The FSA has called on brokers to improve their record-keeping practices. Recent reviews have revealed a number of firms are failing to detail all pertinent client information and broker recommendations within their records. The FSA has urged intermediaries to improve the way they record and store information and has targeted 2006 as the year this issue is to be resolved. The regulator has attached particular attention to the non-conforming and self-cert sectors, areas that revealed a worrying quality of record-keeping during its reviews.
The provision of self-cert advice has been a concern since the introduction of regulation, with the FSA un-officially keen to stop brokers advising employed clients to borrow on a self-cert mortgage due to perceived issues of mortgage fraud. FSA findings in November revealed three firms were prepared to discuss with clients how they could inflate their salary in an attempt to get a ‘better deal’. Following this review, and general industry concern, the FSA is keen to look at brokers’ reasons for recommending a self-cert product to an employed person. The review also revealed in 47 per cent of cases the firm was unable to demonstrate it had appropriately assessed affordability, with 36 per cent of cases giving little or no reasoning why the self-cert mortgage had been recommended.
Similarly, the non-conforming sector has been targeted, with brokers failing to identify within their records why a client was not offered a mainstream product. With this in mind, it’s no surprise the FSA is keen to stamp out poor record-keeping.
Non-conforming review
The regulators’ record-keeping priority has never been doubted but it raised concerns with quality in relation to non-conforming clients following its September 2005 review. It has been a recurring theme through the majority of FSA reviews since. It revealed, in 80 per cent of cases, a lack of evidence to back-up how the recommended product met the consumers’ requirements and circumstances. The results also went on to show that in 60 per cent of cases firms had failed to obtain enough information about the customer in key areas relating to the non-conforming sector.
Speaking on the announcement of the FSA figures last year, Andy Watson, FSA head of mortgages and credit union department, admitted the review had shown a need to improve record-keeping. He said: “We will be working with firms to raise the standard of sub-prime sales and advice. It is difficult to establish the level of consumer detriment or potential mis-selling as many of the failings related to poor record-keeping and brokers could provide more detail when challenged, and we will be looking for better evidence of compliance with our requirements in future.”
Robert Clifford, managing director of Mortgageforce, agrees the figures made interesting and somewhat worrying reading. He says: “The figures quoted by the FSA in relation to poor records kept by advisers seem high, given that mortgage advisers have repeatedly and constantly been warned of the importance of record-keeping, particularly in the non-prime market where there exists a greater risk of consumer detriment. Regrettably, many brokers are still lagging behind in terms of adopting and embracing regulatory compliance regimes, which are fit for the current environment. That in itself does not necessarily mean that poor advice is being given but such firms do need to sharpen their approach.”
However, Mark Loydall, director at Cambourne Financial Planning Ltd, argues the figures are unrepresentative of the advice given by brokers. He says: “While it may be true that there might sometimes be a lack of written evidence, I’d like to think that it’s not a deliberate case of mis-selling. Usually, you have to look behind what’s written and believe the broker is getting the right deal for the client.”
However, the FSA has stated the information must be recorded in such a way as to remove any ambiguity as the regulator and the client cannot rely on the information being ‘behind what’s written.’ Any uncertainty or lack of information within brokers’ records can hinder the brokers’ defence if at any time a client launches a complaint over the mis-selling of a mortgage.
Despite obvious failings in the keeping of records the non-conforming review did go on to reveal that many firms were acting beyond FSA recommendations with over half (58 per cent) of firms admitting their intentions to review a customer’s non-confirming product to see if they could be moved to a mainstream product once their credit profile had been rehabilitated. A step in the right direction.
Indefinite records
Since FSA regulation came into affect in October 2004, the regualtor has been keen to highlight the need for brokers to display exactly why a particular offer had been recommended to a client, and intermediaries have been urged to detail as much information as possible and retain these records for a minimum of six years.
However, many firms keep these records indefinitely, especially with confusion surrounding the length of time a client has to make a complaint. The confusion surrounding the complaint timeframe procedure has made firms re-evaluate their record-keeping practices, and Thomas Reeh, chief executive of blackandwhite.co.uk, argues that major changes have taken place since ‘Mortgage Day’. He says: “We have seen a big change in record-keeping since regulation as it’s now a key issue, not just in terms of data protection but as a sound business practice. We are currently in the process of keeping all our records indefinitely because you could be giving advice which could be challenged 24 years down the line.”
