Now the FSA regulations have firmly bedded in, compliance in the mortgage sector is no longer an optional choice but an integral part of business life and it is imperative training is taken seriously to meet the regulator’s requirements.
The advent of compulsory regulation over a year ago certainly had an impact on the industry; it has proven to be time-consuming for most brokers and there is no doubt it has had an effect on profitability. The Mortgage Code helped provide a framework for the introduction of new regulations, the Mortgage Conduct of Business (MCOB) and Insurance Conduct of Business (ICOB) and with this introduction there has been a general increased focus on good practice which in turn has acted as a catalyst for raising standards in the sector.
The FSA has succeeded in creating an environment where a flexible risk-based approach to raising standards and the implementation of best practice is resulting in improved quality of service and advice to clients. ‘Treating Customers Fairly’ and promoting best practice have become a key focus of the sector. Anyone working in the industry is now expected to be competent in their role and have undertaken all necessary training. It also wants to see evidence of how an individual’s skills and knowledge are being improved.
It is important that this momentum is maintained and enhanced, and a vital aspect of modern regulation is the need for authorised firms to be able to demonstrate an individual is competent to undertake a specific job. The FSA Commitments dictate that firms are certain their staff are competent and regularly review their employees’ competence. Firms need to be able to prove this work has been completed.
The manner and content of such ongoing assessments is left to the firm to decide. In order that staff assessments are productive, they must focus on the business areas relevant to each individual. The element of control in administering any relevant tests is critical in maximising the business benefit from the individual’s down time. They must be technically accurate and not biased by any corporate view if the results of the assessments are to stand up to regulatory scrutiny. The source and quality of any material must be validated and proven.
Record-keeping
Regulators need evidence. The manner of recording and retaining the evidence is left to the firm but the need to keep it is clear. If you can’t prove it happened, then the regulator will assume it didn’t.
However the firm decides to keep this information, it is just as important to ensure it is collated and shared effectively. Hot spots must be highlighted and areas of compliance weakness identified with appropriate remedial action put into place if necessary. It is important that systems facilitate reporting across teams and business divisions, showing the overall level of competence as well as facilitating individual analysis.
Detailed record-keeping also needs to take place in negotiations with the client. The introduction of a regulated process for mortgages with transparency of charges in the use of Initial Disclosure Documents (IDDs) by advisers has improved consumer confidence. More complaints are upheld because of fact-finding and suitability problems than any other reason. Firms need to review their factfind forms and techniques regularly. People do not fit into little boxes or neat numerical classifications.
Fact-finding is a prose activity and forms must leave extensive room for comment. The forms must be checked to ensure they are a precise match with the forms on the FSA website. In a recent paper, the FSA commented that although variations were not serious, few advisers were producing totally compliant documents.
The danger for small mortgage intermediary firms is that they do not write down what they know about the client, either in the factfind or suitability letter. They then fail to demonstrate how they went from the facts discovered about the customer to the solution or plan recommended. A simple route map describing the pertinent facts, any changes suggested, an explanation of the recommendations and disclosure must be issued every time a particular step(s) is put forward. For financial planners, this keeps the plan constantly up to date.
Training and competence worries sometimes bedevil small brokerages but they should not – especially if they have taken the relevant examinations like the Certificate in Mortgage Advice (CF6), offered by the Chartered Insurance Institute (CII) or the Certificate in Mortgage Advice and Practice. Either of these qualifications is now compulsory. The benefit of gaining further exams and qualifications is that it demonstrates competence, commitment to learning, professionalism and the development of knowledge beyond the basic regulatory requirement.However, training and competence requirements must be continuously reviewed and maintained. This means:
Ongoing training activity being undertaken and recorded. This includes: attendance at FSA seminars, surgeries and roadshows; reading the FSA website and publications; reading the trade press; and taking further examinations.
Sufficient evidence is retained to demonstrate suitability of recommended mortgage contracts. For example, suitability letters or comprehensive file notes.
Product research is being conducted. For example, printouts from mortgage sourcing systems retained on file or comprehensive file notes.
Sufficient client information is obtained when making mortgage recommendations. For example, know your client information.
Networks
The FSA is worried the training and compliance regime in some networks is not as good as it should be. This follows an FSA survey which found a number of potential shortcomings in areas such as the level of compliance resource in Principal firms, the quality of desk checks and field visits to check appointed representatives’ (AR) compliance, the use of computer systems for monitoring ARs and how far networks operate a risk-based approach to the monitoring of ARs.
Networks need to assess gaps in staff knowledge before producing their training plans. Some networks and independent brokerages do not appear to be following this procedure and are simply requesting a multitude of in-house training courses before assessing their staff’s needs. They see this as the more cost-effective and fast way to develop their people, however placing every member of staff on a programme of courses may not be the right answer. Choosing the right course for the right person is imperative.
The FSA has published a factsheet suggesting how networks can improve practice in three main areas: compliance and the approach taken to supervising ARs, admission to membership, and documented procedures and management information.
Before registering an AR, Principals should be able to demonstrate how they have assessed its financial situation and its knowledge, ability and good repute to carry on regulated business. The written contract between the Principal and its ARs should include all the information required under FSA rules.
That means keeping detailed documentation to enable senior management to identify, manage and control risks associated with ARs and to take remedial action for any compliance breaches. This also applies to firms who appoint ARs but do not meet the definition of a network. The FSA has warned that it will be carrying out further work next year to monitor the position and will take appropriate action where concerns remain.
Sub-prime
Last September the FSA carried out a review of compliance by small mortgage brokers with requirements on selling and advising in the sub-prime market. It revealed both good and bad practices, including ‘too many cases where firms were unable to show they had followed the required procedures relating to suitability’.
In particular the regulator highlighted that in over half of the cases examined insufficient information was obtained about the customer in key areas relating to the sale of sub-prime products.
And in 80 per cent of cases there was a lack of evidence to show how the recommended sub-prime product met the customer’s needs and circumstances, showing there is still some work to be done here.
The regulator has identified the sub-prime sector as a priority area for mortgage supervision and a further review of small firms active in the sub-prime market is planned for early 2006.
No firm will ever be 100 per cent compliant. Although it can never say so officially, the FSA wants the main factors of ‘minimum acceptable compliance’ present in every business and it is determined to see this is the norm. Firms that fail will be dealt with harshly. You have been warned.
Alec Adams is director business quality division at Millfield Partnership
