Richard Griffiths is managing director, Network Data
There has been a flurry of reports about the Financial Services Authority’s deep-rooted concerns about the sub-prime market. What are these about and what are the implications for the broker market?
Headlines that have appeared in print include ‘Many sub-prime brokers are not selling by the FSA book’, ‘FSA tackles firms failing to comply in sub-prime sector’, ‘FSA review of sub-prime sector spells bad news for industry’ and ‘Is sub-prime suspect?’. They leave little doubt about the serious nature of the problem.
A recent investigation by the FSA involved visits to 31 small broker firms that are active in the sub-prime market. The FSA looked at 210 case files and found appalling evidence of non-complaint sales practices.
The failings of the brokers investigated come down to ignoring MCOB rules such as not conducting a comprehensive fact-find on clients and their requirements, not being able to produce evidence why a particular mortgage had been recommended, and the absence of record-keeping generally.
This is basic stuff. Excuses such as “sub-prime is especially difficult because of the intricacies of the products” simply do not wash.
The FSA found that three firms out of the 31, or 10%, helped customers in obtaining a mortgage where their income would not have met the lender’s criteria – in other words, inflating their incomes. These firms have been referred to the FSA’s enforcement division for further investigation.
We must, in fairness, recognise that there are times when it is the clients who are dishonest about their income and this puts brokers in an invidious position.
So what is the FSA going to do about the situation? Referring three firms for enforcement is a drop in the ocean. If the 10% figure is a reliable statistic, then applied to the 7,000 firms that have permission to undertake mortgage activities the FSA should be referring 700 firms or so to enforcement.
The FSA is planning another review of small firms active in the sub-prime market early next year. So what? If we see another three firms being referred to enforcement, this will only leave another 697 rogues in the market.
There is the real danger that the industry will increasingly regard the regulator as a damp squib with inadequate resources and a lack of ideas on how to root out bad practices in the industry within an acceptable time frame.
To finish on a brighter note, the FSA findings were not all doom and gloom. Martin Reynolds of BM Solutions talks about positive news, while Ben Stafford of AMI points out that the majority of advice being given is of a high standard.
The FSA acknowledges that most firms are probably giving clients correct advice but they are not recording the fact that they are doing it. The regulator is publishing examples of good and bad practice in a briefing note on its website.
Experts see good and bad in a growing market
Andy Watson is head of mortgage and credit union department at the FSA
“Sub-prime is a growing area of the mortgage market and we have identified it as a priority area for our mortgage supervision. Where we find examples of possible inflation of income, we make further enquiries which may lead to referrals to enforcement.”
Gary Dixon is managing director of Compliance.co.uk
“The FSA has opened a can of worms as inadequate paperwork and not following the correct procedures are strong indicators of bad practice elsewhere. The sub-prime market has a poor reputation in many circles and what worries me is that the good advisers in this sector will have their reputations blemished by the bad practice that seems prevalent in some firms.”
James Cotton is mortgage specialist of London & Country
“Recommending the most suitable product is the absolute golden rule, especially with FSA regulation and Treating Customers Fairly.”
Mark Chilton is chief executive of Purely Mortgages
“Many firms, particularly smaller ones, have found the changes to their working practices required by regulation of the mortgage sector tough to institute into office routines. The MCCB was far less prescriptive in what was required in the sub-prime market.”
Ben Stafford is head of policy at the Association of Mortgage Intermediaries
“Focussing on the positives, the results show the majority of advice being given is of a high standard but the three firms identified by the FSA cannot be defended. Advisers must look at improving paper trails.
Anthony Badaloo is manager of Church Hill Finance
“What is accurate advice in the sub-prime market? Being late in paying a credit card bill because you are on holiday can make you an adverse client and that can lead to mammoth charges being foisted on to your mortgage deal.”
Kerry Nelson is an IFA “There has got to be something wrong with all the other parts of the process not to spot the tell-tale signs because it is so obvious to see when there is something not quite right with the mortgage application.”
Peter O’Donovan is mortgage manager of Bestinvest
“The requirements of providing evidence of why the broker chose a particular mortgage can be difficult.”
Rob Clifford is managing director of mortgageforce
“I think there is always a danger that some commission-hungry advisers might want to let a case fall into a sub-prime category when it might be in the prime category.”
Sally Laker is managing director of Mortgage Intelligence
“This is where a good IT system and a good compliance sales system is important because it ensures that you do all that you should do in the sales process.”
Martin Reynolds is head of sales at BM Solutions “If the FSA’s suggestion that poor record keeping could be a big part of the problem is true, it is imperative brokers address this issue to protect themselves from mis-selling allegations in the future. The fact that firms are active in going beyond the FSA’s rules, with large percentages of firms intending to review a customer’s sub-prime product in the future and issuing suitability letters, is positive news.”