Focus on fines – study 1 (January 2010)

Failing to meet the minimum standards required to be an approved person - potential fine £17,500 - actual fine £5,000 and ban from practice.

The firm also failed to put in place adequate risk management systems to prevent it being used to further financial crime.

Approved person failings

At a TCF assessment it was discovered that the firm’s sole director and senior manager:

• had no relevant qualifications or financial advisory experience, despite holding the functions of ‘training and competency supervisor’ and ‘complaints officer’
• failed to take steps to improve his regulatory knowledge
• in effect left a mortgage sales adviser with no controlled functions to run the business, monitored only by an external compliance consultant who made quarterly visits at which only 10% of files were reviewed
• failed to supervise or engage with either the mortgage adviser or compliance officer – thus was not party to discussions about compliance at visits
• in addition, failed to check and act on compliance failings identified in the compliance consultant’s reports

In so doing the firm’s director failed to demonstrate an understanding of the responsibilities associated with running a regulated mortgage business.

Resulting deficiencies affecting TCF

The following deficiencies were found - many of which had been noted by the compliance consultant but not acted on:

• absence in Fact Finds on the customer’s income, expenditure and savings - making it hard to assess affordability
• included in the above, unexplained absence of information on income from long-term self-employment
• suitability letters with generic or missing information (eg failing to explain why a product had been recommended and how it was suitable if it didn’t reflect the customer’s stated needs and preferences)
• suitability letters where required risk warnings were missing
• absence of records of discussions to show why customers wanted self-certification or interest only mortgages when a standard repayment mortgage may have been suitable
• absence of records to confirm discussions on choice of repayment vehicle, or affordability into retirement or if a customer’s circumstances changed
• internal file reviews failed to take account of quality of advice – instead only considering turnaround times, customer satisfaction and issue of relevant documents

The overall effect was the firm could not demonstrate suitability of its mortgage recommendations and therefore assess whether customers were being advised properly or treated fairly.

Risk management failings

The firm also put itself at risk of being used for mortgage fraud by failing to put in place processes designed to recognise and check inconsistent information – such as employment history and salary. This resulted in a number of applications containing inaccurate and misleading income and employment details.

Focus on fines – study 2 (January 2009)

Self-certification mortgage sales - potential fine £25,000 - actual fine £17,500

Suitability/affordability failings

Following a review of 20 completed self-certified mortgages the FSA found that the firm:

• failed to make appropriate enquiries about customers’ income, expenditure, credit history and debt position – resulting in affordability being questionable in 35% of cases
• often didn’t obtain sufficient information to be able to check the plausibility of income
• gave inadequate consideration to customers’ ability to repay where interest only mortgages were being recommended
• in 30% of cases failed to record any evidence of product research to support their final recommendation
• had no evidence to suggest it had been ‘self auditing’ its self-certification sales during the period for quality and suitability of the recommendations

In addition, from cases introduced by an accountant the firm:

• failed to query the rationale for some long-term self-employed customers seeking self-certification mortgages where accounts should have been available
• failed to carry out further checks where files showed multiple credit searches

The above two points raised not only the question of affordability and therefore suitability, but also failure of due diligence in minimising the risks of handling fraudulent mortgage applications.

Corrective action

Examples of actions taken resulting in a reduction to the fines

The examples below are taken from a range of earlier cases where firms received 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.
• One firm stopped selling self-certification mortgages altogether.