Since the introduction of Financial Services Authority (FSA) regulation in October 2004, the mortgage market has been in something of a state of upheaval. The changes the regulatory regime brought about were designed to create an environment in which customers are treated fairly and better sales practices became the norm in the sector.
While the shift towards principles-based regulation means firms can decide for themselves on how best to meet their business objectives, the lack of any hard and fast rules creates a cloud of confusion over what could be considered compliant as it is down to each firm’s interpretation of the guidelines.
While the FSA claims it has made clear the need for all brokers to document sales and produce a clear audit trail of its findings, concerns have been raised over the growing trend towards affordability-based lending and the number of people now opting for loans up to six or seven times their income.
Alan Lakey, partner at Highclere Financial Services, says that it is becoming increasingly common for customers with no debt or bad credit history to opt for higher loans in order to be able to buy a house in the first place.
However, this causes problems, he says: “It’s strange to think that if you have a client with a perfect payment record and no bad credit that you end up putting them into a non-conforming mortgage. Companies like First National were thought to only be for the bad element, those who were unable to prove income and pay debt. But when a slightly adverse mortgage comes out ahead of prime deals, it doesn’t matter what the lender calls it. If you remove the stigma of the name, what’s important is whether the deal is right for the client.”
Lakey says the change in lending patterns means brokers must be aware that in many of these cases – where clients are willing to take out a substantial loan in a bid to secure the house of their dreams – documenting the evidence in crucial, especially as it is may appear they fit into the mainstream category, but it may be a non-conforming lender that is willing to lend.
He says: “If a client wants seven times their income, I can’t get him a loan with the Abbey, but I can with a non-conforming lender such as First National, Preferred or SPML on an interest-only basis. They’re the only ones with products that are suitable and give the client what he wants. But I’ve read the fear from the FSA and commentators that people are using adverse products because they will get a better proc fee. But it’s not that easy to do.”
Rob Griffiths, associate director of AMI, agrees and says it is therefore crucial that brokers follow a strict process when documenting each sale. He says: “One of the things we always try to get across to our members is they must fully document all the reasons they give their recommendation. Brokers should have a full and complete fact-find going through what’s suitable for the client and make clients aware why the recommendation has been given.
“They should also issue a suitability letter in every case. It’s not a prescribed part of MCOB, but advisers should do this as a matter of course. It’s the one piece of information a client is most likely to read and the FSA always brings up suitability letters as an example of good practice.
Robin Gordon-Walker, spokesman for the FSA, confirms that while interpretation of the rules focuses on outcomes rather than processes, documenting needs to be clear cut. He says: “It’s absolutely spot on. We have rules requiring brokers to give suitable advice, get fact finds and most importantly record it all. From a brokers’ point of view, if there is any enquiry, they will have an audit trail.”
This serves as a stark warning to brokers who fail to account for every aspect of their work. Sloppy administration and second class business practices are not what the FSA wants to see, says Paul Hearnden, managing director at My Mortgage Direct.
He says: “There is not enough understanding from brokers that the FSA requires a clear audit trail. They must protect their own backsides and have a checklist on every case they do. I don’t know if brokers are doing it and they won’t know how well they are covered until the FSA walks through the door.
“What’s got to be remembered is that we are trying to give a service and offer any client a solution, as long as the client is clear why the solution is being offered and the audit trail is there. There should be an audit trail showing that you have tried other routes, before going into non-conforming. There are badges on products and people should be aware they don’t always carry the stigma that’s attached to them.”
The labelling of products does appear to have caused the FSA some concern. The regulator announced in its review of Financial Promotions that it had come across cases where some brokers had sold non-conforming policies to clients who fit the good credit criteria. The concerns were heightened by the high proc fee offered on non-conforming products, amid fears that brokers were mis-selling in order to line their own pockets.
Griffiths says: “The FSA has seen evidence of brokers advising on a non-conforming mortgage when there’s no sign it’s suitable for the client. If a broker is going to recommend that product, they need to record specifically why it’s good for the client. All the information needs to be together in case the FSA does come calling.”
So as the trend for massive mortgage loans continues to grow and more people with good credit scores find themselves wanting loans from non-conforming lenders, brokers would be wise to make note of every single move they make.
Lakey says: “It always comes down to the adviser. As a result, if there are any concerns over the arrangement of the mortgage, it’s the adviser who could be in trouble. That’s why with adverse cases, brokers have to keep very detailed notes to defend themselves and have an audit trail. Mortgages have only been under regulation for a short time and many brokers will not have been called on by the FSA. Although it will vary between advisers, some may not have systems in place that prove they have given good advice. But after a two-year honeymoon period, the FSA is looking to bash some heads.”
