Mortgage Advisers

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1. Affordability
2. FSA announce quality of advice findings disappointing
3. Mortgage fraud
4. Client money accounts – is the money safe?
5. Treating customers fairly – update
6. The Angel GABRIEL is here to save you all, but will he help complete it for you?
7. How do you display your employers’ liability certificate?
8. FSA fines five motor dealers for PPI failings

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?
Please use the following table to decide which article applies to you, if any:

	1	2	3	4	5	6	7	8
Directors/Partners
Compliance / A&O Function
Advisers & Trainees
T&C Supervisor
Back Office

 

1. Affordability

The FSA have produced the first of a series of Fact Sheets they intend to publish regarding the processes to follow when giving mortgage related advice.

Following their Quality of Advice review, they found a high percentage of Mortgage Brokers were NOT adequately assessing income, expenditure and affordability when lending into the retirement. The Fact Sheet focuses on how you the adviser should assess your customers’ affordability.

Introduction
It is the sole responsibility of the Mortgage Adviser to assess affordability before recommending a mortgage.

The FSA have stated it is not acceptable to:

• Obtain a signed declaration from your client stating they can afford the mortgage, without having assessed affordability;
• Rely on the Lender’s criteria or indeed the criteria of the Lender’s Development Managers;
• Fail to assess high net worth clients with high salaries or where the Loan to Value is below the Lenders criteria;
• Use out of date information from old Fact Finds.

Conversely, the FSA have outlined some examples of Good Practice:

• Detailed Budget Planners within a Fact Find to identify disposable income. These were clearly documenting income and expenditure with a documented income commitment towards the mortgage. It was clearly recorded so that the customer could understand.
• Buffer zones were added into all affordability calculations to allow for unexpected emergencies. This was established after completion of the detailed budget planner.
• Bank statements were requested to verify accuracy of outgoings and day to day expenditure.
• Using examples of household utility bills to give a realistic idea of costs, thus helping customers assess their financial position.
• Retirement considerations to be investigated when lending into retirement. The firm requested annual pension statements to show evidence of potential retirement income.
  

 

Ateb view:

Assessing affordability should already form part of your firm’s sales process and documented procedures should be followed for every mortgage sale. Firms must take on board what the FSA are saying. The planned visits in 2009 will undoubtedly cover areas such as affordability under their Treating Customers Fairly (TCF) regime. With the current turmoil in the banking sector and the enormous levels of unsustainable debt, this is an area that the FSA will be concentrating on.

Action required by you:

Ensure you have a documented sales process in place and a structured procedure for assessing a client’s affordability. Ensure the Fact Sheet is passed onto all sales and administrative staff to read and ensure they document this in their CPD records. You can find the Fact sheet here.

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2. FSA announce quality of advice findings disappointing

“The FSA advised that the overall findings in this updated review were disappointing considering this was the second review of the quality of firms' mortgage advice processes”

FSA second review
This second review carried out at the start of 2008 determined whether firms had made improvements in certain areas, and also aimed to evaluate the effectiveness of the communication from the first project in educating firms and raising standards to ensure they have robust advice processes in place.

Around 220 small firms were reviewed through a range of telephone assessments, visits or mystery shops, between January and March 2008. The FSA also looked at business stretching back to as far as April 2007.

The project focused on 6 key areas:

• management controls
• assessment of customer needs, objectives and affordability
• recommendations including product research
• communications with customers
• quality of advisers (training and competence)
• post sale

Many areas identified during their first review remain a concern as firms have not made sufficient progress in key areas.

Key Findings from the Project

Management controls

• Only a quarter of small firms had adequate processes in all areas of their business and good management controls
• About 50% of all small firms visited were making proper use of Management Information (MI) by collecting, analysing and acting on the information (although not all had adequate processes in place). The other half were either not making proper use of MI or were not gathering appropriate MI.

Assessment of customer needs and affordability

• Approximately 50% of small firms visited and 75% of firms that received a mystery shop did not adequately assess both income and expenditure because they did not consider information about customers' outgoings and their general expenditure
• Poor affordability assessments were also seen where the mortgage term ran past the customers' stated retirement age. On some occasions firms did not consider the plausibility of the customer's stated retirement age in relation to their occupation.

