Mortgage Advisers
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1.
FSA conclude that TCF is a ‘cultural issue’
2.
Always check your letters before issue
3.
How secure is your retail customer data?
4.
Don’t fall into the ‘Fast Track Mortgage’ hole
5.
FSA finds poor practice within sub-prime market
6.
FSA produce ‘Mortgage Factsheet’
7.
Supervisor Training – One space still available
8.
Disclosure documents – an update
9.
FSA sets out principles based future for general insurance regulation
10.
Counting on Goodwill …..does a holding company still hold answer?
Ladies & Gentlemen
Please find enclosed the latest compliance and industry news.
As usual, sit back and enjoy!
Kind Regards
ateb consultants
Which article applies to me?
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1.
FSA conclude that TCF is a ‘cultural issue’
The FSA are of the opinion that TCF is a cultural issue.
They recently published 'Treating customers fairly – culture' and 'Treating customers fairly - a guide to management information'.
The culture paper contains the culture frameworks which they have developed for supervisors to use when assessing the risk a firm's culture presents to treating customers fairly. The frameworks are based on factors or ‘drivers’ which they believe have a significant influence on behaviours in firms.
The management information paper has been produced to assist firms as they consider how to meet the March 2008 deadline (i.e. have appropriate management information or measures in place to test whether they are treating their customers fairly). The FSA have included some examples of good and poor practice on MI in this publication.
The FSA have stated that where they are satisfied that a firm has robust systems and controls and the senior management are reviewing and using reliable MI which demonstrates that they are treating their customers fairly, they will significantly reduce the level of testing they (the FSA) carry out on the firm’s culture regarding treating customers fairly.
| Ateb view: |
| We think they may have hit the proverbial nail on the head with this one! |
| Action required by you: |
ATEB have just updated its TCF review document for use by firms and will look to discuss the content of these documents with firms over coming months. More information is available at:
http://www.fsa.gov.uk/Pages/Doing/Regulated/tcf/index.shtml |
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2.
Always check your letters before issue
A firm received an unfortunate complaint recently following an administration error.
The background behind this complaint involved a client who been made redundant. She had examined her insurance demands and needs statement which indicated that she was covered for redundancy. This however was a clerical error, the demands and needs statement had been issued based on a template and the firm had omitted to delete reference to redundancy.
As part of the complaint investigation we could not rule out the possibility that the adviser has mistakenly believed that the PHI policy did indeed cover redundancy. When we examined the fact find we found that the relevant section had been completed incorrectly and so consequently the written evidence was inconclusive.
Based on the advisers experience and statement the firm are likely to defend this case, however the outcome is debateable.
Needless to say this episode of events has cost the firm time and money and frustratingly it could have been avoided. The firm has now amended its procedures to ensure that this situation does not reoccur.
| Ateb view: |
| This was an easy mistake to make, however a correctly completed fact find (detailed file notes) would have eased matters considerably! |
| Action required by you: |
| Have a check in place before issuing letters to clients, particularly where you use templates and as always take care to gather and record know your customer carefully. |
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3.
How secure is your retail customer data?
The FSA have commenced a review looking at the treatment of retail customer data. The review, which will look in detail at about 40 firms of different sizes across the financial services sector, will focus on the methods firms use to prevent the loss or theft of retail customer data by employees and third party service providers. The FSA plan to cover the following subjects as part of their review:
- Policies and procedures relating to the security of retail customer data
- Senior management involvement in ensuring the security of retail customer data
- Whether firms are assessing the risk of retail customer data compromise and putting in place sensible and proportionate measures to mitigate the risk
- Controls over retail customer data held in electronic and manual systems
- Controls over the disposal of unwanted retail customer data in electronic and manual systems
- The access to and use of retail customer data by third parties used by your firm such as outsourced call centres, administrators and marketing agents.
Firms are asked to supply information in preparation of the FSA visit which includes amongst other items, a request for risk assessments conducted or internal reports covering retail customer data security in the last two years.
| Ateb view: |
| We are not surprised by this move, certainly with the amount of identify fraud and related crime ongoing at present. |
| Action required by you: |
| As smaller firms will have only basic procedures in place to deal with securing customer data, maybe this is an opportunity to review things. |
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4.
Don’t fall into the ‘Fast Track Mortgage’ hole
Fast-track mortgages are a type of self-certification mortgage. Neither requires proof of income but the difference with fast-track mortgages is that lenders reserve the right to ask for proof.
