In late August 2014, financial watchdog the Financial Conduct Authority (FCA) imposed a fine of £14,474,600 on Royal Bank of Scotland (RBS) and its subsidiary NatWest over what were described as “serious failings” with its mortgage advice.

The issues can be summarised by saying that RBS was in breach of FCA Principle 9, which reads: “A firm must take reasonable care to ensure the suitability of its advice …”

Some of the most serious issues identified by the regulators were:

  • There was insufficient assessment of customers’ budget and their resulting ability to afford the mortgage payments
  • Advice given to customers seeking to consolidate debts into their mortgage was inadequate
  • Advice was not given over the term the mortgage should run for, with customers left to make this decision themselves
  • Advisers were offering personal opinions on future interest rate rises – one implied that rates were certain to rise and that an increase to 5.5% was possible. Of course, in reality, the Bank of England base rate has remained at 0.5% since March 2009
  • Internal file reviews were more concerned with whether the bank’s sales process had been followed correctly, rather than whether FCA rules had been followed

The FCA’s Final Notice gives a breakdown of the grades allocated to customer files during two historical review exercises.

Firstly, RBS’s Group Internal Audit function reviewed 91 sales made between January and July 2012. Of these, only two were graded as a Pass, while 29 were graded Fail due to issues with following the sales process, 56 contained insufficient evidence to demonstrate that suitable advice had been given, and four definitely involved unsuitable advice involving customer detriment. In over 80% of cases, the file assessment disagreed with that given by the file reviewer at the time of the sale.

Secondly, an external consultant reviewed 73 sales made between January and November 2012. None of these were graded Pass, three others involved unsuitable sales and 19 contained insufficient evidence to demonstrate suitability.

RBS was particularly criticised for failing to respond effectively both when concerns were raised by the then regulator, the Financial Services Authority (FSA) in November 2011; and when its own Retail Compliance function made its feelings known in June 2011.

Tracey McDermott, director of enforcement and financial crime at the FCA, said:

“Taking out a mortgage is one of the most important financial decisions we can make.  Poor advice could cost someone their home so it’s vital that the advice process is fit for purpose.  Both firms failed to ensure that their customers were getting the best advice for them.

“We made our concerns clear to the firms in November 2011 but it was almost a year later before the firms started to take proper steps to put things right.  Where we raise concerns with firms we expect them to take effective action to resolve them without delay.  This simply failed to happen in this case.”

Ross McEwan, RBS Chief Executive, replied to the FCA notice by saying:

“Taking out a mortgage is one of the biggest moments in our lives, and our customers have every right to expect the very best service when making this decision. It is clear that in the past the bank just didn’t get this right, this was unacceptable and should never have happened. We have worked hard to put things right.”

This is the seventh occasion on which RBS and its subsidiairies have been fined by the FCA since August 2010. Previous sanctions have concerned transaction reporting, manipulation of LIBOR, breaches of anti-money laundering rules by Coutts & Co and Ulster Bank, mis-selling of bonds by Coutts & Co and complaints handling.

The information shown in this article was correct at the time of publication.  Articles are not routinely reviewed and as such are not updated.  Please be aware the facts, circumstances or legal position may change after publication of the article.