Mortgage firms working with packagers
We have conducted research into the relationship between mortgage packagers and mortgage brokers.
Brokers who are using a packager should review their procedures in line with the findings of our research. This will help the broker to put adequate risk management systems in place, and will help ensure the suitability of advice for any customer who relies on them.
FSA research
We visited nine brokers, six packagers and conducted a telephone questionnaire with a further 25 brokers.
Key findings
Even when using a packager, it is important for brokers to remember that if they are representing themselves as the provider of advice to customers then they - not the packager - are responsible for that advice.
Making product recommendations
- Just over half of brokers interviewed said they always reviewed the alternative product suggestions made by packagers (where their initial application has been declined and the packager has offered two or three alternative product suggestions from their panel of lenders) to satisfy themselves that the product is the least expensive or otherwise most suitable before recommending it to their customers. Therefore, a significant number of brokers are exposing themselves to risks as they have failed to undertake necessary due diligence.
- Approximately a quarter of brokers said they only sometimes checked for suitability.
- A smaller number of brokers never checked and relied entirely upon the product suggestions made by packagers.
We are aware of recent instances where contracts have been drawn up between unregulated packagers and some of the larger broker firms, where packagers are required to provide the broker with reasons why a particular product has been sourced by the packager. If it is found that the resulting advice given by the broker was not suitable, the agreement provides that any compensation due to the customer is paid by the packager.
Even if such an agreement has been drawn up, all regulatory obligations remain the responsibility of the broker and we would expect them to evidence the reasons why the product they recommended was suitable for their customer. Information provided to the broker by the packager can form part of that suitability assessment. In the case of non-compliant advice, any resulting regulatory action will be taken against the authorised broker, not the packager (even if that packager sourced the product).
Issuing the Key Facts Illustration (KFI)
- The majority of the brokers interviewed said they issued KFIs at the appropriate time, either using software systems or using lenders' websites.
- A minority of brokers said that when using a mortgage packager, the packager issued the KFI, as part of the mortgage application pack sent to the broker for the customer to complete.
We found in most cases brokers issued the KFI to the customer. However, some brokers did tell us that the packagers they used issued the KFI. Regardless of who issues the KFI, it remains the responsibility of the authorised firm that is dealing directly with the customer to make sure the KFI is given to the customer at the right time. So, if the broker uses a packager to issue a KFI and the broker is dealing directly with the customer, then it is the broker who is responsible for ensuring that the packager issues the KFI at the right time.
When an authorised firm makes a personal recommendation to a customer to enter into one or more regulated mortgage contracts they must ensure that the customer is given a KFI at the point the recommendation is made, unless it is made by telephone. In this case the firm must provide the customer with a KFI within five business days. In all cases, the KFI must be provided before the customer submits an application for that particular regulated mortgage contract to a mortgage lender.
Where an initial mortgage application has been declined and another lender has been recommended you must ensure that the application is amended. Before passing the application to the new mortgage lender you must provide the customer with a KFI that illustrates the current recommended regulated mortgage contract.
Choosing a packager: should they be authorised?
The Perimeter Guidance manual (PERG 4.15) describes various packager activities and gives a view as to whether these activities are regulated activities for which authorisation would be required or whether they are exempt.
An important consideration in determining whether or not a particular packager requires authorisation (or is exempt) is the nature of the activity they are carrying out, not the description of that activity or the description of the packager itself. This is a key consideration and forms the basis of the guidance outlined in PERG 4.15.
We are aware that some lenders are refusing to accept business because at some point in the chain an unauthorised packager has been involved. We do not propose to comment on such commercial decisions. However, where a packager does not need to be authorised for any of their activities then lenders will not be contravening our requirements regarding use of firms’ mortgage mediation services by using unauthorised packagers. Under these circumstances these rules should not prevent lenders accepting such business.
Summary
Even when using a packager, it is important for brokers to remember that if they are representing themselves as the provider of advice to customers then they are responsible for that advice, not the packager. Brokers should review their procedures to ensure that this is indeed the case and that they are satisfied that any product they recommend is suitable for their customer.