Recommendations including product research

• A high number of files relating to higher risk products such as interest only, sub-prime and self certification did not demonstrate suitability
• The majority of firms involved in selling these products also failed to adequately monitor the quality of the advice provided
• For interest only cases, in just over 50% of cases there was no planned repayment strategy in place to repay the outstanding capital
• For sub-prime cases, in around a 33% of cases firms were still failing to gather sufficient information about the customer's credit history to support the recommendation of a sub-prime product and were unable to explain why the product was appropriate
• For self-certification cases, in just over 50% of cases it had not been made clear why a self-certification mortgage was appropriate compared to a full status product.

Communications with customers

• On a positive note, adequate processes were in place in the majority of firms to ensure initial disclosure and key facts illustrations were accurate and issued in a timely manner
• In the majority of firms visited, other written communications such as suitability letters were not well tailored to individual customers, limiting their overall benefit.

Good Examples as seen by the FSA were;

Management Controls

• A risk-based approach to the monitoring of advisers, based on experience, market knowledge, business levels etc, with levels of supervision agreed.
• Regular observations/ role plays and file checks on advisers to identify training needs and risks to the firm.
• A system where files were checked and remedial action was recorded on the training and competence file, monthly management meetings were carried out to discuss performance and issues arising from the supervision and weekly adviser meetings held as training events on products or industry issues.
• Use of outside compliance consultants to monitor the quality of advice provided. The findings and market changes are discussed at regular meeting between the advisers.

Assessment of Customer Needs

• Firms completing a Gap analysis to identify weaknesses in their Fact Finding Process and implementing improvements in this area.
• One firm identified that customers tended to focus on cheapest monthly payment or maximum amount available to borrow. As part of their sales process they would highlight other issues and features a customer needed to consider and demonstrate the effect on the overall costs.
• Detailed notes were kept on the client file of all communication with the client and the provider. The firm is able to use this information in their assessment of complaints and therefore back up any decisions made. It also meant if the adviser was unavailable other employees could quickly identify what was happening with any customer.
• A detailed budget planner was used within a fact find and a net disposable income figure identified. This was then discussed with the customer and agreement reached as to how much of this figure the customer was willing to commit towards the mortgage.

Communication with Customers

• Disclosure documents were issued to customers at the appropriate time and firms recorded when these were given to customers which helped provide a clear time line for the sales process.
• Simple diagrams were used to help explain how different mortgage product types (e.g. fixed, discount rates, as well as repayment methods) worked. With a full discussion on the risks and benefits of these, it was felt the client had a better understanding of the suitability of the recommendation.
• A fact sheet was issued at the first interview with a client that explained in plain language the meaning of the technical jargon associated with mortgages.

Quality of Advisers

• Advisers being encouraged to study and pass Advanced Ce-Map to improve their knowledge and quality of Advice.
• Induction courses for new staff/Advisers on the firm’s systems, sales processes and compliance.
• Assessment of Adviser’s knowledge on mortgages to help identify development needs, followed up with role plays and observations before going out on their own.

Post Sale

• Comprehensive diary systems to ensure client contacted prior to the end of a mortgage product term and reviewing their circumstances and making a further recommendation.
• A questionnaire to clients after the mortgage had been completed to assess whether the client was satisfied with the service received. The information from this was then used to highlight weaknesses and adjustments made under the TCF regime.
• A firm identified a trend with complaints relating to one adviser. They reviewed all of this adviser’s other business and ensured that the shortcomings were not repeated in the future.
  

Ateb view:

The FSA are not going away. Firms must take on board the comments made following this second review and take steps to remedy any gaps you may have in your systems and controls.

Action required by you:

It’s another opportunity to update or review your last gap analysis under TCF and make plans to further improve your firm’s processes.

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3. Mortgage fraud

The FSA approach to tackling mortgage fraud
“This year we have banned 17 individuals, including a £129,000 fine, for their part in mortgage fraud”

Mortgage fraud has been perpetrated on a large scale in recent years. Easy credit conditions and streamlined application processes have prompted fraudsters to target the mortgage sector. The FSA know that mortgage fraud causes substantial social harm and can be bound up with other forms of criminality such as money laundering and people trafficking, and so it is crucial that firms remain vigilant.

The FSA wrote to key trade bodies on Tuesday 22 July to set out their approach to toughen the industry’s defences against mortgage fraud and to make it harder for organised mortgage fraudsters to get away with their crimes.

