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Sub-prime ministering

It’s sub-prime time again as an FSA probe claims to show compliance shortcomings by brokers. Nicola York investigates the controversy-hit sector

Sub-prime is once again in the spotlight with an FSA investigation claiming to show that some brokers’ are not keeping to the correct business procedure.

The regulator’s research into sub-prime covered 31 small brokers and claims to have found cases where firms could not produce evidence on suitability when advising on sub-prime mortgages.

IFA Kerry Nelson says these findings are giving the industry a bad name but she believes that blame cannot be focused just on the brokers. “There has got to be something wrong with all the other parts of the process not to spot the tell-tale signs because it is so obvious to see when there is something not quite right with a mortgage application,” she says.

The report alleges that in 60 per cent of cases, insufficient information was obtained about the customer in key areas relating to the sale of sub-prime products.

Bestinvest mortgage manager Peter O’Donovan is not surprised by these figures as he expects it to take some time for the regulations to bed in. He says sub-prime is especially difficult because of the intricacies of the products. “The requirement of providing evidence of why the broker chose a particular mortgage can be difficult.”

The FSA referred three firms to enforcement for further investigation after it claimed to have found that they helped customers in obtaining a mortgage where their income would not have met the lender’s criteria.

O’Donovan says: “Some-times you can see why people do inflate income but it is a bit of a worry.”

Mortgage Force managing director Rob Clifford warns that it is easy to draw the wrong conclusions from the findings but agrees the research must be taken seriously.

He says: “It is important at least to separate poor book-keeping from poor advice and certainly to separate poor advice from fraudulent activity.”

Clifford thinks that many brokers are compromised by client dishonesty but says he is not defending brokers who have operated improperly and believes that anyone acting improperly should be driven out of the industry.

Clifford thinks it is far more likely that a broker suffers from poor admin-istration, inadequate records and inadequate evidence rather than giving dishonest advice to a client.

The sub-prime business can generate higher fee level and Clifford says: “I think there is always a danger that some commission-hungry advisers might want to let a case fall into a sub-prime category when it might be in the prime category.”

London & Country is looking at offering no-fee advice in the sub-prime market. L&C mortgage specialist James Cotton thinks this and other changes will bring improve-ments in the sector as the days of “enormous tie-ins and very high lending charges” start to recede.

The FSA report also claims that in 80 per cent of cases there was a lack of evidence to show how the recom-mended sub-prime product met the customer’s needs and circumstances. Mortgage Intelligence managing director Sally Laker is surprised by this figure but says it reaffirms the need for brokers to have a clear sales process that is compliant. She says: “This is where a good IT system and a good compliance sales system is important because it ensures that you do all that you should do in the sales process.”

Laker says it is often not the sales process that is is wrong but brokers do not keep records as evidence to show how the process has been completed.

She adds: “When any of these reports come out, it is always a good time to look at your own processes and check that what you are doing is FSA-compliant. One assumes that everybody is aware of everything that they should be doing but that is not the case.”

BM Solutions head of sales Martin Reynolds thinks the report shows some positives as well as negatives. He says: “The fact that firms are active in going beyond the FSA’s rules, with large percentages of firms intending to review a customer’s sub-prime product in the future and issuing suitability letters, is positive news for the industry.”

But he says it is imperative for brokers to address the issue of poor record-keeping in order to protect themselves from misselling allegations in the future.

FSA head of mortgages & credit union department Andy Watson says sub-prime is a growing area of the mortgage market and the regulator is making it a priority area for supervision.

Watson says: “It is difficult to establish the level of consumer detriment or potential misselling as many of the failings related to poor record-keeping and brokers could provide more detail when challenged, but we will be looking for better evidence of compliance with our requirements in future.”

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