Case Example – Self Certification
A medium sized mortgage broker with 12 consultants. A new Sales Director has recently joined the firm.
The firm markets a wide range of full status and Self Certification mortgage products from a limited number of product providers. On reviewing the sales statistics, the new Sales Director notices that Self Certification mortgages make up a noticeably higher percentage of overall sales than at his previous firm.
As a champion of TCF (and alert to FSA concerns in the Self Certification area) he is keen to check the facts behind the figures more closely. He is also aware that under FSA principles 6 (having due regard to a customer’s interests), and Principle 9 (ensuring that advice is suitable) if customers aren’t being advised appropriately – and are paying a higher interest rate than is necessary - the firm will be leaving itself open to action from the FSA at the next ARROW visit.
He is further aware of the need to assess affordability for Self Certification mortgages (even though proof of income isn’t necessary) and wants to assess whether current practice is allowing for this.
Proof of income was sometimes available
A review of a sample of files reveals that some Self Certification mortgages have been sold to customers who would have been able to prove their income and would therefore have qualified for a cheaper full status mortgage. (Some were employed, others were self employed and had been in business for over three years).
Individual discussions with sales consultants reveal that in some cases they had offered the customer the ‘convenience’ of Self Certification in terms of reduced paperwork/speed of processing. However there was no evidence to support the need to proceed quickly or that they had explained the benefits of proving income to get the cheaper alternatives.
In other cases consultants were able to give specific reasons for recommendation of the Self Certification product. For example, one self employed customer (who was fully aware that she could have had a slightly cheaper mortgage by proving income) was recommended the Self Certification product because she needed her mortgage to complete within three weeks to prevent the vendor selling to a cash buyer. She was unable to prove her income within that time because her third year’s accounts were only just being finalised and her accountant was abroad on holiday. In this case the Self Certification mortgage was the most suitable in the circumstances and the customer had been treated fairly – however, this couldn’t be proven because these discussions hadn’t been recorded in the Fact Find or anywhere else.
Affordability not fully assessed
The file check also reveals a lack of in-depth questioning to properly assess and record affordability. This is of concern because although Self Certification mortgages don’t require proof of income, in order to demonstrate product suitability the consultant must still be satisfied that the customer will be able to meet the mortgage repayments.
Fact Find review
A review of the Fact Find document reveals that opportunities are being lost to record the reasons for recommending a Self Certification product – and to assess affordability. Such information would not only enable the consultant to evidence TCF, it would also help ensure that related principles 6 and 9 are followed and make it less likely that unsuitable advice would be given
1 - Fact Find Update
To address the above problems, the Fact Find document could be updated to include a number of additional sections and questions. These would be designed to ensure that sales consultants:
2 – Product suitability checklist
Using the information from the updated Fact Find, sales consultants could be required to assess product suitability and record their recommendation in a product suitability checklist. This could be separate to or tagged onto the end of the Fact Find, and could also form the basis of a tailored suitability letter.
The checklist would confirm all relevant information affecting the final choice of product, such as (but not limited to):
For content suggestions, go to our Product suitability checklist.
3 – Record keeping incentives
Consultants could be given incentives/targets that include the requirement to complete all sections of the Fact Find and Product Suitability document in full, with failure to do so having a negative effect on performance related remuneration.
4- Product Suitability Letter
By making the use of a suitability letter mandatory, the firm could further evidence TCF as the consultant would need to justify the reasons for the final product choice to the customer. The suitability letter could even go one step further and re-confirm any key implications discussed, such as the effect of opting for a Self Certification mortgage when in a position to prove your income. Once again, issue of a satisfactory suitability letter could be linked to incentives.
5 - Refresher workshops
As well as making amends to the Fact Find and issuing suitability letters as described, refresher workshops could be run for all sales consultants on MCOB rules on suitability of advice and how this relates to TCF and principles 6 and 9.
For more information on product suitability see our related Product Suitability Case Example.