Leonard said that the regulator’s focus on mortgage price alone is a “sad thing” and the industry must push back on that being seen as the only good customer outcome.
So, this week Mortgage Solutions asked brokers what the other key factors are in order to make up the best deal for customers and how they document those in compliant terms.
The reasons why an adviser hasn’t recommended a potentially cheaper mortgage are usually stated within the client file, as this has been a point of ‘best practice’ for some years. The reason may need to be made more explicit within the closure letter in some instances, but this new rule is unlikely to lead to significant process changes for most firms.
A couple of sentences within the suitability report, backed up by evidence of the research undertaken, should suffice for this purpose.
A key finding from the FCA’s Mortgage Market Study was that 30% of consumers using an intermediary didn’t get the cheapest deal. But this figure alone does not tell the whole story.
The base research used to provide this figure highlights that the 30% includes direct deals and other mortgages that the advice firm does not have access to.
The base research states that, when limited to the deals available to the firm this figure falls to 15%, meaning that advisers recommend more expensive deals to roughly one in seven customers.
Given the diversity of individual customer circumstances and requirements that could lead to the discounting of potentially cheaper deals, the figure doesn’t appear to be excessively high.
Under FCA rules, firms are perfectly entitled to limit their scope and range to exclude direct deals and use panels, so long as this is clear within disclosure documentation. The proposed new rule only applies to deals within the firm’s ‘scope and range,’ so will only be relevant in the minority of cases.
What the proposed new rule will do is put a heightened importance on both the accuracy of sourcing software and the evidence of appropriate research within client files.
Our advisers all too regularly see clients that have made mortgage decisions based on rate or price alone and this has not always resulted in a good outcome for them or their family.
I think that it is imperative that a thorough fact find takes place, ensuring that advisers have a clear vision of clients plans and aspirations.
Planning now for major events such as having children or big expenses like weddings, home improvements or further education is crucial in good mortgage planning.
Focusing on price alone may often be too bland, a perfect example is when clients are concerned about interest rate rises and believe that rate may well be significantly higher in two years than they are now, the cheapest product now might be a two-year fixed but is it the most suitable?
For some clients, flexibility may well be worth paying a little extra for, if they have a plan that will enable them to save overall. The real selling point of a good adviser is the ability to think outside of the box, ensuring that the solution is tailor made and will stand the test of time.
It goes without saying that our advisers source on total to pay first and need a clear justification as to why the top product has not been selected.
Getting clients to be happy with the payment today is easy, ensuring as far as possible that the decisions our clients make today, still work when the fixed rate ends or when their children go to university is the real aim.
There are essentially a number of things that brokers should consider before making a recommendation to a client: lending criteria, affordability, price (cost) and what I’d call “other factors”.
Price is only one part of the mix – once we identified the potentially suitable lenders based on criteria and affordability, we have to look at who offers the cheapest deal, but the recommendation process does not necessarily stop there.
Other factors may include a client’s preference for not dealing with a certain bank or the situation requires fast turnaround time and the lender offering the cheapest deal would not be able to meet the deadlines.
Of course, it is important that we offer the “best deal” for the client, but it may not be the cheapest deal.
In line with the Treating Customers Fairly and Know Your Customer guidelines as well as the various conduct rules, our recommendation has to be documented, justified and proven to be the most suitable for the client, so if the FCA wants to focus on recommending the cheapest deal and then justifying if we do not do that, it should not be anything new.
Through our case notes, evidence of research, affordability calculations, suitability letter and so on, a broker should already have all the evidence to explain why the cheapest deal was not recommended and why the recommended deal was the most suitable one for the case.