The key elements of their approach are:

1. Targeted visits to 200 mortgage intermediaries to assess your systems and controls;
2. Increasing intelligence received from lenders by streamlining reporting processes and providing more clarity on the information needed;
3. Enhancing the way intelligence is used in supervising firms and bringing about enforcement actions;
4. Strengthening engagement with regulators and law enforcement partners including the National Fraud Strategic Authority (NFSA);
5. Encouraging improved information sharing and intelligence analysis in the industry; and
6. Reviewing the Approved Persons regime as it relates to mortgage intermediaries including brokers.

Here are just a few of some of the FSA initiatives.

Targeted supervisory visits
The FSA have planned a programme of mortgage fraud-focused visits to a representative sample of 200 mortgage intermediaries, to be carried out over the second half of 2008. They have also written to key trade associations to remind their members that they should have determined their vulnerability to fraud risks and put in place appropriate mitigations. The FSA emphasise that they will not hesitate to take action should they identify any serious short comings in systems and controls.

Approved Person regime
In 2002/03 the FSA decided that mortgage brokers did not need to be part of the Approved Persons regime; however, they believe it is now appropriate to review that decision. The review will be conducted in Q4 of 2008, at which point they’ll consider the options available....watch this space.....

Increased Intelligence from Lenders
The Information From Lenders (IFL) project was launched in 2006, as a result of collaboration between the FSA and the Council of Mortgage Lenders (CML). This allows lending institutions to report mortgage intermediaries they suspect of being involved in mortgage fraud. More than 300 reports have been submitted since then, allowing the FSA to take actions against dozens of intermediaries which range from enhanced supervisory oversight to prohibitions and heavy fines. IFL information can and will be passed to police and other regulators for further action.

You can find out more about their approach here.

Ateb view:

The FSA have come under a great deal of scrutiny of late with the collapse of Northern Rock, and the demise of some of our huge banking organisations. One feels this is a bit like shutting the barn door after the horse has bolted. However it can be only a good thing to have an approved person regime for qualified Mortgage advisers.

Action required by you:

Ensure the firms Systems and Controls include a detailed sales process for gathering good KYC information and documenting it. In addition, ensure you have a good anti Money Laundering process. It may be a good time to remind internal staff of the “Whistle blowing procedures”.

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4. Client money accounts – is the money safe?

The vast majority of you will not hold client money, so will not be affected.

In light of the current turmoil in the banking markets, have those of you who do operate client money accounts considered if the money is safe?

We know from discussions with trade bodies from the general insurance market (where the holding of client money is common) that there is concern that such accounts have limited protection from the Financial Services Compensation Scheme.

Ateb view:

It would be too easy to dismiss this issue as ‘something that will never happen’. Personally I would rather be safe than sorry and take every precaution necessary.

Action required by you:

You should consider this matter carefully and understand what protection you receive under the FSCS. Does your disaster recovery plan cover this eventuality?

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5. Treating customers fairly – update

The FSA embarked on a three-year regional programme in January 2008 to assess how managers in small firms approach Treating Customers Fairly (TCF) and how they embed TCF into their businesses.

The assessment is based on the small firm’s management behaviours framework. The FSA believe that the management of small firms can only ensure good intentions result in good outcomes for consumers, if they establish and maintain the right behaviours.

The assessment looks at:

• the relationship the firm's management has with its staff
• how it communicates TCF to its entire staff (not just advisers)
• what controls, including management information (MI), it has in place to demonstrate consistently fair treatment of customers.

In their communications with small firms, they are continuing to emphasise the importance of embracing TCF. They will, however, continue to take a tough stance with those firms who choose not to raise their standards, including, where appropriate, the use of enforcement action.

They are continuing to make use of case studies/examples of good and bad practice to illustrate the various ways in which you can meet their TCF obligations. ATEB will endeavour to keep you up to date with the latest FSA views.

Next Step for Firms
The FSA expects all firms to undertake a significant amount of work to ensure they meet the December 2008 deadline. They believe you will have to:

• Be able to demonstrate that you are consistently treating customers fairly (i.e. your MI or other measures should show good results). The FSA will expect to see evidence to demonstrate that you are meeting those TCF Outcomes which are relevant to your business. The evidence expected will vary with the size and complexity of your firm.
  
