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Know your clients or get to know the FSA

The Financial Services Authority is on the warpath again.

It seems several mortgage firms have been cutting corners when it comes to protecting customers and we can expect a round of hefty fines to follow as a consequence of these failings.

The firms involved may not have been pocketing client money but they might as well have been. Not having the right processes in place to ensure that customers are getting the correct advice can be just as damaging to a home owner’s financial wellbeing.

You would think that mortgage firms would have worked out by now that it pays to keep your house in order.

Every customer should be treated to the best possible advice and every intermediary’s record-keeping process should be top notch. Not only is this fair and honest but it protects a broker’s business as any new customer could be an FSA mystery shopper.

The results of the regulator’s latest research in-volving 252 firms shows that smaller firms are more likely to fall foul of the rules. They not only need to implement appropriate systems but must also be able to show that these systems are being used.

Larger firms were found to have robust processes in place but could not always demonstrate that they used them.

More worrying still, FSA investigators found room for improvement in all aspects of the mortgage advice process with some of the worst areas identified as being assessing customers’ needs and affordability, training and competence and record-keeping.

Record-keeping is important, as many brokers have already found to their cost in the matter of endowment sales.

With no records that clients were warned about the potential downsides of these deals, many companies had to stump up compensation they did not feel was justified.

But as more lenders start to offer loans to customers with credit problems it is essential that they can show they are able to properly assess customers’ needs and what they can afford.

Many firms are insisting that they do have this expertise as Norwich and Peterborough – one of the more cautious lenders – did when it launched a range of mortgages for people who have low credit ratings last week.

Richard Barker, product manager for N&P, says: “Credit im-paired mortgages are a growing market. While we are careful about lending in what is a higher risk area of mortgage business, this type of lending has become commonplace.

“Using our affordability index means we have a clearer picture of an applicant’s earnings and outgoings, and an accurate view of whether they can really afford the mortgage.”

Let’s hope he’s right. The FSA’s research shows that many firms do not have the affordability assessment skills that they claim.


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