A storm is gathering over the mortgage intermediary market. For those who have not pegged out their operations compliantly, there is only going to be one winner when it comes to a showdown with the regulator.
Part of the problem is that many mortgage brokers are not using all of the products available, such as surrounding insurances and alternative lines of finance, as a means of getting to the bottom of each client’s specific circumstances.
This in turn makes it difficult for brokers to prove they have effectively assessed a client’s affordability and status.
Time for improvement
Mortgage regulation came into effect three years ago and since then many firms have worked hard to understand how the sales processes they use, and the secondary insurances they offer, can combine to help keep them compliant.
Having spent the last three years reviewing, investigating and measuring the performance of various sectors, the Financial Services Authority feels it has a good understanding of where the mortgage market is failing in its obligations and has clearly stated that the time has come for drastic improvements to be made if firms wish to avoid future enforcement action.
Releasing the findings from its latest reviews into the market, the FSA said there were a number of serious failings that continued to plague the industry, including an inability by brokers to effectively assess clients’ affordability or collect sufficient information to enable them to accurately establish clients’ needs.
Not a new fault
The bad news is that this is not a new fault, and brokers have already come under fire for not getting to grips with their clients’ true circumstances on numerous occasions. However, the good news is that there is a relatively simple solution if firms are prepared to make the effort to put it into play.
But why are brokers so bad at assessing affordability? Well, in the first instance, who wants to turn down business? Some brokers feel it is not their job to delve too deeply and if a client says they can pay then who is the broker to say they can’t? In the second instance, poor record-keeping means that even if a broker has acted impeccably, they have no way of proving this with an incomplete audit trail.
Getting to grips
So clearly there are a number of issues to address. The first is record-keeping. No one likes it, it is boring and it does not grow the bottom line. However, without a reliable set of records, a broker’s business will not be worth the lettering above the door. Unless firms realise this, they will find putting their house in order more costly and commercially damaging than they could ever have imagined.
To really get to grips with affordability though, brokers need to find out how clients will repay the mortgage. How secure is their job? What plans do they have in place to meet their repayments should their personal circumstances change dramatically?
By taking the time to lead clients through the possibilities in the protection market, brokers will not only get a good idea of the client’s situation, but also of their ability to deal with changing circumstances and the possibility of generating protection sales where suitable. Keeping all of this on record will help in proving to the regulator that the client was effectively and appropriately advised.
In today’s environment, brokers could also spend some time looking into the outstanding debt that borrowers already have. Yes, they may ask a few cursory questions about outstanding balances on loans and credit cards, but how many take the time to ask whether these are likely to grow? How many look at the protection in place for this borrowing? How many examine the alternatives for both the present and the future?
Would borrowers need to release equity from their property to cover personal borrowing if they had a problem? Would the mortgage allow them to do this without penalty? Is it likely that further equity will be required for other purposes?
Giving a full picture
By looking at these things and taking the time to discuss secured loans, as well as insurance, alongside the mortgage, brokers can give clients a full picture, make them aware of potential problems and highlight possible solutions. Once this has all been recorded in a client’s file, it also provides concrete evidence that a thorough job has been done.
Mortgage broking is not simply a processing exercise. It is about adding value and giving excellent advice to clients making the most important financial decision of their lives.
Those taking the time to explain the options and record their dealings will establish a better relationship with the client, create more opportunities to cross-sell and protect their own business into the bargain.
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