The recent enforcement action by the Financial Services Authority (FSA) against Rainbow Homeloans Limited (RHL), including a £35,000 fine, has already started to send shockwaves through the mortgage adviser sector, as firms start to realise that the regulation honeymoon is over. A substantial fine is bad enough, but the actual financial loss can go way beyond the value of the fine itself, as any firm experiencing enforcement procedures must bear the cost of making the changes that the FSA stipulates – which could be considerable. In addition, there is likely to be a period when no income can be earned because the firm will not be able to carry out regulated business until it is cleared as fit to do so.
Tightening procedures
What can mortgage firms learn from the RHL case, and how can they tighten up their own compliance procedures to make sure that they are good enough to satisfy the FSA, if called to account? The FSA’s Final Notice provides some answers. Issues centred around senior management regulatory responsibilities included: no authorised person carrying out controlled director functions; no apportionment of responsibilities for controlled functions, systems and controls; undue reliance on an inadequate compliance consultant; and senior staff unable to demonstrate knowledge of their obligations under regulation. Senior management of all authorised mortgages firms will no doubt be revisiting the Senior Management Arrangements, Systems and Controls (SYSC) part of the FSA handbook to see where they can improve their own organisational arrangements to ensure compliance in these areas.
Even if a firm has got its management responsibilities fully allocated and understood, there remains the matter of controlling the day-to-day mortgage advice and sales activity so that the correct (i.e. compliant) procedure is followed in the right order, and properly documented to provide proof that this has been done, every time without fail.
Key points
Key points in the advice and sales process where RHL failed to deliver a fully compliant process should make broker firms take notice.
Information from a marketing company was used to make recommendations to customers instead using information from an adviser interview. Key Facts Illustrations (KFIs) were issued only after the application form had been submitted. There was failure to record information about the customer’s financial circumstances, insufficient attention was being given to ongoing affordability (for example, the variable nature of tax credits and the mortgage term extending after retirement age), and no proper warnings were being given on the dangers of debt consolidation.
The majority of cases were sent to one lender, rather than being spread more evenly across all panel lenders, and evidence of product research was insufficient or non existent. Non-conforming products were being sold to prime credit customers, the complaint handling process was inadequate, and there was no evidence of carrying out compliance reviews.
Having designed and developed Home Buyer Systems as a mortgage and general insurance (MGI) advice and sales compliance system, it’s clear these failings fall into two areas of control.
The first is establishing an advice and sales process that systematically covers every FSA requirement in the right order and automatically produces and stores documentation to prove this has been done.
The second is establishing a compliance monitoring process that picks up deviations from the FSA-compliant process before they have a chance to result in customer detriment. Taking the advice and sales process first, a mandatory fact-find and budget planner built into the sales system would take care of all the issues around customer affordability (including debt consolidation).
A confirmation/suitability letter, signed by the customer, provides proof that the information used to source the product is an adequate reflection of the customers needs and demands. When it comes to product research, the issue of KFIs before the application is made, etc, only a system that cannot proceed unless the relevant steps have been taken in the right order can ensure compliance every time as it leaves no room for human error.
‘Safety net’
This idea of a safety net to catch non-compliance before it can cause any problems feeds through to the second key area of control – that of constant compliance monitoring. Here, trigger points should be built in to any system that alert the compliance officer about danger levels. For example, under a properly controlled system it should be impossible for the majority of cases to go to one lender, or for non-conforming products to be sold to prime customers, as this sort of bias would show up at an early stage for immediate investigation. Compliance reviews and proper complaint handling systems must also be integral to a fully compliant system.
These controls can all be built in to a manual system – but man-hours will be considerable as will running costs. An automated system such as Home Buyer will call for initial investment of time and financial resource – but will bring the rewards of consistently compliant advice and sales activity, monitoring and documentation. The choice is yours – but inaction is no longer an option and the consequences for continuing to run an inadequate compliance process are now plain.
