FCA fines in cases with no customer detriment

FCA fines in cases with no customer detriment

How lenient will the Financial Conduct Authority (FCA) be when imposing fines where there has been no customer detriment?

David Carson, principal of Carson & Co which specialises in financial services law, regulation and compliance advice, says the regulator is punishing not necessarily for actual customer detriment but for the fact that customers were put at risk of losing out as a result of a financial institution’s failings.

Original news

RBS fined for mortgage advice failures, LNB News 27/08/2014 103

The Royal Bank of Scotland (RBS) and NatWest have been fined £14,474,600 after they failed to give customers suitable mortgage advice. The banks were fined following two reviews of sales in 2012 which found that in over half of cases the level of advice was not clear from the file or call recording. Only two of the 164 reviewed sales met the standards expected by the FCA.

What is the background to the enforcement action?

On 27 August 2014, the FCA imposed a fine of nearly £1.5m on RBS for what was described as ‘serious failings’ in its retail mortgage business. The regulator found that weaknesses in the bank’s mortgage advice process gave rise to a material risk of customers receiving unsuitable advice, both in respect of its RBS and NatWest lending brands.

The penalty is the latest of a number of fines to be imposed on RBS, which is 80% owned by the UK government. RBS avoided paying a £20.7m fine by settling the FCA’s enforcement action at an early stage and qualifying for a first stage 30% discount.

While the fine is significant even in the context of the FCA’s enhanced powers to levy punitive penalties for failings by financial institutions, RBS is also required to conduct a contact exercise in respect of 30,000 of its customers who received mortgage advice between mid-2011 and early 2013.

What were the reasons that the FCA gave for the penalty?

Fundamentally, the enforcement action and penalty were levied due to systemic failings in the bank’s advised mortgage sale process. The FCA found that:

Sales process

The advised sales process was not fit for purpose and failed, in material respects, to comply with aspects of the regulator’s requirements under the Mortgage Code of Business Sourcebook (MCOB), which applies to mortgage broking and mortgage lending activity. Notably, the bank’s internal Mortgage Sales Guide, which provided sales staff with information on the mortgage sales process, contained with very little guidance on the practical application and provision of advice to customers and how suitability should be assessed.


The quality of mortgage advice provided by staff was deficient, either because advisers had not sufficiently examined a customer’s individual circumstances and/or they had failed to provide suitable advice to the customer. The FCA also found that in many instances, record-keeping was poor and there was insufficient evidence on the customer file to evidence the basis for the advisers’ decisions or suitability of sale.

System and controls failure

The bank’s failures were compounded by serious systems and controls failures in that:

  • there was no clear line of ownership and responsibility for the mortgage advice process, which in part accounts for deficiencies not being identified or rectified in a timely manner
  • front-line checking and assurance failed to focus on whether regulatory requirements were being adhered to and whether advice given was actually suitable for customers
  • when failings were detected by the bank’s own internal audit function, the bank was slow to address failings and failed, in part, to remedy defects

Moreover, in mid-2012, RBS provided the regulator with written confirmation that changes had been made (or were shortly due to be made) when in fact that was not the case.

Is there anything about the enforcement action that is particularly noteworthy?

In part, the magnitude of the penalty in this particular case can be attributed to the previous disciplinary history of the firm—this is the eighth time that RBS has been fined by the regulator and the seventh time in the last four years.

Notably, the FCA found that there was no evidence of systemic customer detriment resulting from the failings—significant numbers of customers appeared not to have lost out as a result of the weaknesses in the mortgage advice business but the scale of the failings, which posed a real risk of detriment, was considered by the FCA to be very serious. RBS was one of the top six providers of mortgages to retail customers and, during the period focused on, the bank provided approximately 177,000 mortgages of which around 30,000 were sold on an advised basis. Once again, the regulator is punishing not necessarily for actual customer detriment but for the fact that customers were put at risk of losing out as a result of a financial institution’s failings.

Should other firms be concerned about the outcome in this case?

Since the failings at RBS occurred, the regulatory rules and requirements relating to the provision of mortgage advice and mortgage lending have been subject to wholesale change under the FCA’s Mortgage Market Review.

The overwhelming majority of mortgages are now required to be made on an advised basis and this particular enforcement action illustrates the FCA’s ability and willingness to punish failures which, while not necessarily resulting in wide-spread customer detriment or loss, nevertheless pose a risk to consumers of receiving unsuitable advice or unaffordable borrowing.

The timing of this Final Notice is pertinent, not least given the FCA’s intention of carrying out in the near future a thematic review of advised sales outcomes. The risk of mortgage mis-sale remains high on the regulator’s conduct risk agenda and firms need to exercise ongoing care and vigilance to ensure compliance with Mortgage Market Review requirements. FCA will operate a zero-tolerance approach to systemic and material failings.

What should lawyers advise their clients?

Clients involved in mortgage broking or lenders providing mortgage advice should ensure that mortgage sales processes are fully compliant with the regulator’s requirements, notably in MCOB.

Mortgage lending and the risks posed to consumers through unsuitable mortgage advice remain high on the regulator’s conduct agenda. In part, the learnings from this enforcement action can be readily used as a road-map for firms to ensure that advised mortgage sales processes are delivering compliant and appropriate outcomes.

Clients should ensure that responsibility and accountability for end-to-end customer-facing processes, such as mortgage advice or the underwriting of mortgages, are clearly apportioned to appropriately senior personnel. Clients should take steps to ensure that staff are adequately trained, that incentive arrangements are geared towards delivering appropriate customer outcomes and that the outcomes of customer-facing processes are properly monitored and visible at the appropriate level in the firm’s governance structure. Importantly, record-keeping is key—firms should take sufficient steps to ensure that they can evidence compliance with rules and requirements and are able to demonstrate, on a case-by-case basis, that appropriate outcomes are being delivered. It is clearly not sufficient for a firm either to assert that they comply with requirements or to produce policies and procedures that are themselves compliant. Evidence in case files will be looked at to demonstrate whether this is indeed the case on a customer-by-customer basis.

Firms should ensure that front-line checks and controls are timely, comprehensive and appropriately calibrated. One of the key lessons of this enforcement action relates to the risk of ‘false’ assurance being delivered through checking and monitoring activity—RBS’ core front-line monitoring was process-focused and failed to consider key regulatory requirements or whether appropriate customer outcomes were being delivered. In turn, failings and weaknesses in the underlying process were not detected until the regulator conducted a review at the bank.

Where weaknesses are identified, firms should take prompt corrective action and take sufficient steps to then ensure that any weaknesses are fully eradicated through an appropriate regime of testing and assurance.

Clients involved in sectors of retail lending which are outside of the Mortgage Market Review, notably second charge lending which is now regulated by the FCA and which, in due course, will be subject to a harmonised set of rules under the FCA’s implementation of Mortgage Credit Directive 2014/17/EU, should take careful note of the standards imposed by the FCA and the regulator’s willingness to punish weaknesses.

Interviewed by Nicola Laver.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

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