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Checks and balances

Our panel welcome the introduction of income-checking of potential borrowers by HM Revenue & Customs but are wary of the practicality of such a system, plus: views on proposals from the regulator in the mortgage market review for cutting paperwork and concerns over where the buck stops on affordability

By the end of the year, lenders will be able to check applicants’ stated level of income against HM Revenue & Customs’ records in cases where they suspect fraud. Should this be done as a matter of course and not just for suspicious transactions?

Cornell: Without doubt, lenders should be using this kind of facility when they have any suspicion of fraud. As to the rest, I think it definitely has some merit but it is a blunt tool. Information that a lender would get from HMRC would not differentiate a person’s income, what is basic, what is bonus, what is commission or car allowance. I think it has merit but we need to get our heads around how it would work.

One of the reasons that self-employed people wanted to go self-cert is that some of them said their stated income did not necessarily reflect their real income.
That is tax evasion, so the more people we can get paying the right amount of tax the better it is for putting the country back on track. I think it is something we will see eventually.

Hollingworth: It does sound like a good thing to do. If lenders could automatically check income via HMRC, then potentially that could be an alternative way of verifying income and could lead to a very quick process across the board. However, that might be a bit hopeful in terms of how smoothly that would work. I do not think anyone would have a problem with it being used to try and stamp out fraud and perhaps go more widely than that as long as it is a robust system and there are doubts over how practical that would be.

If you have got the systems to support that, great. If not, this could lead to all sorts of problems, if it is giving back inacc-urate information, for example.

As part of the mortgage market review, the FSA has proposed making brokers declare whether or not they will give advice on direct-only deals. Would you consider giving advice on direct-only deals?

Cornell: Currently, it varies from broker to broker at First Action, I do not think there is a one size fits all policy. There are some people who are charging clients research fees and then pointing them towards direct-only deals.

The FSA have looked into some of the issues over direct deals and the position it puts brokers in. When a borrower sits down with a broker who says, “don’t worry I’m whole of market”, then they immediately assume that the broker can recommend every deal in the market.

Obviously, with direct-only deals, if we do not have all the relevant information, it is difficult to recommend them but the FSA has said we do not necessarily have to issue a key facts illustration for direct-only deals, which makes good sense.

Hollingworth: We make our clients aware there are deals that we cannot access. Most clients will want a broker’s assistance throughout the whole process, not just in terms of what is the cheapest or best deal but in processing that application through to offer and ultimately completion.

In many ways, it will not change for us. It is a good move for people to declare it. It makes it more transparent for the customer and also puts everyone on the same footing in terms of how much they acknowledge the presence of direct deals.

The problem in advising on direct deals is how much you can help the client with the application for that deal. Sending someone off down the road is not a great situation for anyone, including the borrower.

Will FSA proposals in the mortgage market review to streamline the paperwork that advisers have to give their clients make giving mortgage advice any easier?

Cornell: One of the things they are proposing to do is to scrap the initial disclosure document. What they are proposing has some merit. During the course of arranging a mortgage for a client, you basically hand out two or three forests’ worth of paperwork. Sometimes, the details are lost in the sheer volume of paperwork.

Not having to hand over an IDD will streamline things slightly but I think most brokers will still hand over something like a statement of business or terms of business because disclosing your status is one of the most important parts of the advice process.

Hollingworth: I like the way the FSA have done this. They have said you do not have to give information in the form of an IDD. You will have to disclose what kind of service and the scope of the service you offer at some point and if you want to keep using the IDD they did not preclude that.

Similarly for suitability, most people as par for the course will include reasons why the product will be suitable. On KFI issuance, it all seems sensible.

The FSA has also said in the latest mortgage market review paper that final responsibility for affordability is to rest with the lender. Is this an improvement for brokers?

Cornell: Brokers have been in a slightly difficult position because no one has really clarified what affordability means. If I went to 10 brokers, they might all have different views of affordability. The lenders are ultimately making the decisions and they have very sophisticated models and credit-scoring systems, so even if a broker goes through the most detailed income and expenditure analysis, ultimately what the lender will lend depends on their credit score and we do not have access to that.

Hollingworth: As part of the advice process, quite a lot of work is done in terms of the best interest and appropriateness test for clients and part of that is whether it is affordable for the borrower and do their circumstances fit the lender’s criteria.

A lender ultimately sets the criteria for what they will and will not accept, so if a lender is going to make the final lending decision it would seem appropriate they have to carry the final responsibility for that. But we also take it seriously and look to have some evidence of income in all cases.

What do you make of Which?’s decision to move into the mortgage broking market because they say their members ’find it difficult to know where they can turn to get trustworthy advice from someone who will give them the full picture’?

Cornell: I think most of us were very disappointed to read that statement in particular. There are around 10,000 brokers in the industry. In any industry, there are bad apples but 99.99 per cent of brokers are desperate to give the right advice and find the right deal.

For Which? to say that people struggle to find people they can trust is I think quite sad and factually incorrect.

As a decision, it is fascinating. I cannot see what they are going to gain from it. Remunerating salespeople in a way that does not depend on their product sales is a challenging one to master. But also if they are not going to charge people fees and they are going to recommend lots of direct deals, then they will retain the regulatory responsibility for that advice but are not getting paid for the advice.

It is a brave decision but it is a big market and the more competition the better.

Hollingworth: Obviously, there are lots of places were people can turn to get trustworthy advice. I think if you look at the decision in a broader context, this is really Which? saying they feel advice is the way forward for borrowers looking for a mortgage, that people do need advice. In that sense, they are endorsing the advice market. On this occasion, they are endorsing it to the extent they are going to get involved, with all the operational difficulty that entails.

They have got a subscriber list they can approach in terms of selling that service but it will start fairly small. I do not think that people should feel particularly threatened by it.

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