19 Aug 2015

Client Briefing: Compliance, Conduct and Risk Bulletin August 2015

Client Briefing: Compliance, Conduct and Risk Bulletin August 2015


1. The Financial Ombudsman Service (FOS) attacks post-MMR ‘box-ticking’ by lenders

The Financial Ombudsman Service (FOS) has hit out at what it has called the “box-ticking” approach by some lenders to underwriting and has urged them to stop hiding behind the Mortgage Market Review (MMR) when making lending decisions. According to the FOS, since the MMR came into force in April 2014, it has received complaints that lenders have applied the new rules too rigidly and this has led to “outcomes that are unfair on customers” in some cases.

The FOS has said: “While a business’s lending criteria aren’t something we can change, we know from cases we see that inflexible processes and ‘box-ticking’ don’t always lead to a fair outcome for the customer involved. So we’ve been clear that, while a business’s overall lending criteria are a matter for them, the new rules don’t mean that lenders shouldn’t consider the customers’ individual circumstances when making decisions about lending”.

2. New accountancy rules ‘may hit lending and raise mortgage costs’

The International Accounting Standards Board has a new set of accountancy rules which are due in January 2018. The new financial instrument, IFRS 9, changes the way banks treat bad debts.

Current practice is for lenders to calculate and create a loan loss provision for accounts in arrears. Under the new accounting standards, every loan will have a provision reflecting an estimated future loss, regardless of whether it is being maintained. This is to enable banks to make adequate provisions for current and potential losses.

Experts say a knock-on effect of the new rules could be reduced lending levels. 

The new rules are to be adopted by the UK with the European Union expected to ratify the changes before the end of the year.

3. The Council Of Mortgage Lenders (CML) Responds to FCA Review

Following the recent publication of the thematic review of mortgage advice and distribution the CML responded to the FCA’s findings.

The CML believes lenders had a huge workload in implementing the comprehensive rule changes in April last year as a result of the mortgage market review (MMR). Those changes have been reportedly introduced with little disruption for consumers or to the market more generally.

The review did not identify "systemic consumer detriment" and had a number of other positive findings:
  • In a majority of cases (59%) where advice was provided customers were given a suitable mortgage recommendation.
  • In only a very small number of instances (3%) was a recommendation judged to be unsuitable.

Lenders will now reflect carefully on the review’s findings, and stand ready to work with intermediaries to improve the experience for consumers. The industry welcomed the FCA’s feedback and, in particular, the regulator’s commitment to work with the CML and with firms to deliver good outcomes.

In only a very small number of instances (3%) was a recommendation judged to be unsuitable.     

Although the news was largely positive there are a number of areas which need further improvement according to the FCA’s findings:
  • Quality of advice in the mortgage market was mixed. Some firms were engaging customers in focused and relevant discussions, leading to suitable recommendations based on a good rationale. But there was a lack of structure to the advice from other firms, with a risk that advisers were not getting sufficient understanding of the customer’s needs and circumstances on which to base a recommendation.
  • Both intermediaries and lenders had scope to take a more customer-focused approach to giving mortgage advice, the FCA said. This included better gathering of information about borrowers’ needs and circumstances, and probing consumer's pre-conceptions to determine whether they really do need what they think they need. The FCA found that larger retail intermediary networks had most work to do to manage and mitigate the risk of poor outcomes for consumers.
  • Firms needed to be careful about relying on completing point-of-sale application systems. In some cases, there was little flexibility for advisers to use their judgement and adapt delivery to meet the customer’s needs. But the best performing firms were able to strike an appropriate balance.
  • Some customers were confused about the purpose of the questions they were asked and worried that they may be ‘caught out’ or declined finance if they answered questions ‘incorrectly.’ The FCA’s research suggested that this may lead customers away from volunteering all relevant information to an adviser.

Following publication of the review, the CML has committed to working with the FCA and with its members later this summer to help identify good practice in delivering advice to consumers. The industry recognises the importance of  good experiences for customers, and more than a year on from MMR implementation it is a good time to take stock and review.

4. FCA publishes Annual Report for 2014/15 

The FCA has published its second Annual Report which looks back on key pieces of work undertaken by the organisation in 2014/15.

The topics covered in the report include: consumer credit regulation; the launching of Project Innovate; implementation of a new Senior Managers Regime; analysis of market studies; and the FCA’s response to the Davis review.

Find out more: FCA Annual Report 2014/15   

5. The Clearing House Automated Payment System (CHAPS) settlement day to be extended in 2016

New rules have been agreed by Bank of England.

The time period allowed for CHAPS settlements extended by 1hr 40 mins from summer of 2016.

This decision follows a review conducted in early 2014.

Minouche Shafik, deputy governor said: Extending the settlement day will provide greater flexibility to businesses and financial institutions when making decisions on funding, investment and risk management, and a longer window during which housing transactions can complete. We expect all participants to implement the change and pass on the benefit to customers.”

6. Lenders too cautious about giving advice, says FCA

The FCA’s recent post-MMR thematic review into advice and distribution shows that firms have adopted a cautious approach to providing information to customers.

The source of this is to mitigate risks of unqualified staff providing unregulated advice. The FCA are concerned that the lack of advice at times has prevented customers from getting answers to basic questions about their product range.

Paul Salter has stated that “there is scope for firms to be less cautious”.

Salter also commented that the way networks are structured means that effective oversight of advice is particularly challenging.

He went on to say, “There is a challenge in the model to ensure that the range of different members all give a good, clear and consistent customer experience”.

The FCA has already provided individual feedback to the firms involved in the review, as well as actions for improvement required. 

One year into the MMR 59% of cases are suitable; 3% unsuitable; and, 38% unclear (meaning that the adviser did not collect all the relevant information required to provide advice).

7. Interest charged to a mortgage after “voluntary surrender” deemed unreasonable by FOS 

This case study involved a complaint relating to a Lender’s voluntary surrender process.

After Mrs A was told she could no longer work, Mr and Mrs A were no longer able to afford their mortgage account. So after moving out, Mr and Mrs A agreed with their lender to voluntarily surrender their home.

A year later, the Lender finally contacted the customer at Mrs A’s sister to say they had not received the voluntary forms and that the Lender had tried to contact the customer numerous times. 

Mr and Mrs A insisted that they returned the forms a year prior. 

The mortgage company for the interim period had charged interest on the account which created a shortfall which they were now pursuing the customer for.

The Financial Ombudsman upheld the complaint saying that although there was some responsibility on the customer to ensure that the forms were received by the Lender, there was no excuse for the Lender not making contact in the one year interim period. 

The customer had informed the Lender of the change of address. 

On that basis the Lender had to recalculate the shortfall balance and pay Mr and Mrs A £200 for upset caused.

Find out more: Ombudsman News 
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