Last week, following a series of reviews, the Financial Services Authority (FSA) announced that more than 70 firms were found to be operating below acceptable standards, with seven firms being referred to enforcement and a number of others being considered for referral. But is it right to solely blame intermediaries for the failings discovered?
The four reviews, conducted by the regulator between June and September 2007, covered a total of 345 firms, the great majority being small mortgage intermediaries. 142 firms were visited and the others surveyed over the phone or by written questionnaire. In total, the review teams examined 1,194 client files.
The studies found that in spite of some improvements, a number of mortgage brokers continue to operate well below standard, with senior management failing to adequately monitor and control their firm’s performance to ensure that they are treating their customers fairly.
Putting the results in context
The reviews – across a range of brokers operating in the prime and non-conforming markets – examined the assessment of affordability, self-certification mortgages, training and competence standards, and the effectiveness of senior management controls.
The self-cert review targeted 48 brokers, several of whom were suspected of breaching FSA rules. The investigation confirmed many serious failings, including readiness to proceed with arranging a mortgage despite doubting the accuracy of financial information customers were giving them.
John Charcol’s senior technical manager, Ray Boulger, says because the sample was targeted in this way, finding non-compliant firms was the obvious and inevitable outcome.
“The sample of firms looked at in the self-cert review were particularly targeted as having had failings in the past so you would expect to see a higher amount of people breaking the rules than if it was a random sample – so the results need to be put in context,” he says. “But a targeted sample makes sense, because the majority of brokers are doing a good job and complying with the rules.”
FSA retail intermediary sector leader, Stephen Bland, said that during the reviews the FSA also saw a number of good brokers who were meeting the required standards – but they are being undermined by the negligence or wilful non-compliance of others.
His view is backed up by James Cotton, mortgage specialist at London & Country Mortgages, who says there needs to be a distinction made between the brokers identified as failing below standards and brokers as a whole.
“I also think there is nothing surprising in what the FSA found and the reviews revealed things we knew already,” he says. “But you shouldn’t lump all brokers together. There needs to be distinction between people failing to meet standards and the ones doing a good job.”
Bland says the review also found some brokers that, despite having some way to go, were willing to engage with the FSA and be helped to improve their performance. “However, there are still an unacceptable number of firms unwilling to change and they are damaging the rest of the industry,” he says.
“We found some firms willing to offer mortgages they know to be unaffordable and to accept self-cert business even where they had concerns that the financial information provided by the customer was implausible. These practices are completely inconsistent with ‘Treating Customers Fairly’ (TCF) – hence the large number of enforcement referrals and other regulatory actions.”
Enforcement
The FSA’s enforcement division investigates when firms breach the rules or the provisions of the Financial Services and Markets Act 2000. Under enforcement the FSA can take action such as withdrawing a firm’s authorisation; disciplining authorised firms and people approved by the FSA to work in those firms; imposing penalties for market abuse; applying to court for injunction and restitution orders; and prosecuting various offences.
But firms entering enforcement are not publicly named – something which Boulger says is a good thing.
“As to whether the FSA should name and shame those firms it has taken enforcement action against, they probably shouldn’t be named at this stage,” he says. “If they are later found not to have broken the rules they will still have a bad name as mud tends to stick.”
The Association of Mortgage Intermediaries (AMI) does not condone poor practice and so strongly supports the work the FSA is doing to root out the firms that persist in tarnishing the image of the vast majority of good firms within the industry.
AMI director, Richard Farr, says the significant majority of intermediaries are honest hardworking individuals, but a few serve to damage the reputation of the industry – a sentiment most brokers appear to agree with.
“It is important to note that many areas of strength were discovered during this review, and again we support the FSA for highlighting this. It is crucial in such a turbulent market that we highlight positives and not just focus on a small minority of failings,” says Farr.
“We must ensure that confidence remains in this sector and as such it is vital that the FSA is prepared to help and guide those firms who are unsure of the corrective action needed, but eager to take remedial action. This is evidenced by the improvements made by so many firms that the FSA re-visited in this latest round of thematic work.”
The Council of Mortgage Lenders (CML) also welcomed the FSA’s findings. In a statement, it said it also supported action against brokers which fail to address compliance weaknesses when drawn to their attention by the FSA, saying that poor practice undermines the reputation of good brokers, and of the wider mortgage industry.
However the CML also urged the FSA to ensure that its guidance is as clear and unambiguous as possible.
CML director-general, Michael Coogan, says: “After three years of regulation, the FSA is right to expect its regulatory standards to be in place across the whole market. These findings are a wake-up call to those brokers who are behind the pace.
“But the FSA also needs to make sure that it sets out its expectations clearly and ambiguously, which does not always happen. This is particularly important for small broking firms.”
