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Mortgage edge: Alan Cleary

Brokers using packagers for sub-prime lending could fall foul of the FSA because they do not understand the full implications of MCOB.

Many brokers probably have not even read MCOB|, even though it puts them directly in the firing line. That is understandable as they have been busy getting compliant and keeping their businesses on track following M-Day but they cannot afford to take that chance any longer.

BM Solutions is keen to help brokers understand what this complex document means in practical terms. We have the educational resources and would be delighted for brokers to contact us with their questions.

We have seen what has happened with previous regulatory changes and how things can go wrong. Brokers typically wait to see how the FSA enforces a regime before tightening up their procedures. However, you cannot afford to sit on your hands because this time it could be your business getting punished.

Principle 9 of the high-level rules states that firms are required to take reasonable care to ensure the suitability of advice. Many brokers are unwittingly breaking this principle, particularly on sub-prime business, by asking a packager to source the right product for their client.

The broker hands over the customer’s details to the packager, which runs the credit checks and selects the mortgage. This practice may have been fine before M-Day but it is not under statutory regulation.

Unless the broker has established safeguards to check that this mortgage really is the most suitable, they are in breach of Principle 9 and probably Principle 6.

But if brokers have the information to make these checks, then why on earth would they use a packager in the first place? Surely it is better to go straight to the lender and cut out the middleman?If the FSA thinks the broker or packager’s decision has been swayed by the size of the lender’s procuration fee, it will act. Some sub-prime lenders offer procuration fees of around 2 to 3 per cent to drum up business. Inevitably, the borrower pays for this in the form of higher interest rates. I cannot see how that can be described as suitable advice when there are better-priced products around.

Here is how you could incur the wrath of the regulator. For example, you set up a 100,000 sub-prime mortgage with a lender which offers mortgages at 4 per cent above base rate. Over three years, that client will pay more than 6,000 more for their mortgage than if they had come to BM Solutions. But what happens if the customer discovers this fact?They will, of course, take their complaint to the broker. If the broker takes up their grievance with the packager, they will reply: “Sorry, we are only authorised to arrange the mortgage or not even authorised at all. Giving advice is your job.”

In the eyes of the FSA, they are right. The ombudsman may force the broker to recompense the customer. The broker could then face the choice of paying higher professional indemnity premiums or reimbursing the customer themselves, plus costs and interest.

A lot of brokers simply do not realise what they are letting themselves in for.

It is unlikely that brokers will be able to defend themselves by claiming that the procuration fees were clearly set out on the key facts illustration. Most customers have no idea what fees should be paid. In fact, the average customer may not fully read the KFI.

Sub-prime customers, in particular, are financially vulnerable and the FSA will be anxious to protect them.

Nor will brokers be able to argue that their client was charged more because the lender’s quality of service was so much better. That is a smokescreen and it will not fool the FSA.

Service levels at BM Solutions are more than a match for other lenders, especially in the sub-prime market.

Brokers cannot absolve themselves of the responsibility for giving advice. If they hand that to the packagers, they are still the ones who will pay.

MCOB is a minefield and it simply is not worth taking the chance with your business. BM Solutions is keen to help brokers get to grips with the new regulations, to ensure a safe and compliant future. We look forward to speaking to you.

Alan Cleary is head of sales at BM Solutions

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