Case Example – Product Suitability

The company

A medium to large sized mortgage broker with 25 consultants qualified to advise on mortgage sales.

Current practice

The firm has a standard Fact Find document which is issued by all consultants and retained with the client’s papers. Consultants are aware of the importance of completing this as part of the product selection process, but there are no specific targets in the company linked to how it’s completed.

Offer and sales volumes have been high in the last year however feedback from the lender panel is indicating that a significant percentage of customers are starting to have difficulty meeting their mortgage payments. This is despite the fact that in all cases the products recommended fit into the lender’s criteria.

The mortgage broker decides to run a report to see if it can identify the source of the problem. The report indicates that the cases causing concern link back to three consultants, and that there is also a relatively high cancellation rate between offer and completion for the same consultants.

The TCF problem

A file check reveals that in carrying out their Fact Find the consultants haven’t asked for sufficient information to assess affordability and therefore suitability of the products for their clients. Although there is a section in which consultants are expected to record notes about affordability, this is ‘free form’ and it is up to the consultant to judge what information to ask for and include.

For the cases in question information had been gathered about each client’s current income, but little or no information had been recorded relating to their current and expected outgoings. In one case the client had been approaching retirement age at the time of taking out the mortgage, yet the consultant hadn’t made any notes about his expected income after this point. The client had recently retired and was now having problems with his payments.

A related outcome of the file check was that one consultant didn’t appear to have discussed with any of his clients the long-term cost implication of converting a previously unsecured loan into a long-term loan secured on their property. Lack of evidence of such discussion was a departure from the MCOB rules. It also meant that the consultant wouldn’t be able to demonstrate that he had treated the customer fairly by discussing all the facts in order to assess suitability for the customer's needs and circumstances.

TCF Solution

In order to be able to conclude that the recommended mortgage is appropriate to the customer's needs and circumstances there are a number of steps that the firm and its consultants could take.

Firstly the firm could increase the frequency of file checks to ensure that consultants are completing them fully and accurately – and perhaps link file check audit results to performance assessments and objectives.

The firm could also adjust the file check questions to ensure that affordability is properly assessed by including specific questions relating not only to current income and outgoings (other loans, variable outgoings and monthly outgoings, such as council tax), but also asking about expected income over the next five to ten years and special personal circumstances that could affect outgoings in the short to medium term (life event, house move etc).

On the debt consolidation side, the Fact Find could include questions on whether the customer has tried to come to a credit arrangement with the existing lender or has contacted a free credit counselling service or Citizens Advice Bureau. Contact details could be provided where relevant. The Fact Find could also include a final ‘checklist’ to prompt discussion of additional considerations with the customer (for example, the pros and cons of transferring a short term unsecured loan into a longer term loan secured on the property).

To further complement the above approach, the firm might ask customers to bring information with them to help the fact finding process, such as statements relating to income and expenditure, existing mortgage/loan accounts and evidence of their current debt position.

Finally, by making the use of a suitability letter mandatory, the firm could reduce the likelihood of unsuitable products being recommended by requiring the consultant to justify the reasons for the final product choice. The suitability letter could even go one step further and choose to re-confirm that key implications have been discussed, such as the effect of converting a short term unsecured loan into a longer term loan on a property.

All of the above factors would not only help increase the likelihood that the customer is treated fairly and offered a product suitable to their individual needs and circumstances, they would also enable brokers to evidence to the FSA how they are doing this.

FSA links and examples

For more examples of good and poor practice in the areas of product suitability (in the sub-prime market and elsewhere) follow the links below to the FSA website.

FSA research into advised sales in the sub-prime market (opens in new window) 
FSA research on quality and suitability of mortgage advice (opens in new window)
FSA feedback on self certification advice (opens in new window)
Small firms - actions and recommendations for improving quality of mortgage advice (opens in new window)
Sub prime mortgages - examples of good and poor broker practices (opens in new window)
FSA factsheet September 2008: 'Improving the way you give advice - affordability' (PDF) (opens new window)