Dear CEO Letter to Mortgage Intermediaries

The UK residential mortgage market is of critical importance to the wider UK economy. Whether it functions well or not can have a huge impact on the wider financial system. The FCA have set out their supervision strategy for the sector in a recent ‘Dear CEO’ letter. This was only issued to firms in the FCA’s Mortgage Intermediaries portfolio but is relevant for any firm that provides mortgage advice. The letter covers some consistent themes arising from FCA supervision in the wider financial advice market. There are further areas of specific conduct risk, systems and controls, and governance arrangements that firms need to be aware of going into 2021. 

The good news is that many aspects of the market work well and consumers have access to affordable loans. However, there are areas of ‘potential harm’:

• Instances of unsuitable advice
• Excessive fees or charges
• Mortgage fraud

FCA supervision will focus on Lifetime Mortgages and second charge lending. They will also be looking at firms’ arrangements in relation to mortgage fraud, cyber risks, governance and oversight and SM&CR (Senior Managers and Certification Regime) implementation.

Lifetime mortgages

The FCA is concerned that there is insufficient personalisation of advice, inadequate challenge to customer assumptions and a lack of evidence to support suitability. Adviser behaviour, and the processes they work within, can drive suitability outcomes. Tick-box client data gathering, order taking, or applying a one-size-fits-all approach can all lead to poor results.

Second charge lending

This will be an area of increased regulatory attention in 2021. The FCA will be particularly interested in advice suitability, consumer understanding, TCF and the levels of fees and charges.

Mortgage fraud and cyber risks

Fraud is an inherent risk in the mortgage sector. Firms need to be vigilant to identify and report any suspicions. They need to monitor the way they do business and ‘be bold’ in taking action where issues arise. Cyber risks pose a threat to all firms and the FCA will want to know how your firm manages them.

Governance and oversight

Oversight arrangements need to be proportionate and sufficient for the size of a firm. The use of trading names will come under scrutiny.

SM&CR

It is clear that the way firms have implemented SM&CR will be central to future supervision. Firms need to have met all the required deadlines in areas such as initial fitness and propriety assessments and conduct rules training. The ‘how’ of this implementation will be of greater importance than simply the ‘what’.

What it means

The FCA’s areas of concern are clearly laid out. It is not surprising that the two main areas where suitability concerns are raised involve a higher chance of client vulnerability. There is a risk that, in trying to maintain ‘business as normal’ through the pandemic, firms may have neglected their systems and controls or governance arrangements. While some SM&CR deadlines have been extended, the expectations in respect of the value that should be added by its implementation have not changed. 

All firms providing mortgage advice should be familiar with the content of the Dear CEO letter. You should consider the issues raised in context of your own processes and how far they support the outcomes the FCA is looking for. Discussions should be held at senior management level with a clear set of actions to address any issues. All decision-making processes should be documented and auditable.

At Tenet, we can support you in this. We recognise the suitability concerns raised in relation to mortgage advice. Too often firms are let down by poor record keeping and client files that do not show the full picture. As market leaders in supporting advisers we can help you understand what good looks like. We can provide the tools to help you efficiently demonstrate suitability on a consistent basis. We can complete a review of advice standards in areas such as later life lending or second charges with detailed and practical feedback.

We have a range of material and options to support your wider business practices and governance arrangements. We can review your SM&CR implementation progress and ongoing delivery. SM&CR is an opportunity to review the effectiveness of your business and ensure it is well positioned to thrive without being exposed to unnecessary regulatory risk.

For Professional Adviser Use Only