The quality of mortgage advice being handed out is "mixed", and some firms need to improve their standards, the City regulator has found.
The Financial Conduct Authority (FCA), which introduced stricter rules around the way mortgages are handed out last year, has reviewed the quality of advice provided by lenders and intermediaries.
The new regime means most consumers now receive advice, with the aim of ensuring they are only recommended mortgages which are suitable for their needs. But the FCA found that while most customers receive suitable advice, there is scope for improvement.
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It used mystery shopping exercises, file reviews, on-site visits and consumer research to look into the quality and suitability of mortgage advice provided by firms.
The FCA found that 59% of mystery shops and files resulted in suitable mortgage recommendations to customers - but one in 33 (3%) cases was assessed as unsuitable.
Many firms failed to take reasonable steps to obtain sufficient relevant information about customers' needs and circumstances before making recommendations, the regulator said, resulting in a high number of cases where the FCA was unable to determine whether the mortgage recommended was suitable. The basis for 38% of recommendations was unclear.
The FCA said some firms were engaging customers in focused, relevant discussions leading to suitable recommendations, but overall, the quality of advice in the mortgage market was "mixed".
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It found that some firms' application systems left little flexibility for advisers to adapt to individual customers' needs.
The best-performing firms in the sample of lenders and intermediaries showed it is possible to strike a balance, the FCA said.
Consumer research also indicated that customers found it difficult to distinguish mortgage advice from other aspects of the application process.
Customers may not engage properly with discussions where they are unsure about the purpose of certain questions designed to identify mortgage products that meet their needs, the regulator found.
Some firms were making changes to improve their service to customers, while others need to do more to create a culture which supports good customer outcomes, the FCA said.
The regulator said it had found "no evidence of systemic customer detriment".
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Toughened rules were introduced in April last year under the Mortgage Market Review (MMR) to ensure irresponsible lending does not take place.
The rules mean lenders have to check people's spending habits more thoroughly to make sure they can afford their home loan, both now and when interest rates start to rise.
Linda Woodall, acting director of supervision at the FCA, said: "A mortgage is a significant undertaking for anyone. It is vital that customers are able to get suitable advice and a positive experience when deciding on their options. Some firms were able to provide this, but not all.
"Although we welcome the considerable work of those firms delivering advice for the first time, and particularly those that have proactively identified issues within their own processes, there is still scope for improvement. We'll continue working with firms to ensure they deliver good outcomes for consumers."
The FCA said individual feedback to firms visited as part of the study has already been given, together with actions required as a result of the findings.
From autumn, the FCA will begin a wider assessment of barriers to competition in the sector, with a view to launching a market study early next year on those aspects of the mortgage market that are not working in consumers' interests.
Paul Smee, director general of the Council of Mortgage Lenders (CML), said: "We welcome the FCA's conclusion that there is no evidence of systemic consumer detriment or of significant numbers of customers getting an unsuitable outcome.
"Lenders have had a huge workload in implementing the new rules and, in many ways, the report's conclusions chime with what firms are telling us about the challenges they face.
"This work is evolving, as some lenders seek to fine-tune their processes. Like us, individual firms will welcome the opportunity to work with the FCA towards consistently delivering good outcomes for consumers."
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