The national and specialist financial press are awash with the most recent Financial Conduct Authority [FCA] fine, this time against The Royal Bank of Scotland [RBS] and NatWest, in the sum £14,474,600 (which would have exceeded £20 million had the businesses not agreed with the FCA findings and reached an early settlement) for “serious failings in their advised mortgage sales business”. The main reasons for the fine were identified as failings against two of the FCA’s Principles for Business (Principle 2 and 9) and a specific breach of the mortgage rules relating to “ensuring suitability of advice to customers”.
The FCA Principles for Business 2 and 9 could not be clearer, they require firms to:
- Conduct its business with due skill, care and diligence
- Take reasonable care to ensure the suitability of its advice and discretionary decisions for any customer who is entitled to rely upon its judgment.
The Final Decision Notice raises many specific concerns, but as always in these matters other firms will consider the notice and ‘map’ their position against that of RBS and NatWest for themselves.
Two high level issues should immediately be apparent:
Suitability of advice
There has been an adage within financial service regulation since the 1986 Financial Services Act that ‘if you can’t prove what you did/said you didn’t do it/say it’. That thinking has been built into all the regulatory systems of control of professional financial advisers over the 3 decades. As financial service regulation has become tighter and more focused over the last decade systems of control/record keeping have become more robust rather than less. In this case, however, as long ago as November 2011 the FCA warned the firms of its “overarching concern” that “only a small proportion of the files reviewed contained sufficient information to evidence the basis for the decisions by the adviser, or demonstrated the suitability of the sale.” Despite this clear concern the FCA, in this review, remained of the view that a high percentage of the files did not contain sufficient evidence to demonstrate that suitable advice was given. So although organisations such as the Financial Ombudsman Service [FOS] have attempted to ‘water down’ the old adage (to a position of ‘if a firm has a process that shows that it was probable that something was said/done it probably was’) this FCA Final Notice has firmly put the responsibility back on a firm to prove their case in respect of suitability.
Where compliance monitoring is concerned there has always been a debate about the cost effectiveness and efficiency of internal departments v external experts – it’s a debate that happens in every compliance department whenever systems of control are discussed. Again the FCA, in November 2011, expressed concerns about whether the internal Mortgage Business Quality Unit was “operating effectively”. It is often the case that internal quality units have to juggle too many conflicting objectives to ‘tell it as it is’. In this regard, the FCA pulls no punches suggesting that the businesses did little to adequately assess the risk raised by the FCA until the end of September 2012. As the FCA puts it, until then the “firms response was poorly planned and under-resourced” and it was not “subject to adequate governance and oversight”.
What happens next?
So the overarching messages are clear for all firms, but what happens next to customers who may have been affected. Although the FCA confirms widespread customer detriment is unlikely to have occurred, the firms have agreed to contact around 30,000 consumers who received mortgage advice in the relevant period, to allow them to raise any concerns they have about the advice they received. Overall, the reputation in respect of advice from the firms concerned was high, so the question being asked by the financial services industry is ‘where does this leave the advice process in other lending institutions’?