It is highly probable that a number of lenders under pressure to make sales are encouraging brokers to abuse the FSA rules in this area.
We must therefore remind firms that ‘application fraud’ occurs when incorrect or misleading information is knowingly submitted within a mortgage application. This would include exaggerating income to qualify for a larger advance.
Whereas the rules do not specifically state in so many words that you must obtain verification hard copy evidence we are puzzled as to how else firms can have “reasonable grounds to conclude that the recommendation is the most suitable”.
We accept that many firms will see specific verification as an extra chore that potentially defeats the purpose of fast track or self certification. However, given the cavalier approach of many lenders we would urge firms to consider very carefully how their file record supports their recommendation.
To reinforce this view the FSA have repeatedly stated on visits to firms and via their website that a “plausibility of income check” is best practice and where a customer has income from various sources including PAYE and wishes to self-certify their income, the firm verifies the customer's main income.
After all, it only takes 5 minutes to ask for copies of pay slips, P60s, bank statements or write to an accountant or simply write down some expenditure.
| Ateb view: |
| Lenders use the “Teflon Method” to communicate their guidance; this means that when there is a problem “nothing sticks” and they know the responsibility falls back to the BROKER. |
| Action required by you: |
| Take care and a little extra time to ensure that you back up any fast track or self certification mortgage with good quality documented evidence and by all means discuss this with ATEB on our rounds. |
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5.
FSA finds poor practice within sub-prime market
The FSA are very concerned that consumers in the sub-prime market are not being properly assessed and advised. The sub-prime market in the USA is imploding, having a significant effect on worldwide investment markets. The FSA have therefore stated unequivocally that they will not hesitate to take action where they find bad practice.
Regarding intermediary files reviewed they found the following:
- In 33% of cases there was an inadequate assessment of affordability
- In 50% of cases there was an inadequate assessment of customers' suitability
- In over 50% of cases customers had self certified their income but it was not clear in many cases why they had been advised to do this.
Also, significant numbers of consumers were advised to re-mortgage, thereby incurring early repayment charges, without the adviser being able to demonstrate that this was beneficial to the customer.
For Lenders the main weaknesses were found in their lending policies:
- None of the lenders adequately covered all relevant responsible lending considerations in their policies. For example, some firms’ lending policies contained unclear affordability or self-certification requirements.
- In many cases, lenders did not apply their own policies in practice. For example, some firms failed to check the plausibility of information, as required by their own lending policy.
| Ateb view: |
| Getting things right in this area is not rocket science. The outcome of this review and obvious poor practice are down to lack of care and greed. We expect FSA enforcement to sanction firms heavily in this area over coming months and lenders will undoubtedly tighten up on their lending policies. |
| Action required by you: |
You can read more about the review at:
http://www.fsa.gov.uk/pages/Library/Communication/PR/2007/081.shtml |
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6.
FSA produce ‘Mortgage Factsheet’
The FSA consumer booklets and factsheets cover a wide range of topics. They are written in plain English and are a good starting point if you want to give clients general information.
The FSA have redesigned their publications following consumer research to make them more appealing, engaging and easier to read and understand.
The FSA have just released a mortgage factsheet - this can be an excellent complement to your suitability letter.
| Ateb view: |
| These are well written guides and firms can order up to 2000 copies, we fully endorse firms building these guides into their process. |
| Action required by you: |
You can get more information and order copies of this and other guides from the FSA website.
http://www.moneymadeclear.fsa.gov.uk/publications |
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7.
Supervisor Training – One space still available
Content:
- Overview of general T&C requirements on regulated firms
- Setting customer facing sales process standards
- Consistent and accurate assessment skills
- Theory of coaching and training
- Training Needs Analysis completion
- Constructing SMARTA development plans
- Structuring one to ones
- Monitoring performance
Who should attend?
- Qualified supervisors wishing to top up existing supervisory knowledge
- Newly appointed supervisors
- Supervisors who had previously been classified as ‘self supervising’ (under PIA)
Timings:
10.00 am until 4.00 pm
Location:
Newcastle upon Tyne
Cost: £175 plus vat per person
| Ateb view: |
| Although we often quote the regulatory requirements, don’t forget that quality supervisor training will certainly have a positive impact on your business. |
| Action required by you: |
| Please let us know by email or telephone using the contact details in this newsletter. |
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8.
