RIP Self Cert Mortgages?

The Financial Services Authority have published an interesting Consultative Paper on the future of "Responsible Lending". This is part of the FSA's enhanced consumer protection strategy - and smacks of bolting the stable door after the horse has bolted. 


Comments are invited by 16th November 2010 on these proposed changes to Mortgage Regulation.

Some of the key proposals include:

• Imposing affordability tests for all mortgages and making lenders ultimately responsible for assessing a consumer's ability to pay;
• Requiring verification of borrowers' income in every case to prevent over inflation of income and to prevent mortgage fraud;
• Extra protection for vulnerable customers with a credit-impaired history.
• For Interest Only Mortgages - expect a further paper from the FSA but in essence requiring the borrower to have an appropriate repayment vehicle in place to repay the balance of the loan.

This will also impact on the Self-Employed and will require them to be able to evidence that they have adequate means to maintain and repay any loans.

Further information is available from the FSA website 

What now for Mortgage Advisers and Arrangers?

The FSA paper on the Mortgage Market Review PS10/9 makes gripping reading and will result in a number of people leaving the Industry.


Gone are the days when a mortgage salesperson could "duck under the radar" and hide behind their Principals
licence when advising and/or arranging regulated mortgages.


The policy statement confirms that all advisers and arrangers AND their supervisors will have to become a Controlled Function (CF31).  For many existing IFA's I will hear you say "So what?" we are already a CF30 - but you will need to apply for the additional CF - and the FSA have developed an on line notifications portal to cope with the anticipated 20,000 applications. This new system needs fine tuning and should be ready to accept applications for the new CF from 31 March 2011.


The FSA will, once fully implemented, have available for public display a full list of all CF31's in the Industry. The new rules should reduce the risk of unsuitable people operating within the Industry and to make those that do fully accountable for their actions.


Those thinking of moving to restricting their activities to unregulated mortgages are in for a shock. The plans to  extend the scope of the "son of FSA" in a couple of years will result in BTL and second charge loans being subject to this regime too. 


Interestingly, the FSA believe that this is the right tool for reducing Mortgage Fraud.



• CF31 will not cover the functions which take place after the application by the customer for a home finance transaction unless the person concerned is also involved in the upfront sales process.


 • CF31 will not apply where  no new monies are advanced . So, an individual will be exempt from requiring approval for CF31 if the home finance transaction they are dealing with does not involve new monies being advanced.

Trainees are permitted to become CF31's but the Firm will need to have a robust process in place to ensure that :-

The Individual is "Fit and Proper"
Taking relevant professional examinations
Receiving ongoing supervision and coaching
Records of the ongoing supervision and CPD are up to date

There will be no need for the Firm to notify the FSA once the Trainee has been signed off as competent - but the Firm must retain records.

Firms are expected to undertake "Fit and Proper" checks on all new staff (trainees and job movers) including undertaking CRB checks. Any adverse information must be disclosed to the FSA. The FSA expect that such CRB checks are current - not than 2 months old prior to the date of the application for CF31.

Firms will need to have in place robust systems that can demonstrate compliance with these new rules - in order to qualify for the transitional arrangements.

Recruitment - referencing including a current CRB check.
Professional qualifications - where relevant
Record of supervision / coaching
Approval arrangements - competency
Appointment of CF10 - Compliance Officer

Small Firms will be required to have in place arrangements to obtain CRB checks- details of umbrella organisations that may be able to help can be found at http://www.crb.homeoffice.gov.uk/

CRB checks take anything between 2 and 8 weeks to complete - this needs to be taken into account when recruiting new advisers / arrangers.

The FSA have confirmed that it may take up to three months to approve a CF31 application - therefore it is in the interests of all Firms to ensure that their house is in order.

The Transitional arrangements will mean that applicants that meet the criteria and have the necessary paperwork submitted on time to the FSA will be able to continue to act as an Adviser / Arranger prior to the FSA "sign off".

Next steps from the FSA :

Sept 2010  - Final Mortgage Rules published and new content available on FSA Website
Q4 2010    - Modified Form "A" available in draft
Nov 2010  - Sole Traders / Single Director Firms registered with Umbrella organisations for CRB checks
Feb 2011  -  Sole Traders / Single Director Firms apply for their own CRB checks
Feb 2011   - All other CF31 Firms apply to Disclosure Scotland
31 Mar 11 -  Start of application period for CF31's and CF10's.
30 June 11 - End of transitional application period.
1 Jul 2011 -  Anyone that hasn't applied MUST cease to undertake regulated activities unless a current CF.
1 Jul 2011 -  Applications from current CF's requiring CF31 or CF11 to be submitted
1 Oct 2011 - Anyone that hasn't applied for CF31 must cease to undertake relevant regulated activities - even if a CF.

If you need help the please get in touch at http://www.compliantsolutions.co.uk/fsa-problems.php

Online Notifications and Applications

The FSA launched on Monday their new on line facility for Regulated Firms.

Log in details may be accessed via

http://www.fsa.gov.uk/Pages/Doing/Regulated/ona/index.shtml

In essence, the FSA could not cope with the 20,000 or so expected applications from Mortgage advisers / arrangers next year with the current set up. As a result, they have developed an on line system that becomes mandatory from August 2010.

