Is there no end to Banker’s Folly?

Posted by Steve Wanless

Steve Wanless of WWFP examines how bad mortgage advice from RBS and Natwest landed the pair with a bill of £15million in FCA fines.

Banking culture needs to change

The news that the Royal Bank of Scotland (RBS) and NatWest have received yet another fine - almost £15million – from the Financial Conduct Authority (FCA) for serious failings in their advised mortgage sales business left many shaking their heads and wondering “Will they ever learn?”

The bank was bailed out with £46billion of taxpayer’s money in 2008 and what makes this latest fine worrying was the fact that it related to mortgage selling as recently as 2013, enforcing the view that little has changed especially in the behaviour of bankers.

RBS and NatWest actually got a discount of 30% on the fine of £14,474,600 for settling at an early stage – otherwise it would have been over £20m. Although he wasn’t in charge at the time, it shows the tough job that chief executive Ross McEwan has, to change the banking culture.

Yet, closer examination of the FCA’s investigation shows the dilemma for those offering financial advice. That’s a situation that Independent Financial Advisers (IFAs) are well aware of; the customer-client relationship becomes more conflicting when the financial advice offered is not independent.

That is something that the FCA’s Mortgage Market Review (MMR), which came into force in April, could have prevented.

The basic facts of the RBS/NatWest case relates to mortgage advice between June 2011 and March 2013. The banks will be contacting all 30,000 customers, regardless of whether they received incorrect advice.

According to the FCA’s verdict, only two of the 164 mortgage sales reviewed reached the standard required overall in the sales process.

According to the banks, only 4% of the customers have been left worse off; they will compensate those who are out of pocket.

It will be interesting to see how many claim they have been short-changed by being granted a mortgage that has allowed them to join the property boom. It would also be interesting to see how many of those are in mortgage difficulties or have defaulted and handed back the keys.

Much of the FCA’s criticism focused on “affordability” which has become the watchword of the MMR. It’s likely that the vast majority of those taking out mortgages have substantially improved their financial position and security by owning property.

The Council of Mortgage Lenders (CML) has recently voiced its concern that the MMR has created an unnecessary barrier for homeowners wishing to switch their mortgage to a cheaper deal. They will address these issues with the FCA when it looks at the unintended consequences of the MMR later this year.

“We remain concerned about the level of bureaucracy in areas such as product switches,” said a CML spokesperson, adding that it wants the FCA to provide more guidance in this area so lenders have the confidence to simplify the process for borrowers without the fear of falling foul of the rulebook.

One of the main criticisms by the FCA of the RBS and NatWest mortgage process was the fact that advisers gave personal views on future interest rate rises. This was deemed “highly inappropriate” by the regulator. This could easily have resulted in borrowers taking a fixed or variable-rate mortgage on false grounds; the view of the FCA.

Talk about being spoon-fed. Nobody, as we have seen increasingly in the media in recent weeks, knows when the next rate rise will be and by how much. A calculated guess would be that rates will rise by 0.25% early next year.

We all saw the trouble the Governor of the Bank of England, Mark Carney, got into when his words were interpreted at one meeting that the rate rise might be earlier than anticipated, and the markets reacted. At the next meeting, his thinking was described as “muddled”.

If a mortgage adviser merely mouthed the opinion of the Governor, would that be “inappropriate.” The FCA has to get real, if a customer is speaking to a financial adviser in one of our major banks, how will he react if the “expert” does not have an opinion on his own area of expertise?

If the adviser says, “I’m not allowed to give that advice”, you think “how unhelpful” – if he says, “I don’t know”, you think “why am I listening to him/her!”

This “grey” area has been created by the FCA’s MMR. It stipulates that all mortgage customers should receive advice – but not “independent” advice!

The consequence of the MMR is that the major mortgage lenders are able to give advice, but only about their own products! Where is the sense in that? Especially, as it is clear in the RBS case, when the adviser is restrained from offering anything more than advice on how these products relate to the customer’s financial situation, as laid down by the MMR guidelines.

And it is the MMR’s guidelines that mean there are now claims that many “interest-only” mortgages have been sold inappropriately in the RBS dossier; it’s also why there are an increasing number of the mortgage “prisoners” that the CML are so concerned about. 

Trying to obtain an interest-only mortgage for your main residence is now almost impossible. Why? Mainly because the MMR does not highlight the selling of that property as an acceptable means of repaying the debt at the end of the mortgage term.

Why not? You live in a four-bed semi-detached house worth £450,000 with a five-year fixed-rate £125,000 interest-only mortgage that is coming to an end. You are told that you cannot renew on an interest-only basis; at which point you realise you can’t afford the £125,000 mortgage on a repayment basis.

Hence, you’ve become a mortgage “prisoner”. Sell up or pay through the nose. Where is the logic, or fairness, in that, when you can easily afford a new five-year fixed-rate mortgage at under 4%. Much of the MMR smacks of the nanny state, and telling us what is the best financial way to live.

What many resent is that the very financial authorities and institutions that should have spotted the dangers, if not prevented them, leading up to the 2008 financial collapse are still in place, some under a different name, and continue to set the rules and regulations and police our finances.

No one wants to return to the crazy-mortgage lending days of seven years ago, when some loans seemed to be based exclusively on house price increases; those days are long gone, although many of the restrictive regulations suggest they are still here.

What is clear from the collapse and subsequent recession is that it’s hard to beat genuine, independent financial advice!

Steve Wanless is an independent financial adviser at World Wide Financial Planning. If you would like to know more about this subject or about the services offered by WWFP visit their website

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