Small broking firms might find the advice on the AMI website useful as it is easier to read and understand than pages and pages of the FSA rulebook. The site contains sections on current issues – including the FSA and TCF – as well as links to relevant webpages from the FSA website.
Self-cert issues
The sale of self-cert mortgages came in for particular criticism from the FSA but done properly with brokers taking the necessary precautions to ensure clients are not overstating their income, self-cert can help clients with income streams that are not easily verifiable to achieve funding.
Melanie Bien, director at Savills Private Finance, says: “Self-cert is a higher risk area of business and should therefore be underpinned by a robust process, supported by strong systems and controls. It is important that brokers conduct their own assessments of affordability and don’t rely on a lender’s checks alone. A straightforward reasonability assessment should be the first consideration – is the income stated consistent with the client’s circumstances, for example, employment type, length of service, or time trading, etc?”
The biggest potential pitfall is the risk of brokers encouraging clients to overstate their earnings to achieve the loan amount required – this is potential fraud so it is important that brokers do not suggest required income figures or lead clients down this route in any way.
Andrew Montlake, director at broker Cobalt Capital, says brokers need to be able to show on their files that affordability checks have been done. Every self-certified case should be compliance checked and then checked for affordability and feasibility, and the reasons why a self-cert loan was recommended double-checked.
Montlake says: “With self-cert cases brokers often have to act in good faith – but without going through bank statements , etc, it is very difficult to know if the customer is telling the truth. However, experienced brokers will know if something doesn’t add up and if that’s the case – and there’s any doubt about whether the client can afford the mortgage – they shouldn’t put the case through.
“But there are a small minority of brokers that will put the case forward anyway. It’s not fair to blame brokers per se as lenders have to do their due diligence too and accept some of the responsibility”
This may well be the case but the FSA’s findings relate only to brokers, not lenders. The results of the FSA’s review of the extent to which lenders are meeting their responsible lending requirements are due next Spring and look set to be an interesting read.
Montlake says it is very difficult for a broker to stop a client hell-bent on breaking the rules from doing so. After all, the more systems and ways we have to detect fraud, the more clever the fraudsters seem to get. The key is making fraudulent cases as few as possible.
“People can be very convincing, but the important thing is that brokers shouldn’t lead people down that route,” he says. “If it is an employed self-cert the broker needs to check the reasons why – they might have an offshore income, a trust fund or a wealthy family giving them an allowance, for example. Brokers and lenders need to work together and lenders should ask for the self-cert rationale on every self-cert case.”
Record-keeping is key
Brokers fearful of falling foul of the regulator when it comes to why they recommended a self-cert, or other kind of mortgage should remember that record-keeping is key. If an intermediary has gone through affordability checks with a customer then recording it is the next logical step.
“It all comes down to brokers documenting why a certain loan was recommended for a certain client – that’s the duty of the broker,” says Cotton. “You have to write down why the advice was given and why it was suitable for them. The onus is on the broker to do that – not just give advice, but record why the advice was given.”
Cotton is right. If you have gone to the trouble of building a strong client relationship and sourcing a great deal, then you need to record how the client intends to afford the repayments and whether they will still be able to afford it if interest rates increase or if they are left languishing on their lender’s standard variable rate.
Bien agrees: “As with all mortgage advice, from a regulatory and compliance angle, documentation is key. The factfind process must sufficiently demonstrate why a client can’t prove their income and the supporting documentation and correspondence on file must evidence that the client has been made aware of the implications of proceeding on this basis.”
Record-keeping was one of the issues bought up by the CML at the Mortgage Business Expo last month. Jackie Bennett, head of policy at the CML, told delegates that they should keep more detailed records of all their dealings with customers who self-certify in order to help prevent fraud. She also said the CML would be stepping up its efforts to prevent fraud next year.
Lack of improvement
However, record-keeping aside, there are still some brokers that, despite being found to be doing things wrong in the past, have not improved their processes.
Boulger says these intermediaries should be dealt with in the appropriate way – whether that be by offering guidance or advice or starting the enforcement process
He says: “Where brokers have been found to be in the wrong in the past and haven’t upped their game, it could be said they are not trying and not complying with regulatory requirements. This non-compliance also gives them a competitive advantage as they are not meeting their regulatory obligations and so are keeping their costs down – consequently they will have a competitive advantage over brokers doing things correctly.”
Ultimately the FSA reviews have revealed that there are still some brokers not coming up to scratch but it is a case of a small minority spoiling it for the rest. Affordability checks and keeping adequate records of why certain advice was given, and loans recommended, are the key to not falling foul of the regulator – and getting the whole industry a bad name while you are at it.
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