You will need to register to use the service –

http://www.fsa.gov.uk/Pages/Doing/Regulated/ona/registration/index.shtml

the facility will allow you to complete and submit changes in respect of the following :

• Approved persons
• Appointed representatives
• Passports
• Variations of Permission
• Cancellations
• Waivers
• Standing Data

·

I hope that the systems that the FSA have introduced are more robust than the GABRIEL system that was launched a couple of years ago and still encounters problems.

Treating Customers Fairly III

Outcome 3 - Consumers are provided with clear information and are kept appropriately informed before, during and after the point of sale.

Have you updated your initial disclosure material or terms of business to reflect the FSCS changes announced in January? Do your client files consistently record details of information obtained from and provided to the customer? Is the file up to date?

Can you demonstrate that all of your communications are clear, fair and not misleading? your marketing material - do you ensure that any information is "balanced" and important exclusions are prominently disclosed? Would it pass the "mother in law test?"

Where you have more than one adviser working within the business are you satisfied that all advisers operate to a consistent high standard? Are any issues identified as part of the monitoring process recorded and appropriate training provided to avoid any repetition?

How satisfied are you that Customers have a good understanding of information that you have provided? Can you prove it?

Fighting Financial Crime

The FSA has published the findings of its review into small firms’ anti-financial crime systems and controls, which covered anti-money laundering and financial sanctions, data security and fraud controls. 159 small Firms were part of the review. The findings indicate that the small firms sector is “generally weak in its assessment and mitigation of financial crime risks”. Just over half of the firms reviewed had used outside compliance consultants to produce policies and procedures.

Exciting stuff - generally speaking IFA's need to pull their socks up. As is often the case, business owners will invariably "tick the box" that they have something written down and then either fail to adapt it to reflect their individual needs or simply ignore the process altogether.

Firms are required to have systems in place to verify that they are not being used to facilitate financial crime.

This will include:

Adequate controls on recruitment - including taking up CRB checks where appropriate

Verification of identity and sources of funds

Provision of training to staff on tackling financial crime

Controls over dealing with politically exposed persons (PEPS)

Ensuring that existing and prospective customers are not on the treasury blacklist.

Having strategies in place to identify and tackle potential fraudulent activity / market abuse.

Appropriate due diligence systems to identify or deal with higher-risk customers or situations.

Clear and effective procedures for managing suspicious transactions including reporting to SOCA.

I expect that this will be another topic on the shopping list for discussion when the FSA next turn up at a small firm near you - How do your controls stack up?

For help and guidance contact me at info@compliantsolutions.co.uk

Treating Customers Fairly II

Outcome 2 - Products and Services sold in the RETAIL market are designed to meet the needs of identified customer groups and are targeted accordingly.

As an Insurance / Investment / Pensions / Mortgages arranger or adviser you may think that this only applies to Product Providers and lenders. Not so - increasingly, firms are looking to offer their clients attractive products that may include an element of "white labeling".

Distributor Influenced Funds seem to be a current "flavour of the month" topic of concern for the FSA - if you are marketing such funds what steps have you taken to be satisfied that you continue to treat your customers fairly?

Insurance Intermediaries - do you operate with a "Binder" and as a result have a facility to direct clients to a specific Insurer? Do you have a profit share arrangement in place and if so, how are you able to demonstrate that you are not "jogging against the pot"? By placing the best risks with the Insurer offering profit share are you maximising your profit opportunity at the expense of the client?

For packaged products are you able to demonstrate that you are selling the right products to the right clients consistently? What levels of business are written on a non-advised / execution only basis? How confident are you that clients have a good understanding of what they are acquiring?

Ignorance is bliss - just because the customer completes a customer satisfaction survey and gives the firm a 10/10 for service does not mean that they have been treated fairly - how do you stack up?

Minimum Capital Requirements

One of my clients had a run in with the FSA recently - thankfully now all resolved.

Imagine the situation:

You are a provincial IFA doing an excellent job for your clients and have never had a complaint in 5 years trading. Your clients love you and provide a steady stream of referrals.

Having been nagged by me about minimum capital in the business you set aside funds on deposit.

You keep on top of your cashflow and have regular management accounts. A very well run business.


Your year end is 31st December and you make £15,000 profit. Your capital requirement is only £10,000*

On the GABRIEL return for the year ending 31st December you state that your Capital within the Firm is £15,050 including fixed assets and cash etc.

Your Accountant then has eight months to finalise your books and submit them to Companies House and HMRC.  During the period between 31st December and when the accounts are finalised you make a further £20000 in profits. Your Accountant suggests that you draw a dividend of £15,000 and charge it to the last year. After all, the interim profits for the current year mean that you still have over £15,000 in the bank.

Wrong. By taking the Dividend from the previous tax year this resulted in the capital position of the Company as at 31 December being only £50.  Who ever said that cash was King?

A simple error and easily rectified - the Accountant was able in this instance to provide sufficient comfort to the FSA that the Firm had sufficient resources - better safe than sorry and avoid grief from the FSA and a large bill from your Accountant.

* dates and numbers have been changed to protect client confidentiality.