Mortgage advice has room to improve
THE reasoning behind mortgage recommendations given to almost 40% of customers is unclear, the Financial Conduct Authority (FCA) says.
The watchdog says that suitable advice and recommendations were given in 59% of the cases they looked at - but they couldn't see quite why 39% of customers got the advice they did.
The remaining 3% were given advice that the FCA deemed "demonstrably unsuitable".
Meanwhile customers were often found to be focusing too much on the size of the monthly payment to really consider the other details of different mortgage deals.
The mortgage market review
In April last year, tighter rules on mortgage lending came into effect, aimed at preventing the kind of mis-selling that played a part in the British banking crisis of 2008.
The immediate effect was to make mortgage lenders look much more closely at potential customers' finances - as the FCA put it, "the responsibility for assessing affordability rests squarely with the lender".
After seeing that almost a third of customers were sold a mortgage without any assessment of how well it suited them, the FCA insisted that advice be given in all "interactive" sales, with only very few exceptions.
That means that whether we're talking to potential lenders face to face, or over the phone, our situation should be considered and we should be given advice based on that.
To help raise standards, the FCA ruled that anyone dealing with mortgage sales must hold a Level 3 mortgage qualification.
In addition, they were no longer obliged to recommend the "most suitable" mortgage.
So if a provider doesn't offer a product that really fits our needs, the adviser can say that - and shouldn't push us towards something less suitable.
Flexibility and structure
The good news is that for the majority of the time, the FCA review found that suitable advice and product recommendations were given to customers.
But they've sounded a warning about the large proportion of cases in which companies "failed to take reasonable steps" to get enough information about a customer's needs or circumstances before making a recommendation.
From their "mystery shopping visits", they also found that 19% of people thought they'd been given a mortgage recommendation despite the fact that they didn't get any advice.
How meetings with mortgage advisers were structured played a part in the quality of the advice received.
Some companies relied heavily on point of sale applications, giving advisers little room to use their own judgement and adapt a meeting and the recommendations they could offer to customers.
One example cited in the FCA report shows how some lenders use systems designed to get customers to commit to applying for a mortgage with them before they'd make a recommendation.
Other lenders expected customers to apply to them for a loan as soon as they received a recommendation.
At the other end of the scale, some had very little structure to their sessions, meaning the advisers often didn't get enough information from the customer on which to base a recommendation.
I want that one
But it's not always the fault of the lenders that advisory discussions don't go as well as they could.
Consumer research carried out for the FCA by ESRO revealed that many customers regarded their conversations with mortgage advisers as hoops to be cleared in order to get their loan:
"I know what I'm doing when it comes to remortgaging... Having to take a day off work to go in to the bank and talk them through our family finances was pretty ridiculous. The deal would mean we pay less a month, so obviously we can afford it."
Other people saw the discussions as a chance to validate the product they'd already chosen, and that the adviser's role was to offer support, rather than solid advice on the best products:
"...it was quite laborious. It was a good thing I already knew what I wanted."
The FCA say many people "mistakenly believe" that mortgage advisers are only really there to tell them which of that lender's products meets their initial preferences and target monthly payment.
It's a real shock to some, then, that a good adviser might want to challenge them about the mortgage they think they want, or to talk about their circumstances and priorities in life.
Not that talking about the future always helps.
One customer with a maximum budget of £400 a month was offered a fixed rate mortgage that used the whole of that budget - and that would cost at least £30 a month more once the fixed term was over.
As if this wasn't bad enough, the customer didn't think their income was going to increase, had very little disposable income, and wasn't putting anything into savings or a pension.
But the mortgage had been recommended because the adviser believed that paying it off before retirement was more important than the other factors the customer has mentioned.
It's important to stress, however, that on the whole, the FCA found that the advice and recommendations being given were useful and suitable, and they found no evidence of "systemic customer detriment".
Their report also highlights examples of great customer service.
One is a particularly long case study, where they explain how an adviser helped a first time buyer work out why they wanted a particular type of mortgage, before going through the various options that opened up, to help them come to a better, informed, decision.
Where they found problems, the FCA say they're working with the lenders in question to help them improve.