  
• Be able to demonstrate that senior management has instilled a culture within the firm, whereby they understand what the fair treatment of customers means, where they expect their staff to achieve this at all times and where errors are found, they are put right promptly and learned from.
  
  
• Be appropriately and accurately measuring performance against all customer fairness issues materially relevant to their business, and be acting on the results.
  
  
• Be demonstrating through those measures that you are delivering fair outcomes.
  
  
• Have no serious failings – whether seen through MI or known to the FSA directly, including in areas of particular regulatory interest previously publicised by the FSA.

You will be expected (following the interim deadline of March 2008) to already have appropriate measures in place to test whether you are treating your customers fairly (i.e. to be able to measure outcomes through MI). This reflects Principle 3 of the Principles for Businesses that ‘a firm must take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems’, as well as the specific SYSC requirement that ‘a firm must take reasonable care to establish and maintain such systems and controls as are appropriate to your business’.

The FSA are strongly encouraging firms to consider the examples of good and bad practice in the context of your own business model. These can be accessed via the FSA website on

GI Firms
http://www.fsa.gov.uk/pages/Doing/small_firms/general/tcf/report/case1/index.shtml

Financial Advisers
http://www.fsa.gov.uk/pages/Doing/small_firms/general/tcf/report/case2/index.shtml

Mortgage Broker
http://www.fsa.gov.uk/pages/Doing/small_firms/general/tcf/report/case3/index.shtml

The FSA has designed a TCF MI Matrix which sets out examples of MI which firms should be collecting and using to measure their performance against the relevant TCF outcomes. Such information should be drawn together regularly, reviewed by managers/principals and acted upon where it indicates potential risks to the TCF outcomes being achieved.

The matrix includes some examples taken from firms achieving good outcomes with the help of compliance consultants. An FSA supervisor will expect the firm to be able to explain how your MI relates to the TCF outcomes.

The FSA has also noted that some firms have found customer feedback questionnaires to be helpful. They also observed that these only provide useful information on whether TCF outcomes are being achieved where they go beyond requesting feedback on customer satisfaction by gathering information on actual customer understanding of products, services and risks.

You may find it useful to check out the MI Matrix here.

Ateb view:

There is no getting away from this one, be you a small firm or a large one. It is absolutely vital that you are adequately prepared.

Action required by you:

You must ensure that you understand the above, have implemented the requirements detailed and are able to discuss and demonstrate confidently how TCF applies to, and has been incorporated into, your firm. If you remain in any doubt about the requirements, please discuss with ATEB.

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6. The Angel GABRIEL is here to save you all, but will he help complete it for you?

GABRIEL
Gathering Better Regulatory Information Electronically

GABRIEL is the FSA’s new web based electronic reporting system, designed to make it easier for firms to submit regulatory data. GABRIEL will be replacing the reporting part of the Firms Online system from 1 October 2008 and will become the FSA’s central system for the collection, validation and storage of regulatory data. This system will provide the basis for risk based supervision.
With the move to GABRIEL the FSA is making 2 important changes to RMAR and MLAR. The FSA has at last realised and identified that some data did not actually contribute to RMAR’s effectiveness and have, therefore, reduced some of the RMAR data requirements by 30%. Some of these changes include removing redundant questions, making certain questions mandatory, altering the layout and wording in some sections and tailoring the schedule so that only questions relating to your firm’s activities need be completed.

When will the changes to RMAR take place?
The changes are being implemented from 30th September 2008 and applies for all RMARs with reporting periods ending on or after the 30th September 2008.

Here are some of GABRIEL's key features:

• Firms will be able to view online all their reporting requirements on a rolling 12 months basis
• Your PU (Principle User) can be easily identified on line
• Data can be submitted independently if required
• Online returns are tailored, based on the firms' regulated activities and accounting reference date
• After GABRIEL goes live, firms will be able to access all GABRIEL submissions online
• GABRIEL will provide online system and policy help texts
• Firms can download and print returns.

There are 4 ways to submit regulatory data - Online Forms, Offline Forms, Web Upload and Direct Communication. However, the FSA sees the Online Form as the favoured method of submission.

How do we sign up for GABRIEL?
If you are already registered with Firms Online, your PU (Principle User) will become the PU for GABRIEL. However, this isn’t an automatic cross-over. You are required to activate your new account following an activation email from the FSA. New usernames and activation passwords will be given via email.

