Brad Baker is former director of communications MCCB
Just as the busy autumn business season begins, the Financial Services Authority has laid down another marker for the industry in its review of how sub-prime mortgages are sold. The findings go to the heart of consumer protection regulation – providing suitable advice based on client needs, with these needs carefully assessed through a comprehensive analysis and fact-finding process.The sample was small, encompassing a review of only 210 files from 31 small mortgage companies. But the results revealed that “in too many cases firms were unable to show that they had followed required procedures relating to suitability of advice”. In three cases, firms were identified as potentially having assisted customers to obtain higher mortgages through inflation of income. These firms have been referred to enforcement for further investigation. In 60% of cases reviewed, insufficient information was obtained in areas considered of relevance in the sale of sub-prime mortgage products. And in 67% of cases, prescribed additional factors relating to debt consolidation did not appear to be taken into account, while in 80% of files reviewed, insufficient evidence was recorded to demonstrate suitability of the non-conforming product against customer needs. The FSA has speculated that this may be partly attributable to poor record keeping, rather than wholly due to poor advice with a high risk of consumer detriment. As well as this concession, the FSA also positively highlighted some good practices evident from its review that go beyond its formal requirements – notably the plans of firms to conduct future client reviews, with the potential of transferring customers to cheaper prime products when their circumstances allow, and the issuing by many firms of suitability or ‘product confirmation’ letters. The latter is an old Mortgage Code requirement, no longer compulsory under MCOB. But it provides benefits in process and evidence terms to clients and companies. For these reasons MCCB lobbied hard for the retention of such letters in the mortgage sales process so it is encouraging that many firms have chosen to continue issuing them. Despite these positives, overall the published findings make concerning reading. There is no doubt in my mind that the vast majority of firms do a good job for their customers and also do their best to comply with regulatory requirements. Year on year, compliance standards will improve with understanding and experience, just as we saw under the Mortgage Code. But the sub-prime sector punches above its weight in terms of media profile and the potential for bad publicity. Many competent firms operating within the sector and without could have their reputations tarnished by media reporting of generic poor practices such as those recently disclosed by the FSA. The industry has a moral duty to provide extra care to customers within the sub-prime sector. These are borrowers who are invariably more vulnerable – in some cases desperate – as they seek financial solutions to problematic circumstances. This is borne out by the fact that in more than half of the cases reviewed by the FSA the mortgage arrangements involved an element of debt consolidation. The FSA’s findings certainly add weight to the argument that such mortgage sales be classed as higher risk and subject to special rules and higher levels of regulatory scrutiny, as is the case in the selling of lifetime mortgages. A significant area of reputational risk for the industry remains the sale of self-cert mortgages. The FSA’s probe into the way these mortgages are sold and the processes lenders have in place with regard to these products is further evidence of its competence in identifying and tackling priority issues. We all remember the furore surrounding The Money Programme expos矩n October 2003 and its follow up in February 2004. This provided a reputational wake-up call, even if some of the programmes’ conclusions could be seen as somewhat sensationalist. There is, of course, nothing wrong with self-cert mortgages in principle as they are well suited to some categories of home buyer, particularly the self-employed and contract workers, and individuals with extra income sources such as regular bonus or commission earnings or income from family trusts, investments or rents. In its pre-Mortgage Day review of self-cert, published in February 2004, the FSA concluded that “lenders have adequate controls in place” to protect themselves from fraudulent applications and that the arrears profile of self-cert mortgage cases was not significantly higher than for standard mortgages. The grey area – and the issue I am sure the FSA will focus on – remains the sale of self-cert products to salaried individuals who have no additional income. Although MCCB’s own work at the time of the first The Money Programme broadcast did not point to any widespread bad practice in terms of income inflation on the part of mortgage advisers attached to MCCB registered firms, this is an area where the industry must act consistently in a manner beyond reproach. The issues of suitability, affordability and responsible lending are obviously important in the mortgage sales process. Indeed, affordability is the most critical issue in all mortgage sales and advice provision. Self-cert should therefore be limited to cases only where proving income is genuinely problematic, such as for some self-employed individuals. To safeguard the industry’s reputation, it is not good enough to hide behind the small print. It is the customer who makes the income declaration and assumes the risk of future legal action if the declaration is inflated. Any loopholes that allow for the pandering, encouragement or turning of the proverbial blind eye to such practices to secure higher loans may come back to haunt us all.