Two perennial topics of compliance interest are payment protection insurance (PPI) and Financial Promotions – and both have been the subject of recent enforcement action by the Financial Services Authority (FSA) with particular focus on the fair treatment of vulnerable customers.
Taking PPI first, a substantial (£55,000) fine was imposed on a mortgage and general insurance (MGI) broker for failures relating to its sale of mortgage-related PPI that came to light during a thematic visit by the FSA in August 2005. The financial penalty was imposed on the firm in respect of breaches to the FSA’s Principles for Business that cover firms conducting business with due skill, care and diligence; taking reasonable care to control affairs responsibly and effectively with adequate risk management systems; and ‘Treating Customers Fairly’ (TCF).
Regarding the TCF element, the failures were viewed as particularly serious because the firm’s customer base consists primarily of non-conforming customers who have limited financial means and access to credit and who would suffer considerable detriment if they were unable to claim on their insurance policy.
Here are examples of the poor practice that caused the breach of the principles. Information gathering from mortgage payment proection insurance (MPPI) customers was not sufficient to ensure that recommendations met their demands and needs. Before the FSA’s thematic visit, the firm had failed to identify any weaknesses in its systems and controls, and therefore could not put them right.
Management information supplied to the firms senior management was not sufficient for them to identify regulatory risks, and there was inadequate record-keeping with a large number of demands and needs statements having been destroyed. There was also an inadequate compliance function that failed to identify breaches of the regulatory requirements. Above all, policies were being sold under which customers would not be able to claim, and to customers who were already covered by another insurance policy.
Moving on to Financial Promotions, enforcement proceeding against a friendly society reveals some useful reminders for MGI firms – even though the products being promoted were investments rather than mortgage loans or insurance. The firm did not ensure that the Financial Promotions were confirmed as compliant before issue (i.e. ‘signed off’); it did not keep the required records; and it did not include the appropriate risk warnings.
The final notice cites four conditions that mark the failings out as particularly serious. The promotions were aimed at a vulnerable section of society (the elderly); the failings persisted over a long period of time; they were only uncovered as a result of the FSA investigation and not through the firm’s internal systems and controls; and they persisted despite a Dear CEO letter addressed to that particular financial services sector addressing the very issues on which this firm persisted to fail.
The vast majority of non-conforming MGI business is sold through intermediaries, together with self-cert and debt consolidation deals across the full credit spectrum. We are therefore distributing and promoting products to sectors of society that would be viewed as vulnerable if put to the test, so extra care about regulatory compliance is advisable.
A legal query
Q1. I am a sole trader with, until recently, another qualified mortgage adviser working for me. He left last month and I have found out following a compliance audit by my principal that he wasn’t doing a very good job and that I may have to both respond to client complaints and possibly pay compensation for his poor advice. Can I take legal action against him to recover any loss?
Bill answers: Yes, you could take legal action, but I would suggest you consider the following points before you do. You say your principal identified the issues when carrying out a compliance audit of your firm. Did they raise any other related issues? For example, were all your cases compliant? Were they satisfied that you had taken appropriate references prior to employing the adviser? Did you follow your principal’s Training & Competence (T&C) requirements? Did you have an opening competence statement and possibly a training plan? If the answer is no to some of these questions you may want to think twice before taking such a serious step as legal action, as you were responsible as owner and supervisor for the adviser and his advice, your principal may not support any legal action, which could prove difficult for you perhaps.
Making contact
Q2: I have been asked by my compliance department to make contact with a number of clients to revisit the sales and disclosure process and documentation as it says there are gaps. This is going to be embarrassing. Is there any way I can avoid making contact with the clients?
Bill answers: You don’t say if you are a mortgage adviser employed by a directly authorised (DA) firm or working for an appointed representative (AR), not that the answer is really any different. I presume you have been told exactly where the gaps are in your records and if these impact the quality of advice given to the clients then you have no option but to contact the clients. I am sure your compliance department won’t have taken the decision lightly and given the FSA rules and the TCF focus, you would be well advised to follow the request.
TCF confusion
Q3: I keep reading about what the FSA is saying about TCF but it all seems to relate to large firms. Where can I get some guidance that is specific to our firm, which is medium-sized and trying very hard to comply?
Bill answers: While I understand what you say about some of the communications about TCF, they do contain some very clear guidance as to what is required by all firms. You might like to access the FSA website and find guidance for small and medium-sized firms at http://www.fsa.gov.uk/pages/doing
/regulated/tcf/pdf/medium.pdf.