With brokers concerned as to exactly how long they have to keep records for, many have called for a secure storage facility to hold older records and have urged the industry to collate a uniform system so that record-keeping becomes an easier process to undertake. Mike Sammon, manager at Thornley Grove Financial Services, argues that more needs to be done to ensure brokers and lenders are in sync when it comes to the compiling and handling of information. He says: “We’re all guided by what is a requirement now and we seem to be holding more paper than ever before. Sometimes it’s puzzling for the client as you give them a form to sign and they’re thinking, ‘Haven’t I signed this already?’” He adds that continuity between lenders and brokers should exist in an effort to make the process easier. It’s strange because even though everything seems to be on computer now, the networks are still asking for quotes, Key Facts Illustrations (KFIs), disclosure documents and so on in paper form. We’re running out of space and in the next four to six weeks, we are going to start scanning all our documents and even when we do that, the networks will still be asking for paper copies,” he argues.
Technology
However, despite a lender reliance on paper-based records since the FSA announced a further look into the issue of record-keeping, technology has become an increasing factor in the gathering and storing of mortgage information. In an effort to improve record-keeping a number of software packages have been launched and additions have been made to various websites to help with the collating of information. Pre- and re-population of information has helped the record-keeping process, making the process less time-consuming and allowing brokers to focus on the selling and recommendation of products. However, the financial implications of including specialist software to improve record-keeping have put many brokers off, and some are opting to retain a largely paper-based system. Jonathan Cornell, technical director at Hampton’s International Mortgages, argues: “Specialist systems can make life easier but if you are organised, you can work on paper quite effectively.”
James Cotton, mortgage expert at London & Country, similarly admits that although technology can improve record-keeping to help firms meet regulations while reducing the time spent recording information per case, for some firms the costs would prove too expensive. He says: “As it is out there, the software can be worth investing in but the financial costs must be weighed up as brokers obviously can’t keep buying software for everything.”
While advancements in software have aided brokers in keeping and filing client records, firms have begun to take extra steps to ensure all information is available to them. A growing number of firms are now taping client conversations, which provide timed evidence about the exact client needs and a way of keeping information. Reeh says: “Not only do we record all the calls coming into our call centre but our field officers are also equipped with Dictaphones to record every conversation with clients.” He believes this practice is sensible as it removes the ambiguity that the FSA may still have reason to question on a paper or computer-based system.
However, Clifford disputes these claims, arguing that taped conversations are ‘impractical’. He explains: “As the most prevalent intermediary sales process is face-to-face, with some 70 per cent of mortgages being bought this way, recording conversations would be impractical for most firms.”
FSA further review
With obvious advances being made in the field to combat the failings surrounding record-keeping, the FSA has promised to hold a further review with particular interest in the non-conforming and self-cert markets. Sam Bennett, FSA spokesperson, admits record-keeping will be an important factor in these investigations. She says: “The FSA will definitely be looking into the non-conforming and self-cert sectors, particularly with regards to affordability and suitability. The 2005 self-cert review was conducted in two parts with lenders responding to the systems changes needed.” Bennett further confirmed its review procedure of the self-cert and non-conforming sectors would probably not take place during quarter one of 2006.
Peter O’Donovan, mortgage manager at Bestinvest, admits the regulator should find better practices within the broker community since September’s initial review, but this will largely depend on the size of the brokerage and the amount of business they conduct. “If brokers are doing 20-odd applications a month then it is a perfect way to show they have made changes to their record-keeping,” he says. “Anyone doing non-conforming and self-cert business who doesn’t keep adequate records is treading a fine line. I think that taping conversations is taking it too far and if anyone is concerned they should think about getting clients to sign either the initial factfind or their suitability letter. Businesses that are resorting to taping conversations and so on suggests they are not 100 per cent happy with their business and what they’re recommending,” he says.
Getting to grips
Despite clear advances in record-keeping it is clear some firms are still getting to grips with how best to collate and store records. Chris Cummings, director-general of the AMI admits the market still needs some work to please clients and the regulator. “The industry must improve its record-keeping procedures. Record-keeping has always been seen as an expense but should be seen as an investment as it keeps firms out of trouble with the Ombudsman and can also lower the firm’s PI cover if they can demonstrate good processes and administrative procedures. If brokers don’t do record-keeping for love they should do it for the money.” Cummings added that many found it hard to believe the best advisers were not always the best at keeping records as they traditionally were able to provide the advice, but did not have it written down.With a further review of record-keeping through suitability and affordability, and mystery-shopping planned, firms can ill-afford to dismiss the necessity for quality record-keeping or the impact poor practices could have now and potentially years down the line.
Grant Bather is news reporter at Mortgage Introducer. Additional reporting by David French
