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File for the defence

Higher mortgage payments and the sub-prime aftershocks mean advisers could soon be facing an unprecedented volume of complaints from clients.

Borrowers in trouble with repayments are likely to start pointing the finger of blame rather than seek practical solutions. Why get repossessed when you can sue your adviser?

The FSA may have jangled the nerves of some advisers with comments that it was concerned about some practices, including self-cert loans and sub-prime.

The adviser’s best friend is a filing system able to produce evidence to defend against complaints.

Complaints about mortgage business have been rare since FSA regulation began in October 2004 but the rules can penalise any void in documentation.

The adviser must be satisfied that the client can afford the recommended mortgage (according to the FSA rule Mcob 4.7.4 & 5).

That means the adviser must explain to the client that the mortgage is affordable based on current interest rates and the customer’s current circumstances. Either could change.

Rule Mcob 4.7.7E says adviser must look to the future to consider changes in the customer’s circumstances and how the customer will meet the costs of the mortgage at the end of any discounted or fixed period.

The FSA is increasingly basing supervision on “principles and outcome-focused rules” rather than detailed rules prescribing how outcomes must be achieved so it is also likely to be a breach of treating customers fairly if obvious and foreseen changes in circumstances are not discussed with the client and accurately documented.

It is certainly not up to the client to say simply they can afford the mortgage, nor for the adviser to accept their word. If the client file is poorly documented, there could be problems.

Only an affordable mortgage can be deemed suitable. An adviser cannot restrict or exclude the duty of care owed to their customer to consider affordability.

Affordability and fair treatment have to be provable. A lender has a duty to lend responsibly but the assess-ment of affordability of the mortgage and responsibility for the advice will always come back to the adviser.

Monthly repayments may be made affordable by using an initial discounted period. If so, the adviser must take into account using contemporary interest rates the payments that will be applied after the discount period. That will indicate whether the client is in a position to afford the mortgage after the discount period.

Hoping the client gets a pay rise before the end of the discounted period will be little defence to a claim. And if the client needs to become less extravagant, such as taking only one holiday a year instead of two, this assessment must be documented on the file.

Always consider the impact that an interest rate rise will have on repayments. Use the key facts illustration to demonstrate how a 1 per cent rise would affect repayments and whether the client could afford such an increase.

Any facts disclosed by a client can be relied upon by the adviser unless, taking a commonsense view of the information, the adviser has reason to doubt the accuracy of the information.

Affordability has to be based on information that the client provides to the adviser and records on the client file. A well completed fact-find is invaluable when a complaint arises. It will explain why the mortgage was considered affordable and suitable and recommended.

Interest-only mortgages, where there is no repayment vehicle, pose potentially more serious affordability and risk issues.

The FSA’s attention has been attracted by the rapid rise in popularity of interest-only mortgages, fuelled by rises in house prices that continually outstrip increases in average income.

By deferring repayment of the principal debt by paying only interest, the debt shock becomes greater as time goes on.

How does the virtuous adviser avoid complaints? By good file-keeping throughout and issuing a closure letter.

A closure letter to the client is not compulsory under Mcob rules but the letter, explaining what has happened and that affordability has been proven, can be a compelling defence to a complaint.

Likewise for an interest-only mortgage. The letter can confirm the reasons why the option of no repayment vehicle was recommended and remind the client of the risk. A good explanation of the KFI also helps the client to make that informed decision. The adviser’s client file must demonstrate that affordability was discussed and explained and that the client could afford the mortgage, based on the facts collected.

When affordability may be an issue, always get a full breakdown of the clients’ income and expenditure. Consider also that if the purchase involves moving to a bigger property this will lead to higher bills as well as higher mortgage payments that must be taken into consideration.

Support your advice by documenting all conversations, agreements or arrangements which have been agreed. If necessary, repeat them to the client in the closure letter.

We all want to help clients achieve their goals but a dream home can become a nightmare if a borrower cannot afford the repayments.

Compliance is often seen as a burden, but when we are able help advisers reject complaints against them it is nearly always down to the quality of their files.

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