Despite an admission that the FSA has been regulating the big banks ‘on the cheap’ it would seem that there is sufficient resource and investment in the policing of the mortgage broking community at present. Indeed, the enforcement division of the FSA looks like it has been working overtime in the sector given the raft of fines and ongoing action it has recently taken. It is now just over four years since the FSA took over the regulation of mortgages and we are certainly seeing a much more proactive regulator when it comes to ensuring mortgage intermediary firms are following the rules and regulations.
While the regulator continues to work with firms and individuals who want to work with it, the days when it seemed prepared to give the benefit of the doubt to firms who had broken the rules have gone. This year, more than any other, we have seen the number of fines and censures rise dramatically as the FSA seeks to assert itself in the market and deliver confidence to consumers about the quality and the fairness of the advice they are receiving.
Increase in fines
At the time of writing, October 2008 alone has seen a number of fines issued to mortgage intermediary firms for failings. These included:
• Two directors fined £30k each ‘for shortcomings in their mortgage business which put financially vulnerable customers at risk and the firm at risk of being used for mortgage fraud’.
• A Doncaster mortgage broker fined £34.5k ‘for failing to ensure it provided suitable advice which exposed over 900 customers to the risk of being sold an unsuitable mortgage’.
Throughout 2008 we can add the following action taken by the FSA against other mortgage firms including:
• Enforcement action taken against a firm that exposed 425 customers to the risk of being mis-sold a mortgage by failing to provide suitable advice.
• A Derbyshire mortgage broker was fined £63k for failing to give suitable advice and communicate accurate information about mortgage charges to customers.
• Another Doncaster broker was banned for applying for a personal loan supported by a falsified payslip and for making a false claim to the bank overstating his income.
• A Coventry-based mortgage broker was censured for failing to ensure his customers received suitable advice.
These are just some of the actions the FSA has taken and there is no doubt that we will see more in the rest of 2008 and in the months and years ahead. It is understandable – mortgage regulation is still in its relative infancy – that many firms will look at the action taken and worry they are inadvertently breaking the rules and therefore liable for action. However, as has been stated, the FSA does not simply move to enforcement straight away in proceedings – it always works with the firm to understand the potential problems and help it work to establish a satisfactory solution for both the firm and any customers affected.
Take action
Obviously firms can undertake action now to ensure they are never placed in such a position and while the action already taken against firms is unfortunate for those involved, it does provide significant lessons which can be learnt by others. As a matter of course the FSA will publicise the action it has taken and looking at the press releases and the individual reports on each case we can built up a picture of what the FSA is looking for in terms of compliance and the areas where firms can often fall foul.
If we look at the case of the firm which exposed 425 customers to the risk of being mis-sold a mortgage, the main issue here is clearly the suitability of the advice. The firm breached the FSA’s principle that, ‘A firm must take reasonable care to ensure the suitability of its advice and discretionary measures for any customer who is entitled to rely upon its judgment’. It did this by failing to record and maintain adequate information about customers’ circumstances which meant the firm was unable to demonstrate the suitability of its advice.
The firm also had inadequate file-checking systems in place – mortgage processors rather than checking the standard of file completion only checked for the existence of information. There was also no systematic checking of files by the Directors – files were only checked on a sample basis and the checks were not adequate. The FSA also found that the system in place for recording these file reviews was also inadequate. The result of this was that the firm had been issued with a fine of £24k, however it was unable to pay this and therefore the FSA waived it so as to enable the firm to compensate all its customers who may have been disadvantaged by its actions.
Lessons
There are many lessons for firms to learn from this particular case, indeed, much of the rule-breaking here goes to the heart of the mortgage advice rules given that it concerns the suitability of the advice for the client and being able to record and prove that suitability. The fundamentals are fairly simple – intermediary firms must have a system in place which obtains and records from customers all information likely to be relevant to the suitability of its advice, including financial information. Without this, a firm cannot possibly go on to make its recommendation and prove that the suitability of its advice was based on adequately collected customer information. The FSA also view these procedures as essential in fighting financial crime – false income and employment can be provided by customers and the FSA expect the firm to conduct its own checks about the integrity of the information received.
Furthermore, it must have in place quality record-keeping procedures which all brokers must follow, and senior management must then ensure its file-checking system is robust enough to pick up on any potential discrepancies. In the above case, there was no ingrained system of file-checking and only a small, irregular sample of cases were checked by the Directors. The file-checking system itself must also be stringent and ensure those files that are checked and passed have met the firm’s quality assurance process.
Treating customers fairly
The FSA’s Treating Customers Fairly (TCF) initiative is at the heart of its firm reviews and it is certainly looking for evidence of TCF throughout a business. The point has often been made that customers can often deem themselves totally satisfied with the service they have received, however, this does not mean they have been treated fairly. For example, a firm may well recommend a self-certified mortgage to a client when their circumstances and needs make them just as suitable for a mainstream product. The firm may only be doing this to obtain a larger procuration fee, and while the customer might be satisfied with the product, they have not been treated fairly particularly if they could have obtained a different mortgage with a lower rate.
There are many further lessons to be learnt from existing enforcement action – too many to mention in this article, however, some of the more important ones include the monitoring of advisers. Under the FSA, it is important that advisers are not simply left to their own devices – a top earner for a firm may only be achieving these levels through poor practice and therefore adequate arrangements must be implemented for the supervision and monitoring of advisers. Significantly, each adviser must have their own Training & Competence (T&C) scheme and again adequate records must be made and retained to demonstrate how the firm carries out the training of its advisers.
It is important to recognise that robust compliance practices must be a significant part of any intermediary firm. And yet, compliance is not the greatest love of most advisers, therefore having specialists who can ensure all the lessons are learnt and the integrity of the firm is maintained is absolutely vital. For a larger firm this means having a compliance department which has sufficiently experienced and qualified staff; for the smaller firm this will not be possible. However, quality compliance can be bought off the shelf from a number of support service providers and this will be money well spent if it keeps the FSA from the door.
The FSA has certainly stepped up the action it is prepared to take against mortgage broking firms, whatever size they might be. The rules are there for a reason and firms must have the systems and processes in place to ensure they are working correctly and, importantly, that they can evidence the recommendations they make. Fines and past business reviews will be costly, and in this climate no firm wants to be paying out for these unforeseen expenses. Learning from the FSA’s ongoing action and ensuring the compliance function is of the highest quality should ensure most firms do not appear in the next FSA enforcement action missives that will inevitably be issued.
