Is the FSA prejudiced against brokers?

The Financial Services Authority’s Mortgage Fraud Thematic Review was supposed to inspect lenders’ systems and controls for the prevention of fraud.

But listening to the findings being presented at the regulator’s Financial Crime Conference earlier this week, you would be forgiven for assuming that it was brokers, not lenders, who were under scrutiny.

The management of third-party relationships with solicitors, brokers and valuers forms a significant section of the review, which says that many lenders identified solicitors as their largest single source of mortgage fraud risk.

The review says: “One large lender considered solicitor fraud to be their greatest area of concern with approximately 50% of their mortgage fraud losses attributed to the actions of solicitors.”

However, when presenting the findings at the conference, Edna Young, strategy specialist for financial crime and intelligence at the FSA, spent far more time talking about brokers than solicitors and barely mentioned valuers.

She said that many lenders are not employing due diligence in the management of their broker panels, criticising them for having panels that are too large and for failing to carry out adequate checks on brokers.

Part of this focus on brokers rather than solicitors can be put down to the work that lenders have done recently to cut down their solicitor panels.

In July last year, Lloyds Banking Group announced it was to remove solicitor firms from its panel which have conducted low volumes of transactions, and since then the issue of upping standards for lenders’ conveyancing panels has been high on the Council of Mortgage Lenders’ agenda.

So it seems that the FSA is keen for lenders to be equally stringent when it comes to brokers.

Intermediaries should therefore be aware of the danger of being removed from lenders’ panels in the future, as lenders will no doubt want to demonstrate they have taken the FSA’s review on board.

But while the regulator may be right to demand lenders adhere to the same standards for brokers as solicitors, there could be a less impartial reason for the FSA’s apparent desire to penalise brokers.

The review states that many lenders identified solicitors as their largest single source of mortgage fraud, but includes no equivalent information on brokers.

Instead, the introduction to the section on brokers simply states that rogue brokers can present risks to lenders.

The review says: “Some of the FSA’s recent enforcement actions against brokers were triggered by intelligence that brokers were involved in organised criminal mortgage fraud rings.

“In our enforcement actions we also saw examples of brokers encouraging mortgage applicants to exaggerate their earnings to gain larger mortgage advances.”

While these practices may have been rife before the credit crunch, anyone in the industry will tell you that almost all of the rogue brokers were stamped out in the years that followed.

With roughly two thirds of the broker population exiting the market since the boom years, those that have survived have done so through sheer hard work and like to think that being approved by the FSA is enough to prove their credentials to lenders.

But it seems the FSA’s judgement is still clouded by what has gone on in the past.