Focus on fines – study 1

Mortgage sales
Potential fine £15,000 – actual fine £10,500 (August 2007)

Affordability/suitability/disclosure/record keeping failings:

• Files failed to show how affordability of the recommended mortgage contracts had been assessed – eg no breakdown of the client’s income and expenditure and/or no explanation of how the clients would afford the recommended mortgage contracts.
• Self cert cases - failure to show how the firm had assessed whether the clients’ incomes were realistic and appropriate to their circumstances.
• Self cert cases – in some cases employed applicants had self certified their income, however there were no records to demonstrate why they needed a self cert product.
• Absence of records showing product research/why the broker had recommended particular mortgages to clients.
• ‘Generic’ (rather than tailored) suitability letters - failed to address the specific needs and circumstances of individual clients.
• Debt consolidation cases – failure to keep records showing whether/how the implications and long-term cost of converting unsecured debt to secured debt had been explained.
• Debt consolidation cases – failure to keep adequate records about the nature of the debt being consolidated.
• Lending into retirement cases – records didn’t demonstrate whether the products were suitable or affordable in the long term.

Monitoring, training and competence failings:

• Senior management unable to show how suitability of advice was monitored/reviewed – no evidence of file checks (eg non-completion of affordability calculator not commented on) or of other adviser monitoring

Focus on fines – study 2

Mortgage sales
Potential fine £15,000 – actual fine £10,500 (August 2007)

Record keeping/affordability/suitability failings:

• No formal arrangement for recording customers’ personal and financial information to support any assessment of affordability and suitability of recommended mortgages, eg:
  • cost of utilities/food/travel
  • level of disposable income
  • retirement ages (lending into retirement therefore not assessable)
• Instead of own assessment, the firm stated that it relied on lenders applying their criteria to ensure the recommended mortgage contracts were affordable.
• Lack of evidence of product research.
• Absence of documented reasons for recommending a particular product over others which may have been cheaper.
• Where fees were added to the mortgage, no evidence that the additional cost implications had been discussed.

Monitoring, training and competence failings:

• The firm’s management failed to monitor the suitability of advice and compliance with regulatory requirements.

Disclosure failings:

• Some KFIs missing.
• Some KFIs issued after the mortgage offer.
• In some cases more than one KIF on file but incomplete and/or unclear which product is being recommended.
• Type of service offered (advised/non-advised) not clear.

Monitoring, training and competence failings:

• Absence of any formal training and competence regime or reviews for the firm’s mortgage advisers.
• Absence of a system for recognising and dealing appropriately with non-advised sales.

Focus on fines – study 3

Mortgage broker and packager – primarily sub-prime market (August 2007)
In this case the firm was censured, but no fine issued.

Record keeping/affordability/suitability failings:

• Failure to record information relating to customers’ needs and circumstances, including affordability assessments.
• Failure to evidence product research and reasons for recommendation.

Monitoring, training and competency failures:

• As a result of the above, inability of management, compliance consultants and regulatory bodies to assess whether suitable recommendations were being made.
• Failure to keep adequate records of training and competence procedures – therefore unable to demonstrate how the firm assessed the competency and training needs of its advisers.
• Failure to supervise part-qualified advisers adequately.
• Allowing unqualified advisers to have unsupervised client contact.

Focus on fines – study 4

MPPI advised sales – sub prime mortgages (February 2007)
Potential fine £80,000 - actual fine £56,000

Affordability assessment failings:

• Failure properly to assess affordability - due to the inflexible ‘tick box only’ format of the Demands and Needs Statement.
• Affordability checks not passed on from Mortgage Fact Find.
• Failure to re-check affordability of vulnerable customers (‘right to buy’) where there had been a significant delay between mortgage application and mortgage completion.

Suitability assessment failings:

• Sale of MPPI to remortgage customers who already had existing cover through previous mortgage.
• Sale of policies under parts of which the customer would not be able to claim (eg due to pre-existing medical condition or employment status), without considering whether the policy was still suitable. (Related non-disclosure failings –see below.)
• Sale of single premium over monthly premium option without keeping records to evidence why. (Related non-disclosure failings – see below.)
• Because the customer base was primarily sub-prime (therefore with traditionally limited financial means and access to credit), the risks to them of being sold a product they could not afford and was therefore unsuitable were viewed as particularly high.

Disclosure failings:

• Lack of oral disclosure at the point of sale of policy exclusions, price, refunds policy and cancellation rights – denying the customer the right to make an informed choice about suitability or affordability.
• In particular failure to explain the cost of interest on a single premium over the life of the loan.

Record keeping failings:

• Lack of records demonstrating that the policies sold met customers’ demands and needs.
• Because many demands and needs statements (scanned and paper copies) had been destroyed it wasn’t possible to show whether the customer was already covered by other insurance or whether the customer might be able to meet the mortgage payments using other funds if they were unable to work for a period.

Management Information (MI) failings:

• Absence of MI that would enable senior management to assess ongoing risks of MPPI misselling.

Focus on fines – study 5

Mortgage and MPPI sales
Potential fine £25,000 - actual fine - £17,500 (November 2006)

Sales process failings:

• Cold calling potential customers to sell mortgages and/or PPI - contravening mortgage business rules and the TCF principle.

Record keeping/affordability/suitability failings:

• Almost all ASU sales were on the basis of single premium, with no records kept to demonstrate that the potentially higher cost had been explained to the customer or that an alternative potentially cheaper option of monthly payments was available.
• Lack of evidence that affordability of mortgage contracts was properly assessed.

Focus on fines – study 6

Advised telephone sales of PPI
Potential fine £650,000 - actual fine £455,000 (October 2006)

Sales process failings (sales scripts):

• High number of advisers failed to cover all aspects of the provided sales script. This resulted in both inadequate disclosure and inadequate records (eg of existing cover) to demonstrate suitability.

Record keeping/suitability failings:

• Insufficient information gathering or record keeping to show that the policy recommendations made were suitable.
• As part of the above, insufficient records to link telephone calls to individual customers – and therefore to evidence the demands and needs of the customer on file.

Disclosure and suitability failings:

• Customers weren’t made fully aware that there may be parts of the policy under which they couldn’t claim.
• Where customers were sold single premium policies, insufficient disclosure on price suggested that this wasn’t always done with the best interests of the customer in mind.
• Customers didn’t receive enough information at the point of recommendation to make an informed decision about the PPI policy being offered.

Complaint handling failings:

• The firm failed to implement adequate complaint identification and handling procedures – increased risk of customer not being treated fairly/in a timely manner where they had a complaint.

Corrective action

Examples of actions taken resulting in a reduction to the fines

• Introduction of budget planner at Fact Find stage to improve affordability assessments.
• Improved customer disclosure through an enhanced Statement of Demands and Needs and Statement of Price.
• Introduction of ‘Self-Certification Affordability Declaration’ for self-certification applications.
• New documentation for the IDD and Fact Find; a new Affordability Assessment for customers; a personalised mortgage suitability letter; regular compliance monitoring of client files; implementation of a T&C regime for advisers.
• Carry out a past business review of files to identify all cases of misselling followed by a customer contact exercise to offer financial redress where inappropriate sales had taken place (MPPI).
• Remedial action taken promptly and completed within an agreed timeframe.
• External compliance consultants hired to implement changes to practices and procedures and help ensure compliance with regulatory requirements and TCF.
• Additional sales process training provided to sales consultants.