Taxpayer-backed RBS fined over mortgage advice

What RBS did wrong

According to the Financial Conduct Authority (FCA), RBS and retail arm NatWest failed to ensure that advice given to customers was suitable. Two reviews of sales from 2012 found that in over half the cases the suitability of the advice was not clear from the file or call recording.

The issues with the sales process included affordability assessments failing to consider the full extent of a customer’s budget when making a recommendation, failing to advise customers who were looking to consolidate debt properly and not advising customers what mortgage term was appropriate for them.

Only two of the 164 sales reviewed were considered to meet the standard required overall in a sales process. In the firms’ own mystery shopping there were examples of advisers giving personal views on the future movement of interest rates.

The firms did not adequately address the failings when concerns were raised about the quality of the advice process by the FCA’s predecessor the Financial Services Authority (FSA). This resulted in customers being placed at risk for an even longer period.

The FSA initially drew the firms' attention to issues in their mortgage advice process in November 2011 following a review of branch and telephone sales.

The firms did not begin to remedy the issues raised by the review effectively until the end of September 2012 despite the fact that the firms made assurances to the FSA in July 2012 that the necessary changes were well underway to address the FSA’s concerns.

The FCA say there is no evidence that the failings have caused widespread detriment to customers. However, the firms have agreed to contact around 30,000 consumers who received mortgage advice in the relevant period, to allow them to raise any concerns they have about the advice they received.

The firms agreed to settle at an early stage and therefore qualified for a 30 per cent stage one discount. Were it not for this discount the fine would have been £20,678,000.

What should happen

The FCA has 11 principles which are general statements of the main regulatory obligations that apply to firms it regulates. The principles set out in simple terms the high standards that all firms must meet.

In this case the FCA found that RBS breached principle nine because it did not take reasonable care to ensure the suitability of advice to customers (“a firm must take reasonable care to ensure the suitability of its advice and discretionary decisions for any customer who is entitled to rely upon its judgment“) and principle two because it did not put things right properly when failings were pointed out (“a firm must conduct its business with due skill, care and diligence“).

In the past, some people were allowed to take out a mortgage they could not afford. This led to some of them falling behind with their payments or losing their home. The FCA looked at how the process of getting a mortgage can be improved to prevent these problems.

As a result it introduced new rules on 26 April 2014, to make sure that when people take out a mortgage:

• They can afford it
• It suits customers’ needs and circumstances

The rules cover mortgages where customers use your own home as security for the loan, but do not cover buy-to-let mortgages or second mortgages.

Affording a mortgage

A mortgage lender must check that customers can afford your repayments now and in the future. To do this, information about income and outgoings is needed. The lender will also look at how a rise in interest rates might affect customers’ ability to keep up with monthly payments.

Getting mortgage advice

Customers can get advice about mortgages directly from a lender (like a building society or bank), or from a mortgage broker or financial adviser. In some circumstances they can apply for a mortgage without taking advice. But they would have to know the details of the mortgage they want and be able to arrange it without speaking to an adviser.

RBS failings

The fine represents the latest in a string of financial hits the bank has faced including fines and compensation pay-outs in the wake of a series of scandals.

These include £3.25bn to cover payment protection insurance mis-selling and £1.3bn for interest rate swaps - complex financial products which were sold to small firms.

It has faced hundreds of millions of pounds in fines as part of the Libor rate-rigging scandal, and also paid out to settle sanctions-busting allegations with US authorities.

RBS made a loss of £8.2bn last year which included making provisions for past scandals as well as the cost of setting up its internal "bad bank" to dispose of unwanted toxic assets.

But it swung to a pre-tax profit of £2.65bn for the first half of this year on the back of the resurgent economy.