FSA warns mortgage firms over inadequate advice

The Financial Services Authority hit out at the UK mortgage industry yesterday, as it revealed that only one in three companies offering mortgage advice has adequate procedures in place to ensure consumers receive the correct guidance.

In a survey of 252 firms offering mortgage advice, carried out between June and October last year, two-thirds were found to have fallen short of FSA standards, with just one in three abiding by the regulator's code.

The FSA yesterday warned the industry to get its act together or face disciplinary procedures, revealing that it had already taken several mortgage brokers into enforcement.

"We found significant failings in the advice-giving processes in a number of mortgage firms," said Clive Briault, the regulator's managing director of retail markets. "Poor processes increase the risk of unsuitable advice being given. It is essential that firms have robust processes in place, so that they treat their customers fairly and provide suitable advice. It is crucial that customer needs are assessed properly. Customers should consider what they can afford both now and in the future, taking into account any likely changes to their circumstances."

The regulator said there was scope for improvement across all areas of the advice process. However, it said the worst and most common failings were in the assessment of customer needs - including failures to consider affordability constraints. It said training and competence, as well as record-keeping procedures, were also poor.

Of the 252 firms visited, 99 were mystery shopped, while a further 78 were visited, and 75 completed questionnaires. The survey discovered that while larger firms, such as banks and building societies, tended to have more robust processes in place, they were not always applied or followed consistently. Smaller mortgage brokers were highlighted as the worst offenders, with only one in four coming up to the regulator's mark.

Rob Griffiths, an associate director at the Association of Mortgage Intermediaries (AMI), said the trade body was concerned by the FSA's findings.

"At the onset of statutory regulation [in October 2004], many mortgage intermediaries, particularly smaller firms, did not have experience of compliance with a regime similar to that of the FSA, and have therefore had a steep learning curve to climb in meeting the requirements," he said.

"While mortgage intermediary firms are responsible for meeting the rules, the regulator also has a role to play in helping firms to understand how to fulfil their regulatory responsibilities, and in doing so, providing an effective regulatory regime for consumers."

Mr Griffiths added that the AMI was supportive of the FSA's work to help smaller companies, but said more needed to be done. "This need will intensify with the move to a more principles-based regulatory regime," he said. "AMI would be pleased to work with the FSA to help the regulator provide mortgage intermediary firms with practical ideas on ways to meet their regulatory requirements."

Yesterday's warning is the second time the regulator has hit out at the mortgage industry over the past 12 months. Last year, the FSA expressed its concerns about the quality of advice on equity release products.