GABRIEL Online Training
Something the FSA is giving away for FREE!! An online e-learning package lasting approximately 45 minutes (if you listen to everything the guy has to say) which will give you a preview of the new system and how it works.
It is designed for all firms who will report using GABRIEL and will cover topics such as:

• How to register for GABRIEL
• Set up and manage users
• Prepare validate and submit returns online
  View the system and policy help text for support
• Request resubmission of data
  

Ateb view:

They could have thought of a better name!! However, at last the FSA have come up with a system which appears to be user friendly. This should in effect make the submission of your regulatory returns a lot quicker and simpler.

Action required by you:

Spend some time on the e-learning training course to give you an insight in to the new system. You can access this here. Ensure you have activated the new system and are familiar with logging on. Start your return early as there have been significant teething problems!

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7. How do you display your employers’ liability certificate?

With effect from 1 October 2008, employers will be allowed to display their employers’ liability certificate in an electronic format, so long as it remains readily accessible to all employees.

The changes come under the Employers’ Liability (Compulsory Insurance) (Amendment)
Regulations 2008 (the "2008 Regulations"), which amend certain provisions of the Employers’ Liability (Compulsory Insurance) Regulations 1998.

The 2008 Regulations also removes the requirement for employers to retain their employers’ liability certificates for a 40-year period.

However, this could cause problems for what is known as ‘long-tail’ industrial disease claims, where illnesses may not become apparent or be diagnosed for many years, for example asbestosis and mesothelioma. The 40-year requirement was introduced to make it easier for workers to raise claims for industrial diseases.

Ateb view:

None for information only.

Action required by you:

Firms should make an assessment based on their individual circumstances. However, it can already prove problematic to trace policies which pre-date the introduction of compulsory employers’ liability insurance cover or where companies have ceased to trade. As a general rule, therefore, we would suggest that it is in the employers’ best interests to retain a copy of the Certificate of Employers Liability Insurance, for if no insurance records can be found, the employer will be responsible for payment of the claim.

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8. FSA fines five motor dealers for PPI failings

If you advise on premium protection policies, this article will be of interest.

The Financial Services Authority (FSA) has recently imposed fines totalling more than £175,000 on five motor retailers for serious breaches relating to the sale of Payment Protection Insurance (PPI), which exposed a total of 2,175 customers to the risk of being sold unsuitable PPI policies.

In an update on the thematic review of sale of PPI, the FSA has set out that, due to the poor findings from its recent work, it is escalating its regulatory intervention.

The FSA will consider the action it will take to deal with ongoing non-compliant sales practices and consider actions to identify and remedy non-compliant past sales, using a range of regulatory powers at its disposal.

Jon Pain, Managing Director of the FSA's Retail Markets, said:

"Tackling poor PPI sales practices remains a high priority for the FSA. We will intervene to ensure consumers are protected and are considering what regulatory powers are the most appropriate to deliver fair outcomes. Firms may wish to consider stopping selling single premium PPI sold alongside unsecured personal loans, given the continuing problems in the sales of this product."

The FSA's work on PPI included a mystery shopping programme that captured customer experiences of face-to-face branch sales of single premium PPI when sold alongside an unsecured personal loan. The results showed:

• very few customers were told that the cost of the payment protection would be added to the loan as a single premium and that interest would be charged on this amount;
  
  
• only half of customers said that they were told about the key limitations and exclusions of the policy - this is fundamental to establishing a customer's need and eligibility; and
  
  
• many customers were not told of both the monthly cost and total cost of their PPI - at the worst performing firms very few customers were given adequate information on the cost of their policy.

The FSA will publish a further update on the third phase of its thematic work in early 2009. The FSA is considering the Financial Ombudsman Service's (FOS) concerns, raised in its wider implications letter, about PPI complaints and will be working with the FOS on the appropriate response to this serious matter, in the context of FSA's broader strategy.

Ateb view:

Don’t be caught out, review you procedures now!

Action required by you:

The FSA have started to produce more practical assistance. Most firms will find that they are already following the guidance or similar, but it doesn’t harm to have this reinforced. More information can be found here.

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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
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Northumberland
NE22 6AX

T: (01670) 822984
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