Mortgage Advisers
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1.
New measures to help small firms from FSA
2.
Training & Competence
3.
Complaints
4.
Payment Protection Insurance - Update
5.
Protection and general insurance
6.
General Insurance - Advised or Non-Advised?
7.
Recent FSA road shows
8.
Quality of Advice – Mortgages
9.
Mortgage thematic ‘affordability’ visit – feedback
10.
Mortgage broker fined for advertising and sales process failings
11.
Goodwill - Reminder
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.
New measures to help small firms from FSA
The Financial Services Authority (FSA) has announced it is introducing new measures to increase its contact with small firms. The aim is to help firms make faster progress in meeting the FSA's Treating Customers Fairly (TCF) initiative and to identify, more quickly, those firms most in need of regulatory attention.
Building on its current risk-based approach, the FSA is introducing an ongoing programme of structured visits and/or telephone assessments to test the quality of management and progress towards embedding TCF. The results will help update its risk profile of individual firms so that it can better target resources at the firms that pose the biggest risk to its objectives. The FSA expects to carry out full on-site visits to approximately a quarter of firms in order to verify the assessments and follow-up identified issues.
| Ateb view: |
| We see this as a benefit to those firms who are trying to do the right thing and treat their customers fairly. |
| Action required by you: |
Ensure that your TCF plan is up to date and ongoing improvements are documented.
The FSA has already set a deadline of end-December 2008, by which time it expects all firms to be able to demonstrate that they are treating their customers fairly. |
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2.
Training & Competence
The FSA admit that the T&C Sourcebook has become increasingly complex as its scope has expanded and some of the more detailed provisions are legacies from the rulebooks of previous regulatory bodies. Subsequently, the FSA have removed some of the more prescriptive requirements and replaced them with a more user-friendly format.
A key change for IFAs and Mortgage Brokers is the removal of the ‘2 year time limit’ for obtaining an exam. From November 2007 it will be for the firm to set the time limit for qualifying.
| Ateb view: |
| Less guidance means greater chance of getting it wrong – sorry to be so negative! |
| Action required by you: |
| None – We will make updates to the web based ATEB manual. Although we don’t envisage making many changes because we would rather not fix something that isn’t broken. |
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3.
Complaints
There are changes to the FSA complaint handling rules that take effect on 1st November; the key areas are shown below:
- The 5 day acknowledgement letter deadline has been removed and replaced with a requirement to ‘deal promptly’ with a complaint.
- The 4 week holding letter deadline is being removed and replaced with a requirement to ‘keep the complainant reasonably informed’.
- Firms don’t need to display the FOS sticker but must inform the customer earlier in the process about FOS (via a firms terms of business / IDD) and when acknowledging a complaint.
- The FSA want all complaints to be resolved within 8 weeks as standard, except where this is not practical for reasons beyond the firm’s control.
| Ateb view: |
| Welcome the changes but would still recommend that existing timescales are maintained. |
| Action required by you: |
We will make updates to the web based ATEB manual.
Please note that in our experience, numerous complaints extend beyond the 8 week deadline – firms will now need to act promptly on receipt of a complaint to gather investigation material |
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4.
Payment Protection Insurance - Update
This article outlines findings from the recent FSA review of the sales processes and systems and controls relating to the sale of payment protection insurance (PPI). They visited 126 small firms as part of this work, focussing on three sectors:
- motor retailers;
- loan brokers; and
- mortgage brokers.
This latest phase aimed to test the industry against five key outcomes. The outcomes the FSA were testing were that customers are:
- told that PPI is optional, where this is the case;
- given clear information about the product and what it will cost;
- given the assistance they need to be clear about what they are eligible for under the policy, and what the exclusions are;
- where advice is given, recommended a policy that meets their needs; and
- offered a fair refund if they cancel their policy.
Key concern areas:
- Over a third of small firms failed to clearly explain the PPI product, including significant exclusions and limitations.
- A third of firms did not ensure that the customer was eligible to claim against the product.
- Less than a third of statements of demands and needs reviewed were appropriately tailored to the customer.
- For single premium policies, less than a third of customer files could evidence that the policy met the customer's demands and needs.
- In a third of small firms, there were inadequate systems and controls in place around the sales process.
Overall the FSA were not satisfied that firms were treating their customers' fairly when selling PPI.
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5.
Protection and general insurance
ICOB is being revised. However the changes will not take place until January 2008, after which there will be a transition period.
