Towards the end of 2005, the FSA did a compliance review of small mortgage brokers that were advising and selling in the non-conforming market. The review highlighted the need for mortgage brokers, especially those dealing in the non-conforming sector, to improve their record-keeping, with 80 per cent of the reviewed files failing to demonstrate how the recommended product met the client’s needs and circumstances. Additionally, where the purpose of the loan was debt consolidation, in 67 per cent of cases there was no evidence to show the adviser had explained the additional factors concerning debt consolidation loans to the borrower. Having exposed such a substantial lack of record-keeping, the FSA is not likely to simply forget the matter, and no doubt further reviews will be conducted to see if there is any improvement, so record-keeping is something that every firm should be looking at carefully. After all, it’s unlikely authorised firms were deliberately not keeping the required records – they probably just didn’t fully grasp the extent to which records must be generated and retained. This makes it likely that there are plenty more mortgage firms that need to sharpen up their record-keeping systems.
Unfortunately, there are no handy sets of blank records to download and use, as each firm is expected to produce records that are suitable for its own business. On the other hand, within the Mortgage Code Of Business (MCOB) section of the FSA Handbook (under MCOB transchedule), there is a full list of all the records required by the mortgage rules, when they must be generated and how long they need to be kept. However, for those looking for a quick fix, the list can, at first glance, look a little daunting and the fact that both lenders and intermediaries are referred to as ‘a firm’ doesn’t really help in making things any clearer. I have therefore set out the required records under separate groupings for ease of references, and have included an explanation the MCOB rules that each of the required records refers to.
Explaining the rules
The first main group of records relates to our old friend the ‘non-real time qualifying credit promotion’ – in other words what is normally understood as all marketing activity not involving personal communication with the prospective client. These records must be kept by both lenders and brokers, and their specifications are clearly set out in MCOB 3.10. For each promotion (advertisement, mailer, website content, etc) a record must be made on the date that the promotion is confirmed as compliant or approved, and these must all be kept for at least one year after the last time that promotion was last communicated. First, the name of the person who confirmed or approved the promotion must be written down, together with the date of the approval/confirmation (usually referred to as the “sign off”). Secondly the record must include three things: the medium for which the promotion was authorised; evidence supporting any factual statement; and evidence to show that any APR quoted was representative of the business likely to arise from that promotion. There must be a final copy of the promotion, as published, held on file. There is very little ambiguity here – and very little excuse for any firm to plead ignorance if insufficient records are being kept. The reason for this set of records is also very clear; they are there to prove that firms have been clear, fair and not misleading in its communications with potential clients. In these days, with Treating Customers Fairly (TCF) such a major item on the FSA’s agenda, keeping correct financial promotions records should be a priority in any event.
Advising and selling standards
The next group of records supports MCOB 4, advising and selling standards. Regarding advised sales, three records must be generated at the time when the personal recommendation is made and they must be kept for three years. The first is a record of the client’s needs and circumstances that have been used in assessing the suitability of a mortgage – normally referred to as the factfind. Going back to the source (MCOB 4.7), suitability must include affordability (including awareness of future changes in rates – such as when initial fixes or discounts run out, or the client’s circumstances); whether the product is appropriate to the client’s needs and circumstances; and whether the recommended product is the most suitable for the client out of all products that the adviser is able to supply. Always remember that if no mortgage is available that is suitable for the client, then none should be recommended. Within this set of records it must be recorded that any applicant seeking debt consolidation must be made aware of the implications and risks of securing previously unsecured debt on their home and increasing the period of short-term loans and therefore paying more interest on them. In addition, clients must be made aware of the alternative courses of action, e.g. making an arrangement with their creditors. If this all seems like stating the obvious – remember that the FSA’s non-conforming small broker review showed that this last requirement was not recorded on two-thirds of the occasions when debt consolidation was the loan purpose.
Suitability
Still sticking with suitability, after that rather lengthy first record, the next record must be an explanation of why the adviser’s personal recommendations complies with the suitability requirements. Thirdly, under ‘advised sales’, a record must be kept of the reasons for recommending any mortgage product that was not the least expensive for the client. Although not specified as such within the mandatory records, a detailed suitability or product confirmation letter to the client, covering all the points in this section, will keep all this information in one comprehensive record.
Regarding non-advised sales; a record must be made of the scripted questions used on the date on which the questions are first used. The scripted questions must be approved first of course and the staff using them specially trained to use them. The record must be kept for at least one year after that set of questions is superseded by a new script.
MCOB 5, pre-application disclosure, contains the record that is perhaps the most familiar to all mortgage brokers – the KFI. Two records are specified, both of which must be generated on the date that the client applies for the mortgage and they must be kept for at least one year. The first is a copy of the KFIs themselves, and the second is a register of all KFIs issued, including dates and the medium through which the KFI was issued. Very often the sales system being used, such as Homebuyer, will do this for you.
The next group of records that must be kept by mortgage adviser firms concerns the recommendation of lifetime mortgage loans, as outlined in MCOB 8 and 9, where much of the record-keeping requirements for adviser firms are the same as for ordinary mortgages, although those for lenders go into much greater depth and are specified for each separate type of lifetime mortgage product.
Lender requirements
This brings us to the final group of records – those that must be kept by lenders. These include the offer document, a copy of the tariff of charges, information on mortgage credit cards, and disclosure specified at the start of the contract. All of these records must be made on the date the client is notified and kept for at least one year. A lender must also keep records to show that it has assessed the client’s ability to repay the loan, that it has in place a responsible lending policy, and how it has dealt with any clients who are in arrears. These records too must be kept for at least one year, but are usually kept a lot longer.
All records must be kept in a format that can produce printed documents and, naturally, a computer-based system with inbuilt cross checks and safeguards will be much more reliable, economical and far less time consuming than a manual system. For example, we use Home Buyer System for our advice and sales process, which produces all of the mandatory records at the right time and stores them permanently. A warning shot about record-keeping has been fired over the bows of mortgage adviser firms, so making sure that you have all your records in good order should be near the top of your ‘to do’ list.
Bill Warren is director of the Complete Network
