FCA ‘Dear CEO’ Letter to Mortgage Intermediaries
David Ryder
6 February 2025In this regard, on the 30th January the FCA’s attention moved to the mortgage market, with the issue of their latest Dear CEO letter for mortgage intermediaries.
This letter is a key communication for mortgage firms in that it sets out the regulators current and future priority areas of supervisory focus for mortgage advisers over the next two years, highlighting the areas the regulator expects firms to focus on to ensure good practice prevails.
The FCA have made it clear that they will be carrying out thematic work on the back of the letter, and that this will involve selecting an appropriate cross section of firms in the market. The FCA will then share the outcomes of this work by publishing good and poor practice so that everyone can learn from it. We have seen from the FCA’s review of investment firms that any size of firm can be selected so it’s important the messages being conveyed by the regulator here are given due attention and consideration.
As a first action in response to this communication, Paradigm recommends that all senior managers (SMFs) read the ‘Dear CEO’ letter and record this as part of their CPD activities. In addition, and as highlighted by the FCA, leadership teams are expected to discuss the contents of the letter and satisfy themselves that these areas of focus are being addressed under existing Consumer Duty work programmes, or if not, discuss how these risks may need to be addressed going forwards. Paradigm’s recommendation is to minute such a meeting to ensure the issues within the letter have been raised and discussed, and that any planned actions in response to the letter are recorded and allocated to the SMF responsible for that particular business area.
So, what are the areas the FCA will be looking closely at, and how can Paradigm help you to ensure your firm is compliant in these areas?
Quality of advice and unsuitable products
We all know that many customers are facing challenging financial circumstances and/or vulnerability in the current economic environment. The FCA reminds firms in the letter that deep holistic fact finding is required to understand the needs and circumstances of the customer, with this detailed approach to Know Your Customer (KYC) expected to be at the heart of the advice process.
First Charge Market
In the first charge market, the FCA want firms to evidence that customers have considered all their options and to probe customers’ stated preferences and “explore any trade-offs with those who express contradictory or conflicting needs.”
Second Charge Market
In the second charge market the FCA say that they have seen some firms failing to consider whether a secured loan may be more appropriate for customers in financial difficulties. As the FCA state, “recommending products without considering the costs associated with increasing the repayment period and whether it is appropriate for the customer to secure these debts could cause harm.”Firms are reminded that all clients who may be experiencing financial difficulties should also be considered as potentially vulnerable, with Paradigm previously issuing guidance to our compliance subscribers on the subject of the forbearance options that customers have, together with providing a vulnerability checklist designed to help firms correctly identify and manage potentially vulnerable clients. This also links into the Lifetime Market and the FCA’s published guidance on the action needed to ensure good outcomes for later life mortgage borrowers.
Through our dedicated File Review team, Paradigm already help several mortgage firms to manage risk in all of these areas, and we would be delighted to talk to you to discuss how we can help you to ensure these key practices are firmly embedded in your business.
High pressure selling and ancillary products
The FCA says that when conflicts of interest are not properly managed, this can lead to a “high pressure sales culture”. Firms will therefore want to review any payment incentive schemes they have to ensure that they avoid rewarding poor compliance, and our guidance is that no incentive should be payable unless quality of advice is given at least equal consideration to volume of sales.
Excessive fees and fair value
The FCA state, “We understand that certain products or customer circumstances can make the advice process longer or more complicated, and this may be reflected in higher fees. However, we would not expect firms to capitalise on this by increasing prices unfairly or without justification.” Paradigm recommends that firms ensure that their fair value assessments on the products they distribute are up to date, as well as their own fair value assessment conducted on their own advice fees.
Paradigm’s Consultancy team are perfectly placed to provide an independent and FCA focussed view on a firm’s processes and practices, and can provide a sense check that a firm is complying with the FCA’s expectations.
Financial promotions
The FCA reminds firms that, “The Consumer Duty sets out requirements for firms around consumer understanding. It builds on the fair, clear and not misleading standard under Principle 7. Communications should enable the intended recipients to evaluate their options by assessing the benefits, risks and costs associated with these options, and how those options relate to their needs and financial objectives.”We recommend that all firms ensure they have a robust process in place for the design, testing, assessment of target market and approval of financial promotions. Paradigm’s Technical Helpdesk are perfectly placed as an independent third party to review a firm’s financial promotions, thus enabling a firm’s SMF to approve a promotion with confidence before use.
Other Priorities
Appointed Representatives (ARs) & Introducer Appointed Representatives (IARs)
Firms are reminded of the new rules regarding the monitoring and supervision of any AR relationships they may have. Guidance, as well as AR/IAR agreements, due diligence, AR review and AR and IAR self-assessment templates can all be supplied by Paradigm to help you manage your relationships in this area. Where Firms have existing relationships, the FCA has reminded firms in the letter that they should terminate their relationships with ARs where the AR is dormant and does not utilise the permissions afforded to it.
Conditional Selling
The FCA also remind firms about conditional selling, making it clear that they continue to act where they receive intelligence and reports of homebuyers being pressured to use estate agents’ in-house mortgage brokers. The Dear CEO letter encourages any firms to which this applies, to review whether they are adequately identifying and taking appropriate steps to mitigate conflicts of interest in line with the requirements set out in the FCA’s rules and guidance.
Summary
This ‘Dear CEO’ letter is one of the most important communications for mortgage firms that the FCA have issued in recent times and Paradigm would recommend that all staff, as part of a firm’s culture of inclusion and continuous process improvement, are made aware of the letter and the FCA expectations highlighted within it. Firms should take the messages contained in the letter seriously and review all of the areas mentioned, taking actions to address any points which may be of concern or where a sense check my be required.
Of course, Paradigm are perfectly placed and equipped to help you ensure that your firm is in the right shape and complying with these key areas so please do get in touch if you feel you would benefit from assistance with any of the areas that have been mentioned here.
If you’d like to know more, please contact your Paradigm Business Development Director who will be delighted to discuss this with you, or request a call back here and we’ll be in touch.
