Case Example – Poor Disclosure and TCF

The Company

A medium sized mortgage broker with 10 sales staff. A new compliance officer has recently joined the firm.

Current Practice

Brokers in the firm are aware of and aim to comply with the MCOB requirement to provide an IDD and KFIs.  However a recent file check by a newly appointed compliance manager has revealed a number of errors in the format and content of the IDD. For example, while the firm’s IDD document discloses the broker’s fee it departs from standard wording and also fails to reveal that the broker will also receive commission from the lender. In addition, there is no mention of the other charging options available in the market place. The IDD also includes additional ‘non-prescribed’ detailed information, such as the firm’s terms of business and risk warnings. It was also noted that in a few cases the IDD hadn’t been supplied at all.

KFIs were found to follow the prescribed format laid down by the MCOB rules, however not all brokers were recording a note of the reason they had recommended a particular product.

The TCF Problem

The standard format and wording of the IDD and KFI documents is designed to offer a fair, more transparent service by making it easier for customers to understand what they are buying and compare different deals in the market place - both in terms of service and products. In this case the broker is putting the client at risk of unfair treatment by departing from the standard format and, specifically, leaving them unaware of alternative pricing structures which may fit their needs and attitude to risk/costs better.

In addition, while the firm’s terms of business and other risk messages have been added to the IDD with the best of intentions, the effect is further to dilute the document’s intended ‘standard’ format. This could make it harder for the customer to recognise it as a straightforward comparison tool.

Where the IDD was not disclosed at all (albeit unintentionally), the customer has been put at even greater risk of unfair treatment.

Finally, while supply of a correct and accurate standard format KFI confirms that the customer received clear and full facts about the product they bought, where notes are missing on the reason for product choice an opportunity has been lost to evidence how the customer was treated fairly. For example, why were other products that were also available at the time and also fit criteria excluded in favour of the one chosen?

TCF Solution

There are a number of simple steps the firm could take to ensure that disclosure meets with MCOB and also supports TCF.

Non-disclosure

To minimise the risk of accidental failure to provide the IDD or KFI, brokers could be required to complete a simple Client Contact Log after each contact. This could sit at the front of the client’s file (or online if records are kept this way) – and if necessary be completed by administrative staff who file contact notes on behalf of the broker.

The log could be used to:

• record when and how each contact occurred
• prompt brokers to provide relevant documents at key stages

Product choice

To complement this process, and address the problem of product suitability, the firm could require brokers to issue a ‘suitability letter’ to accompany each product recommendation. This could also be recorded on and prompted by the Client Contact Log. The letter would draw on information from the ‘fact find’ (including the client’s individual needs and attitude to risk) as well as the recommended product’s costs/features to offer reasons for the final recommendation. In so doing it would confirm evidence of fair treatment to both the customer and to the FSA.

While the individual elements of such a letter will be particular to each customer, a suitability letter template could help brokers to draft these and ensure that all pertinent facts were mentioned. Issue date of the Suitability letter would be one of the key elements on the Client Contact Log

Incorrect or incomplete disclosure

Resolving problems of incorrect or incomplete disclosure on the IDD or KFI document is a matter of familiarisation with the FSA MCOB rules. Key problems that the FSA has identified in this area in the past are:

• failure to use the prescribed text and format
• inclusion of information the rules do not allow
• lack of clarity around fees, commission and charges

FSA links and examples

To find out more, and for tips on how to avoid disclosure practice that may lead to unfair treatment of customers follow the links below to the FSA website.

Common findings in mortgage IDDs (May 2005) (PDF document,167K)
Example IDD with errors (PDF document, 136K)
Download FSA’s ‘Disclosure Documentation Factsheet for Mortgage Intermediaries’ (PDF document, 43K)
Detailed feedback for firms on the IDD and CIDD (March 2006) (PDF document, 216k)