These firms have been asked to report back to us within an agreed timescale.

Good practice

Examples of good practice in the following areas:

• quality of advisers
• assessing customer needs
• communication with customers
• management controls
• post-sale reviews
• management controls

Examples of good practice and case studies.