Disclosure documents – an update
In May this year, the FSA announced that they were proposing to move the initial disclosure document (IDD) and the Menu (IFA firms only) from rules to guidance in November.
However, disclosure rules mean you will STILL have to provide more or less the same information to your customers about the firm's status, the nature of advice, how the adviser is paid and commission disclosure (IFA firms only) from 1st November 2007.
In reality, from November you will have the choice of:
- developing your own material giving VERY CAREFUL consideration to the detailed directive requirements or
- continuing to give clients the menu and IDD, which will allow you to satisfy a number of directive requirements, although you won't have to provide it in the precisely defined format of the current documents.
The FSA will introduce a replacement in 2008 should their research show that it is necessary.
| Ateb view: |
| At present the simplest and most cost effective compliant solution is to broadly use the documents that are in circulation at present. We will watch this space with interpretation. |
| Action required by you: |
| Very simple – PLEASE DO NOT throw away your documents just yet!! |
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9.
FSA sets out principles based future for general insurance regulation
In June 2007, the FSA published a consultation paper proposing to reform the rules that firms need to follow when carrying out general insurance business with customers.
These proposals have arisen because the current rules cover not only typical general insurance such as motor or household, but also non-investment insurance (protection) products, more typically sold by IFAs and mortgage brokers. The FSA is concerned that the selling practices used for the latter products is not always of sufficient quality.
It is therefore proposing that the new regime will allow a more principles-based approach for true GI products, while non-investment insurance products are likely to attract additional rules.
For protection products (Payment Protection Insurance (PPI), critical illness cover, income protection and term assurance), the FSA is proposing a small number of additional rules carefully targeted to improve selling practices in areas where consumers are losing out.
Some of these new measures will apply to all protection products, for example, a new standard to ensure balanced oral disclosure to help consumers make informed purchasing decisions. One of these - a requirement for firms to provide information on price orally to the customer where a discussion takes place - will have particular impact on PPI markets. Some measures will apply only to PPI, such as extending the cancellation period from 14 days to 30 days.
Following the consultation, the new general insurance regime is likely to come into effect in January 2008 with firms being allowed a transitional period for implementation.
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10.
Counting on Goodwill …..does a holding company still hold answer?
When regulation of general insurance brokers was planned the FSA gave in to pressure and created a breathing space for firms where goodwill was included as a capital asset. This meant that until January 2008 (it seemed such a long way off in 2005!) firms could count goodwill as an eligible asset when calculating their capital resource requirements. From January 2008 this will no longer be possible.
Many firms did not use goodwill in this way but if you did and have not made provision for this then something needs to be done. For many firms the three year period gave them opportunity to build up assets by way of retained audited profits to compensate. A subordinated loan may also be used to contribute. (See your ATEB consultant.) Personal assets can be used if not a limited company. Issuing and paying up of shares may be an option or converting of directors loan accounts. Also converting from a non-statutory trust client money account to a statutory trust client account may help some firms. (Again, see your ATEB consultant.)
One specific major problem arises where a firm has bought another broker firm by purchasing the goodwill of that firm with a loan. This means that the firm has a debt against it but from January 2008, no goodwill to offset this.
One way of resolving this issue has been the idea to pass on both the goodwill and the debt to a holding company or a non-regulated firm within the Group. This seemed a satisfactory solution all round. However the FSA have now stated that although there is no reason why this should not be done and that the capital resource requirements only apply to an authorised firm, they will be looking at the financial standing of the holding company/Group when assessing the financial resources of the authorised firm. They refer to Principle 4 (regulation by Principles again) to justify this. They are non-specific at the moment but state that “the consolidated position of the group as a whole will be a relevant matter”.
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Important Note:
The ATEB Newsletter is intended to provide general guidance on areas of compliance and T&C; however it is not a replacement for the main Rules and Guidance contained within the FSA Handbook.
We welcome all feedback. If you have any feedback or questions relating to any articles then please direct them to your local ATEB consultant or the newsletter editor Steve Bailey email steve@atebconsulting.co.uk
Unless you have consulted specifically (as part of a regular visit) with ATEB on a particular issue then ATEB Consulting accept no liability for any actions taken based on the information contained solely within the newsletter. |
Contact Us:
Ateb Consulting
The Old Post House
29 Nedderton Village
Northumberland
NE22 6AX
T: (01670) 822984
M: (07703) 576951
E: steve@atebconsulting.co.uk
W: www.atebconsulting.co.uk
