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Jump the FSA record-keeping

The recent FSA review once again shows that if firms write suitability letters there is considerably less chance of them falling at the regulator’s record-keeping hurdle, says Bill Warren

Bill Warren is director of compliance, Complete Mortgage and Loan Services
The recent Financial Services Authority review of compliance by small brokers with the requirements of selling and advising in the sub-prime market has created a huge amount of interest. On the one hand, the published percentages look fairly alarming with 60% of the 210 case files having insufficient information about the customer in key areas relating to sub-prime sales. And in 80% of cases there was lack of evidence to show how the recommended sub-prime product met the customers needs and circumstances. In 67% of cases involving debt consolidation firms could not demonstrate they had taken account of the additional requirements relating to debt consolidation mortgages. On the other hand, the FSA points out that firms are going beyond what the FSA’s rules require, with 58% intending to review their customer’s sub-prime mortgage in future and 65% issuing suitability letters outlining the reasons for a recommendation.

This review should not be seen in isolation but as part of an ongoing process of review and feedback by the FSA that is intended to encourage good practice. The review findings have been quickly followed by a briefing paper that clarifies what firms should be doing with regard to obtaining customer information, assessing the suitability of the recommended products and keeping adequate records. No firm can afford to ignore the findings of this review as there is no comparable evidence on record showing that larger broker firms and those that tend to deal in prime business are any better than their smaller, sub-prime specialist colleagues in fulfilling these compliance obligations. So it’s worth looking at these issues in greater depth.

The rules covering suitability are to be found in MCOB 4.7, which is the main source of information on the subject. But there is a useful summary of what needs to be kept as a record of the suitability of personal recommendations in MCOB Schedule 1: Record keeping requirements. The problem many people encounter with the prime source material in MCOB is that is stops short of listing exactly what questions advisers must ask clients and what points must be written down in their records to meet the FSA’s requirements. In the case of smaller firms with no full time compliance officer, the scope for confusion can be even greater, so it will be useful to go to the more specific examples included in the FSA’s briefing note – under the heading ‘things that firms need to be aware of’ – particularly when it comes to selling a sub-prime mortgage product.

The FSA points out that firms must determine what is relevant when dealing with each customer. But it reminds brokers they need to find out some key details about the customer even if they are not voluntarily disclosed, and that there are three important areas in which to seek information. These are the customer’s credit history including their debt position, details of any existing mortgage arrangements, and income and expenditure information to assess affordability. Helpfully, the FSA is going to include the need to provide this sort of information in its consumer messages in October. Regarding the poor level of record keeping on the subject of suitability, the FSA’s briefing note reminds advisers about the usefulness of drawing up a fact-find document to show all requirements have been discussed and considered with clients. It also says firms should consider using a checklist to demonstrate that additional considerations have been reviewed with clients.

For those of us who, from day one, have recommended that a reasons why or suitability letter is produced for every personal recommendation of a mortgage product it is heartening to see that this practice is already in operation in 65% of the firms visited and that the regulator is encouraged that some firms are using this letter to explain and record the implications of interest-only loans.

I can only add that the more firms that adopt the practice of the suitability letter, the less chance there will be of falling at the record-keeping hurdle should your firm be included in any future reviews.

For part two of the discussion on the subject of assessing suitability of a debt consolidation loan, watch this space.

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