For general insurance business, such as household, motor or pet policies, this means moving to principles and high-level rules, except where detailed provisions are required by European Union Directives.
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, and some measures will apply only to PPI, such as extending the cancellation period from 14 days to 30 days.
| Ateb view: |
While this will mean more flexibility for firms, the FSA will require the same standards of conduct and essential consumer safeguards to remain.
Less prescription could however mean a greater chance of getting it wrong. |
| Action required by you: |
ATEB will update its web based manual with relevant changes, although, you may wish to read through the various papers.
http://www.fsa.gov.uk/pages/Library/Policy/CP/2007/07_11.shtml |
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6.
General Insurance - Advised or Non-Advised?
Clearly, it is important your customers are left in no doubt about the level of service they receive when you discuss general insurance products with them.
Often however, when we examine files as part of our file checks it is not always apparent whether clients have received advice or just information. We often see conflicting information for example the firm appears to be making a recommendation in once sentence but includes the phrase “you choose”.
You need to make sure if you are working on an advised basis that your paperwork reflects this and your firm should monitor this on a regular basis.
| Ateb view: |
| Firms are paid well for giving advice and should avoid phrases such as “you choose”. This normally results from insufficient questions (a lazy process) being asked. Firms should therefore consider improvements to their fact find process. |
| Action required by you: |
The fact sheet can be found at:
http://www.fsa.gov.uk/pubs/other/factsheet_sales.pdf |
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7.
Recent FSA road shows
The FSA did the rounds again in September, with roadshows for IFAs, Mortgage and Insurance firms. The key messages were about more ‘Principles Based Regulation’ and TCF, quality of advice processes, and the Retail Distribution Review, which are all ‘big hitters’. However, there were some key messages worth reiterating:
- Stay on your toes for potential mystery shopping (remember we are talking about telephone calls and face to face mystery shoppers) as the FSA is undertaking various projects on TCF and quality of advice – be sure you know your T&C from your TCF!
- Familiarise yourself with the pages of the FSA website – they expect to see that you are keeping yourself up to date with the wide compliance issues and their objectives.
- Be aware of the enforcement actions, the key issues, and you will see the greater focus on Principles rather than Rules. Learn from these and make changes to your own business if appropriate.
- Be aware of the forthcoming changes resulting from the new COBS sourcebook from 1 November (this is for IFAs only and more details will follow in an ATEB bulletin).
Spotlight on TCF
- In particular, the FSA was clear about its focus on TCF and its expectations for how far they expect firms to have moved on this. To bury your head in the sand and say that you must be treating customers fairly because you have been in business x years and have x number of customers is clearly not an option – unless you want to see your name up in lights on the FSA website!
- Examine what action you have taken on TCF thus far. Is it enough? Are you meeting both client and FSA expectations?
- Do you have a clear and documented plan for improvements and action points?
- Do you have management information (KPIs) in place which can demonstrate you are treating customers fairly, or will have by the deadline of March 2008
- Would your process stand up to FSA scrutiny? If you are unsure that it would, you should contact ATEB for further guidance.
Spotlight on Mortgage Fraud
The FSA also used the Roadshow to talk about various mortgage compliance issues, some of which are already well documented about quality of business. However, the FSA has recently undertaken project work with Lenders to identify mortgage fraud issues, particularly concerning the use of fraudulent documentation by clients. The FSA was keen to point out that the broker firms must be seen to be stepping up their own vigilance. Rather than just looking at the bottom line figures on pay slips and P60s etc, you are expected to look at the document as a whole and make a sense check as to whether it looks legitimate. They used examples of pay slips from files checked during FSA visits; type face varying throughout the document, employee numbers missing, no amounts in the boxes for tax and NI deductions, net pay being higher than gross pay etc We all know that these documents are obtainable quite easily, and need to ensure that fraud checks are part of our usual sales process. We suggest it could be included in the admin process with the usual anti-money laundering checks without too much hindrance.
| Ateb view: |
| If you were not able to make the road shows you see from the above that you missed a real treat! |
| Action required by you: |
| Be aware of the above issues and speak to ATEB were you are unsure. |
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8.
Quality of Advice – Mortgages
This could actually be a standing topic on the ATEB newsletter!
Once again, the issue of quality of mortgage business has given the FSA cause for concern. It is concentrating effort and resources in this area and is determined to raise the bar for all firms. It is compounded by recent television and news bulletins, and the issues with Northern Rock.
