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responsibility . This communication is very important as it sets out the regulator ’ s expectations of mortgage firms and confirms its approach and priorities for the year ahead . I will now take you through some of the letter ’ s headline contents :
The key risks that mortgage brokers pose to consumers
Here , the FCA lists four key drivers of harm in the mortgage market :
1 . Suitability 2 . Understanding of the product 3 . Fees and charges 4 . Mortgage fraud
You should therefore consider whether now is the time to review your sales processes and quality of advice standards in line with these first three core concepts when making a recommendation .
Whilst the recent Mortgage Market Study confirmed that the market is generally performing well , issues resulting from the pandemic are likely to place additional strains on consumers and firms alike , which means that suitability will once again be in the limelight .
A consequence of the current climate has been an additional focus from lenders on income confirmation , along with a tightening of loan to value percentages and overall lending criteria . This can result in some clients being made temporarily vulnerable , which can cause distress and may lead to poor decision making such as identifying a mortgage product without properly considering whether it is the right product for their circumstances . For example , where a customer requests that fees and charges are added to the product , do they understand the effect and overall cost of this decision ? This means that the risk of unsuitable advice is perhaps greater now that it has been for a number of years .
The Mortgage Market Study also brought in a new requirement around the cheapest mortgage product , which was previously applied as good practice by many firms . This now requires a firm , where they do not recommend the cheapest mortgage product ( that meets the needs and circumstances of the client ), to explain why they have not recommended that product and record the reasons .
Leading on from this general commentary on key harms , the regulator gave warnings on two specific product areas where it intends to turn its focus :
Lifetime and second charge mortgages
We have already summarised the FCA ’ s June 2020 findings on lifetime mortgages earlier and it is now their intention to carry out follow up work this year in order to assess whether firms are making the necessary changes to address their concerns .
With regard to second charge mortgages , the FCA specifically intend to look at :
1 the suitability of advice ;
1 if customers are getting a product that meets their needs ;
1 if customers have understood the product and have been treated fairly throughout the process ;
1 how the fees and charges payable by the customer are described to them and whether these may be considered excessive .
The Mortgage Credit Directive of 2016 resulted in second charge mortgage advice becoming a regulated activity and the advice process to be followed for this type of contract should be similar to a first charge mortgage recommendation . Also , in light of the current pandemic , some customers looking at this type of product may well be classified as ‘ vulnerable ’ due to them possibly dealing with unexpected life events and / or financial difficulty .
Where a firm makes a recommendation to a lender or refers to a third party master broker it is therefore important to ensure that all fees and charges payable by the customer are set out in a clear and fair manner and that appropriate due diligence has been undertaken .
Senior Manager and Certification Regime
The FCA also used the ‘ Dear CEO ’ letter to remind firms about their responsibilities under the Senior Managers & Certification Regime ( SM & CR ), including a warning that they intend to assess how firms have allocated individual responsibilities across their Senior Managers .
Anyone within your firm ( including appointed representatives ) that requires a qualification to carry out their role , will be known as a Directory Person and their details will need to appear on The Directory . This will include :
1 Mortgage advisers 1 Equity release advisers 1 BUT NOT protection only advisers
In addition , you will need to include any non-executive directors who have not been appointed under a senior management function .