Since the Mortgage Market Review (MMR) was finalised in October 2012, in common with banks and other lenders, many building societies have found timely implementation of the resulting change a significant challenge. Implementation of the MMR is set against a backdrop where some firms are struggling to evidence that they are treating mortgage customers fairly and meeting existing Mortgage Conduct of Business requirements. So what are the root causes of these challenges and what can societies do to address them?
Societies continue to experience difficulties in evidencing that they are lending responsibly, particularly when lending to riskier customer groups, such as those with lower affordability or variable income, or when offering 'non-standard' mortgages. Many have struggled to develop mortgage advice processes for contract variations and to ensure appropriate numbers of adequately skilled agents. When a customer experiences financial difficulty, some societies are unable to demonstrate they are consistently proactive, and in particular, how they anticipate and understand customer circumstances over the short, medium and long term, then identify and discuss appropriate options (such as a forbearance option, a combination of forbearance options or an exit strategy) to find the most suitable arrangement for the customer's circumstance.
The Financial Conduct Authority (FCA) has imposed greater reporting requirements on the industry in relation to Product Sales Data (PSD) and the Mortgage Lenders and Administrators Return (MLAR), with the aim of being able to demonstrate that societies are lending responsibly. It is therefore important that societies have in place robust processes to collect the additional data required, including data on affordability and performance through the life of a product to make such regulatory returns.
These issues have at their heart a number of common root causes. Legacy technology increases the requirement for highly manual customer processes, making delivery of consistently fair and compliant customer outcomes more difficult. These manual processes place a real emphasis on robust training and competence arrangements, but are often found wanting as they do not ensure agents have the quality or frequency of training required to develop and retain competency in key customer facing areas. This compounds issues associated with these firms' resourcing models which often mean that customer facing staff are not sufficiently experienced.
When things do go wrong, a lack of effective root cause analysis at some societies means that the reasons why are never really understood (for example, in relation to unfair or non-compliant outcomes identified through Quality Assurance and monitoring, an assessment of whether these are people, process or system driven will aid appropriate rectification). Oversight arrangements are also often inadequate - specifically there is often a lack of quality information readily available through the firm's governance structure to enable senior management to provide effective oversight of the delivery of fair and compliant customer outcomes.
To proactively combat these issues, there are a number of actions societies should consider initiating. One key action is to deliver targeted programmes of risk based outcomes testing regarding mortgage advice, responsible lending and mortgage arrears handling – using the FCA's rules and guidance as the assessment benchmark rather than the firm's own policies and practices. This testing should incorporate root cause analysis of why any issues are occurring to allow the right course of action to be debated and agreed.
Societies can also identify areas where legacy technology is creating difficulties in delivering fair customer outcomes in an efficient way. Where issues are identified, they should consider the options available to fundamentally change the technology environment, including targeted business process outsourcing to firms with the required technology capabilities or purchasing new systems or software. Societies can also enhance oversight arrangements through monitoring and MI to mitigate risks to the customer as lag changes in IT development can be significant.
And finally, firms should revisit their recruitment, training and competency and performance management models, including incentives schemes, to identify and address areas causing challenges in relation to the delivery of fair customer outcomes.
If planned, delivered and executed properly, these actions will help ensure senior management begin to get to grips with these conduct issues. If societies facing these issues fail to tackle them, they will not be able to evidence that they consistently treat their customers fairly and risk being on the wrong side of the FCA.
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