Mortgage intermediaries should be acutely aware by now that the Financial Services Authority (FSA) has classed a number of mortgage sectors as ‘high risk’ and has used that classification to put the full weight of its resources in to monitoring whether brokers’ sales and advice standards comply with the rules in these areas.
One of those areas under almost constant review is self-certification mortgages – a sector which has expanded and re-invented itself substantially since the days when such products were simply aimed at self-employed borrowers.
Nowadays, of course, given the changing landscape of the way the UK works with increasing numbers opting for contract or freelance work, these products are open to both employed and self-employed borrowers.
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This ‘opening up’ of self-cert has effectively placed the advice and sales practices of brokers operating in the sector under even greater scrutiny. We should all remember that we are not far down the road from a situation where the FSA wanted to ban those who were not self-employed from taking out such products. After consultation with the industry the FSA changed its mind, but it has never forgotten its initial reservations and has therefore placed the spotlight firmly on self-cert since ‘Mortgage Day’.
FSA recommendations
Q2 of this year will see the regulator publish the findings of its follow-up thematic work into self-cert mortgages. It has already given self-cert the once over and has returned to the market to check if its initial recommendations have been taken on board and acted upon by advisers. Those initial recommendations included:
- The information in customer files should make it clear why a self-cert product has been recommended.
- That where proof of income was available, advisers must document clearly why a self-cert mortgage was recommended rather than a full-status mortgage.
- The files should be clear on why the self-cert recommendation was the most appropriate, taking into account the client’s needs and preferences.
The FSA though, is of the opinion that the adviser must dig a little deeper – for example, if the client has said he or she cannot verify their income, why is this the case? In essence, the FSA wants brokers to ‘probe’ the client’s expenditure and says it would like to see firms asking questions about ‘fixed monthly commitments, variable household outgoings and monthly expenditure’.
The question the FSA wants advisers to ask of themselves, with regard to the information the client is giving them, is: ‘Does this information sound plausible?’ Good practice, cited by the FSA, includes ‘checking a customer’s stated employer or self-employed status’, and ‘carrying out in-depth calculations to assess income against outgoings and document these calculations in the form of a factfind style document or a separate income and expenditure table’.
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This is slightly more tangible than just a mere ‘sense check’ of the information received. The FSA wants advisers to actively question and query the information their clients are giving. By taking this route advisers can show they meet the wider affordability requirements of the FSA’s regime.
Fraud
A major strand of the self-cert work last time was the FSA’s checks to ensure that no mortgage fraud was being committed. Its mystery shopping research did find some cases that suggested collusion between the adviser and client to overstate income to obtain a larger mortgage. While it did not believe this type of ‘arrangement’ to be evidence of systemic abuse through the market, it was suitably concerned to make public its desire to take action against any individual firm undertaking this practice.
This continued regulatory focus has been coupled with an increasing lender presence within the self-cert sector. We have seen a step-up in the number of lenders entering the market and advisers now have a vast array of competitive self-cert deals available for clients. These are not just self-cert deals for residential properties – self-cert has also branched out into sectors such as self-build, buy-to-let and non-conforming. In effect, self-cert products are now available for all types of clients.
Historically, the self-cert sector has been the subject of a fair degree of finger-pointing and a concern that widespread inflation of client incomes has taken place, and that these practices will eventually come back to bite borrowers who over-inflated and, following increases in interest rates, will not be able to make their monthly payments.
This is where the role of the adviser is crucial. Advisers must ensure their systems ‘pick out’ those clients for whom self-cert is not suitable. While borrowers must be responsible about the information they are giving, advisers must also be certain on their ongoing responsibilities in recommending these products, taking into account affordability, suitability and their record-keeping requirements. It will be interesting to see the results of this next stage of self-cert work by the FSA – it is to be hoped that its recommendations have been taken on board and that the sector, and the advice given, continues to be a core strength of the overall mortgage market.
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