The FCA has fined Royal Bank of Scotland and NatWest £14.5m for serious failings in the way the banks provided mortgage advice.
In two sales reviews from 2012, the regulator says in over half the cases, the suitability of the advice was not clear from the file or call recording.
Only two of the 164 sales reviewed were deemed to meet the standard required. The failings occurred between June 2011 and March 2013.
The FCA says affordability assessments carried out by advisers failed to consider the full extent of a customer’s budget when making a recommendation. The process considered expenditure based on Office for National Statistics data and took into account some customer data but not all.
Bank staff also failed to give proper advice to customers looking to consolidate debt and did not advise customers which mortgage term was appropriate for them. Instead, they took into account customers’ preferences only.
In mystery shopping exercises carried out by the lenders themselves, there were examples of advisers giving personal views on the future movement of interest rates. The FCA says this was “highly inappropriate and may have resulted in the borrower being sold the wrong type of mortgage for them”.
In one case, when a customer asked if rates would rise the adviser responded “Yes – absolutely,” and suggested rates could reach 5.5 per cent. The adviser recommended a five-year fixed-rate mortgage to the customer, saying: “If we don’t increase interest rates with this double-dip recession, the economy is in dire straits. Rates will rise. If you take a two-year deal, rates will be higher after this period.”
The FCA also found the banks’ fact-find process was “limited” as it included only a basic list of questions which advisers were required to ask. Beyond this, it was left to advisers to determine which questions should be asked.
The training workshop provided to prospective advisers described the process as follows: “Before you carry out a fact-find, you need to have a question bank stored in your head that you can draw upon at any time during your interview.”
The regulator says the process was made worse by the banks’ “cumbersome and restrictive” IT system, which prevented advisers from properly recording the fact-find. They used a free text box restricted to 500 characters, which the FCA says “inevitably led to advisers struggling to evidence general suitability of advice”.
The regulator says although there is no evidence of widespread consumer detriment, RBS and NatWest must contact about 30,000 customers who received mortgage advice to enable them to raise concerns about the recommendations received.
The issues were brought to light by the FSA in November 2011 following a review of branch and phone sales. Despite this, RBS and NatWest did not remedy the problems until September 2012. The regulator says the banks’ response to the issues it raised in 2011 was “poorly planned, under-resourced and not subject to adequate oversight”.
FCA director of enforcement and financial crime Tracey McDermott says: “Where we raise concerns with firms, we expect them to take effective action to resolve them without delay.”
RBS chief executive Ross McEwan says the failings were “unacceptable and should never have happened”. He adds: “We have worked hard to put things right.”
Expert view: Affordability is a creeping issue for advisers
The RBS fine is significant for a number of reasons. The FCA was plainly irritated that even after it pointed out the failings to RBS, the bank’s response lacked appropriate oversight and governance. Large firms should take note.
Some of the failings were as old as the regulatory regime itself.
A key failing of pensions misselling following the Securities and Investments Board review was failure to evidence properly the reasons for a recommendation.
It seems in 2011 and 2012, RBS was still not protecting itself with adequate recording and documentation. Was it trying to slice its systems too thin?
But the major issue for smaller firms of mortgage advisers is the view the regulator took on affordability.
In the FCA’s view, RBS was not going into households’ budgets deeply enough. To some this may sound like the nanny state but that is the reality advisers must recognise: our regulator expects a great deal of nannying.
Moreover, this issue may be creeping up on all the parties involved, including the regulator and households.
As the record spell of low interest rates draws to a close, the standards on affordability are likely to rise.
So as the goalposts move, mortgage advisers will need to take a new aim if they want to avoid suitability issues arising from optimistic assessments of what households can afford.
Richard Hobbs is an independent regulatory consultant
David Sheppard, managing director, Perception Finance
This should be a wake-up call to RBS and other banks to ensure their staff are better trained. I am surprised the banks did not have stricter controls around what advisers could and could not say, particularly on interest rates.
Associate director of communications London and Country
The biggest concern for the regulator is it flagged these issues some time ago but the banks did not respond appropriately.