Record keeping is vital. If the FSA picked up one of your files today, would it clearly show:
- Sufficient details of the client’s needs and circumstances – Know Your Customer data? Do you keep notes of meetings / telephone calls to show the audit trail?
- Evidence that clients have sufficient disposable income to afford the mortgage now and in the future, together with the other costs of owning a home?
- Proof that you have provided the IDD and the KFI and explained both to the client?
If your fees are variable, do you have a signed fee agreement with the exact amount?
| Ateb view: |
| Mortgage firms continue to be under great scrutiny and you should review your sales process regularly to ensure it is up to scratch. |
| Action required by you: |
| If you feel you need advice or assistance on best practices, give ATEB a call. |
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9.
Mortgage thematic ‘affordability’ visit – feedback
We thought you would be interested to hear about an affordability visit to an ATEB firm:
This themed visit was the second visit the firm has had. The first was a more general FSA Mortgage visit which went reasonably well, with an ATEB based suitability letter being taken away as an example of good practice. The two FSA representatives checked 12 files over approximately 4 and a half hours and then approx an hour and a half dealing with questions and feedback on their findings. The visit was very focused with only a half a dozen questions on TCF, around how the firm had approached this and what changes they had made in meeting the TCF requirements.
- They then questioned how the firm went about gathering details in support of income and expenditure. How the firm established affordability pre and post new mortgage being in place.
- The firm had recently adopted the new ATEB Mortgage fact find as the FSA had previously commented that the affordability section on the old versions of their fact find. The FSA seemed happy for the firm to adopt the ATEB format.
- The FSA questioned some of the figures documented within the list of monthly outgoings and commented that they were unrealistic. They checked the figures against any evidence held on file, for example payslips, bank statements, bills, etc. They were concerned about maintenance moneys being taken into consideration where there was no evidence that they were being received regularly.
- State benefits were also a concern where the client's circumstances could change or legislation could change thus removing these benefits and bringing affordability into question.
- Self employed where no records of accounts were available; they suggested that bank statements should be sought and assessed and or letters from accountants confirming income should be requested.
- FSA commented that any regular or irregular bonuses should be assessed closely and generally should not be included as appropriate income for mortgage purposes.
- Where it was clear that affordability was not an issue and the adviser recommended an interest only mortgage, the FSA questioned why a repayment mortgage was not recommended.
- Where interest only was recommended, repayment vehicles were mentioned in the suitability letter but there was no corresponding record of repayment vehicles in the fact find or budget planner.
- They passed comment that the customer was given ‘options’ and was left to choose the product although the firm was promoting an advised service.
- The firm did not factor in credit card payments into the monthly expenditure calculation that were not fully paid off by the remortgage.
- For a first time buyer who had been living with their parents the firm did not factor in realistic expenditure for utilities, food etc. They had simply based their advice on a small entertainment figure.
| Ateb view: |
| It is clear from the visit that the FSA expect firms to give due respect to ‘affordability’ as it is the key part in assessing and recommending whether a mortgage is suitable. Should the client have difficulties in the future and they default on their loan, the chances are they will complain that their adviser did not properly assess whether they could afford the loan. If the material evidence held by the adviser is not robust then it is likely that any complaint against them will be upheld. |
| Action required by you: |
| Keep an eye out for findings of the themed review which will be available at the end of the year. |
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10.
Mortgage broker fined for advertising and sales process failings
The Financial Services Authority (FSA) has fined Select Mortgage Services (Select) £10,500 for poor financial promotions, inadequate sales processes and inappropriate systems and controls to manage its business.
A review by the FSA last year of financial advertising in the sub-prime mortgage market highlighted that the firm had issued unclear financial promotions and had weaknesses in its management systems in relation to the sale of mortgage products generally, not only sub-prime.
The firm has now put in place controls to ensure that its future mortgage business meets the required standard and has also agreed to write to all of its existing customers to inform them of the risks of interest only mortgages.
The firm agreed to settle at an early stage of the FSA's investigations and qualified for a 30% discount. You see the regulator does have a heart!!
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11.
Goodwill - Reminder
You should note that the transitional period for including ‘Goodwill’ as part of your capital resources requirements will expire on the 14th January 2008. After that date you must come into line with other intermediaries and will need to have established alternative funding.
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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
