FCA outlines assertive supervisory plans for wealth management firms
The regulator’s review into later life mortgage providers, published on the 14th of September 2023, took a deep dive into the advice standards and mortgage advertising of the firms collectively responsible for around half of all the UK’s later life mortgage sales.
The review is focused on the equity release market where complex products are sold to customers, particularly customers with a higher risk of being in vulnerable circumstances.
Where the FCA found that standards have fallen short, it explains that it is currently intervening robustly with firms to ensure significant improvements in the advice process.
As a result of this multi-firm initiative, it was highlighted that some firms:
What’s even more worrying for consumers – and the regulator – is that these are all ongoing themes were also found in the FCA’s 2020 review of equity release advice.
Firms fail to comply with the longstanding rules about financial promotions
Despite clear and longstanding rules about financial promotions, the outputs of the review resulted in the amendment and removal of almost 400 misleading promotions found to be inaccurate or misleading.
The regulator found instances of product benefits being highlighted without sufficient transparency of risks versus rewards. Evidence of firms using their regulated status in a promotional manner was also revealed.
A look back at TR14/4 offers a reminder that the FCA’s concerns are not new. TCC has commented in the past on the need for firms to consider the importance of the implicit and explicit messages that customers take from promotion and, in many ways, base their buying decisions on.
Indeed, customers place a high degree of trustworthiness on financial promotions and tend to view them as a part of the advice that they receive, giving them a significant level of influence over their decision making.
Equity Release is a very permanent decision for consumers, and financial promotions can significantly impact a customer’s understanding of the options available to them. As Sheldon Mills, FCA Executive Director of Consumers and Competition, said: “Releasing money tied up in your home later in life is a big decision and can have a financial impact on consumers and their families well into the future.”
Financial promotions need to comply with the new Consumer Duty
Financial promotions – or FinProms – go wider than just advertising: the FCA spelt out in their Consumer Duty guidance that Fin Proms link directly to the Customer Understanding outcome. This outlines that customers must be given the information that they need, in a manner which they understand and at the right time to enable them to make sound financial decisions.
Firms should be considering their communications as a whole – and looking closely at whether they have the controls in place to meet the regulator’s expectations under this outcome.
TCC has worked with a number of firms to analyse the regulated content of promotions and assess the implicit or explicit expectation of product performance that customers may reasonably assume from messages given. All of which are essential to comply with Consumer Duty and wider Product Governance requirements.
With Equity Release being a complex product, firms should consider how they show the regulator that their customers truly understand the permanence of their decision and the downsides, as well as the upsides, of choosing an Equity Release product – satisfying the FCA’s ‘show me, don’t tell me’ approach.
Quality of advice vs Sales incentive structure
Evidence from the report also showed that some sales were incentivised at the expense of providing quality advice. Reward structures that encourage the purchase of a particular product or service when it may not be suitable for the customer can have far-reaching consequences.
In the Equity Release space, there’s a greater potential for major detriment to customers posed from financial incentives: the wrong solution can have a very costly and long-lasting impact due to the higher cost of borrowing and restricted future access to borrowing to meet needs in later life.
Firms should be asking themselves whether the incentive structures they have in place at all levels are designed to lead to good outcomes for customers:
Have you reviewed the implicit and explicit expectations that could arise from your promotions?
Have you undertaken independent consumer research to test your conclusions?
Is the strategy and culture of your business aligned to delivering good outcomes for customers? And can this be evidenced?
Fulfilling your Customer Understanding requirements
Customer understanding is one of the FCA’s key focus areas for mortgage lenders. The regulator expects firms to tailor all communications to meet the needs of their client base and to ensure that all materials are fair, clear and not misleading.
This includes any material used to interact with your customer base – whether that be in the form of advertisements, verbal communications, online, written correspondence or product terms and conditions. These should all be carefully considered under this outcome:
Can you evidence your communications meet the information needs of the intended recipients?
Are you giving customers the information that they need, and at the right time, so that it can be easily understood?
Does your analysis incorporate Consumer Duty, Product Governance and associated PROD rules?
Do you have the right level of MI, metrics and underlying analysis of customer opinion and challenge?
Do you have the right committees and Quorums to review product performance vs expectation?
Firms should again bear in mind that this is a segment of the mortgage sector where customers are more likely to be vulnerable. Later life mortgage products contain features that customers may be unfamiliar with, and so may find it difficult to understand – such as ‘interest roll up’ and ‘drawdown facilities’. As the charges tend to be higher within this market segment, firms should pay even closer attention to ensuring that their customers understand the associated fees and charges.
Furthermore, this means that your financial promotions monitoring must not only be looking at the financial promotions sign-off process but must also oversee the content, placement and appropriateness of all customer communications.
The Consumer Duty now mandates that all firms put customers at the centre of their decision making across the full business lifecycle, and that’s why businesses need to take proactive steps now to meet the more stringent customer understanding requirements.