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A question of affordability

The FSA looks set to hand lenders total responsibility for mortgage affordability Christopher Jarvis reports

Money Marketing recently revealed that the FSA is likely to make lenders solely responsible for assessing mortgage affordability in its review of conduct of business rules.

Under current regulation, responsibility for affordability rests on both the lender and the broker.

Bill Warren Compliance managing director Bill Warren says that in the current process, the broker should be doing an affordability check and a budget planner to show both the client and the regulator that a certain mortgage package is affordable. The lender, after going through its own process, can either accept the broker’s findings or not.

He says: “It is very much the decision of the adviser how deep they dig.”

Telos Solutions director Richard Farr thinks that if the current regulations were followed correctly, there would be no need for new regulation isolating the lender as solely responsible.

“The policy statement that came out at the beginning of mortgage regulation provided for distributor responsibilities in the mortgage market. It clearly said that there was an equal responsibility for the broker and the lender.”

But Farr says some lenders have been getting brokers to sign a statement to show they have been through thorough afford-ability checks in an attempt to absolve themselves of any responsibility.

He says: “The rules do not say lenders can do this but the practice was going ahead anyway.”

But experts warn that if the FSA decides to place sole responsibility for affordability on the lender, lenders may question what purpose the intermediary sector serves for them, which could be very damaging for brokers.

Stroud & Swindon sales and marketing director Linda Will says: “If we got into the situation where all risk went over to the lender, they would realise brokers would not serve any useful purpose. Brokers would not need to take any responsibility for what they said and did, so why would the lender need them?”

Will says that with broker-introduced business, lenders do not have face-to-face contact with the borrower and so they depend on the broker to gather important information on the client’s financial circumstances.

She says: “Brokers are having conversations with the customers about what their future plans are, what their family set-up is, what they are planning to do. A lender receiving introduced business does not have the benefit of that face-to-face discussion with the client.

“We cannot do a full fact-find on intermediary business per se, so the value that the broker adds to the lender is that we rely on the fact that they too have some of that information, so to say that they are not in a position to judge affordability is patent nonsense.

“Don’t get me wrong, the lender still has their responsibilities to have all the appropriate checks in place. The lender cannot subjugate their responsibility to the broker but neither can the broker.”

Warren says the ruling would harm the relation-ship between the lender and broker. He says: “It is very detrimental both to the consumer and the adviser. If the lender has to take the whole responsibility for it, they may not want to be involved as much with the intermediary community as they have been in the past.”

Farr argues that even if there were no formal responsibility for intermediaries to look at mortgage affordability, brokers will still see it as part of their job to make sure their clients do not take on loans they cannot repay.

Warren says brokers who do not want to be involved in affordability checks are simply putting their heads in the sand and “not being very responsible”.

“If the broker wants to stay in business and do a good job for their clients, they will want to own the affordability decision. Ultimately, it is the lender that lends the money and makes the final decision but the intermediary has a huge part to play in that.”

Farr says that whatever the FSA decides, the industry as a whole needs to take the issue of affordability seriously.

Warren argues that brokers are not as guilty of irresponsible advice on affordability in the run-up to the credit crunch as they are perceived to be.
He says: “The fines and penalties boil down to a relatively small number. The number of those who have been banned or fined is somewhere around 1 per cent. Putting that in perspective, the vast majority have done a good job.”

Will says both brokers and lenders share blame for irresponsible lending in the past. “Lenders perhaps compromised way too far on what we were willing to allow to pass through our books. At the same time, a lot of brokers forgot that they were in the business of long-term advice. They took every case as it was and moved on to the next one. They did not build client banks.

“There is no mileage in each side trying to blame the other. Basically, we all need to clean up our act and get it right.”


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There is one comment at the moment, we would love to hear your opinion too.

  1. Michael White CEO Email Mortgages 21st October 2009 at 11:04 am

    Brokers are required for distribution, not to complete affordability status checks. Any lender who relied soley on an intermediary to complete the status assessment for a borrower would be foolish indeed. Ask any competent mortgage underwriter what their job is and the mist should clear quite quickly on this topic.

    Of course any competent broker cannot truly provide advice without understanding his clients financial circumstances. Think of the process as one does in applying Anti-money laundering controls, I am sure our soon to be erstwhile friends at the FSA will be applying any ‘changes’ in this way.

    Fear not the ‘Red Herring’ of responsibility for mortgage affordability, be much more concerned generally about the MMR and its possible consequences to the market, one has only to consider the full frontal attack on self cert mortgages, which is a perfectly valid product for some borrowers, which is most certainly based on a major misunderstanding by the FSA.

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