Detailed feedback for firms from the Self-certification research
The area of self-certification mortgages and in particular the potential for abuse of self-certification mortgage products during the mortgage sales process was identified as an early priority by the FSA. The potential for abuse of the self-certification of income has been well publicised in recent years, with two programmes broadcast by the BBC in October 2003 and February 2004 alleging certain abuses.
The previous mortgage regulator, the MCCB, recommended that the FSA keep a watching brief over this area to prevent poor selling practices and encouragement to overstate income from emerging in the market.
We acknowledge that self-certification mortgages are a valuable product and are extremely useful in certain circumstances. We did, however, want to assess whether the abuse of self-certification products was widespread or systemic within the intermediary market and also whether mortgage advisers are taking reasonable steps to ensure that personal recommendations to enter into self-certification products are appropriate to the needs and circumstances of consumers and to gather all information likely to be relevant for the purposes of establishing the suitability of these products. Whilst 'fast-track' type mortgages form a sizeable proportion of the self-certification market, our review has focused solely on 'true' self-certification mortgage products (i.e. for those customers who could not prove their income(s)).
We visited a sample of 39 small mortgage firms focusing on the sale of self-certification products and reviewed a total of 249 cases.
We also commissioned NOP World Mystery Shopping to undertake a series of mystery shops to around 40 intermediary firms. The mystery shopping was used to explore current practices within the self-certification market focussing on the following areas:
- whether firms are encouraging, or colluding with, clients in order to inflate their income to secure a larger mortgage for the client; and
- whether consumers are receiving appropriate advice, particularly where they are able to prove their income.
In addition we have drawn on the findings from our other thematic activities carried out over the past 12 months such as the recent sub-prime project where the use of self-certification mortgages have been evidenced.
For a summary of the results of this work see the Self-certification mortgages page.
This feedback is based on our existing rules and guidance. It is not formal guidance and does not have the status of guidance in the Handbook. The 'Implications of our rules, guidance and evidential requirements' column summarises relevant aspects of rules relevant to the findings listed. The feedback does not cover all rules relevant to the sale of self-certification mortgages and the text in that column is not a complete statement of rules referred to. You should refer to MCOB 4 for our rules and guidance on advising and selling standards for mortgages, including self-certification mortgages. If there is any conflict between this feedback and MCOB, MCOB takes precedence. Firms should seek individual guidance if they have specific queries.
| Know Your Customer | ||
|---|---|---|
| Rule/Guidance/ Evidential Reference |
Implications of our rules, guidance and evidential requirements | Our findings |
| 4.7.2R; 4.7.4R; 4.2.1G; and 4.7.1G |
- Where a self-certification mortgage is recommended the firm should take reasonable steps to obtain from the customer all information likely to be relevant to the suitability of a self-certification mortgage. When assessing suitability, as well as having regard to facts disclosed by the customer, firms must also take into account other relevant facts of which they are, or reasonably should be, aware. - The suitability of a self-certification mortgage will depend on its affordability to the customer, their needs and circumstances, and whether it is the most suitable of those within the scope of the firm's service. |
- Whilst most firms were using documentation to assist with the collection of customer information prior to any recommendation being made, 51% of files did not contain sufficient customer information to support the recommendation made. - Firms stated they would either ask for more information or refuse the business if they had doubts about the information provided by the customer. Encouragingly, on several occasions we found firms who had queried information provided by customers where they felt that the information provided was out of character with the rest of the client's circumstances and had noted their actions on file. |
4.7.8G |
- Firms may generally rely on any information provided by a customer when assessing suitability unless, taking a common-sense view of the information, it has reason to doubt it. |
- Some firms when asked stated they would either ask for more information or refuse the business if they had doubts about the information provided by the customer. Encouragingly, on several occasions we evidenced firms who had queried information provided by customers where they felt that the information provided was out of character with the rest of the client's circumstances. Firms who had taken such steps had noted their actions on file. |
| Affordability | ||
|---|---|---|
| Rule/Guidance/ Evidential Reference |
Implications of our rules, guidance and evidential requirements | Our findings |
| 4.7.4R; and 4.7.7E | - For all advised sales, including those on self-certification mortgages, firms have to have reasonable grounds to conclude that a customer can afford to enter into the mortgage. - In assessing whether a customer can afford to enter into a regulated mortgage contract, a firm should give due regard to: - Information the customer provides in relation to income and expenditure, and any other resources available; - Any likely change to the customers income, expenditure or resources and; - The costs the customer will be required to meet once any discount period in relation to the regulated mortgage contract comes to an end (assuming interest rates remain unchanged). |
- 47% of the files reviewed did not adequately demonstrate that the firm had appropriately assessed affordability. - It is for firms to decide what information they need to meet the requirement to assess affordability and how they obtain that information, our summary outlines methods used by firms that we felt complied. The 41 mystery shopping results showed that only in the minority of cases did firms ask questions about expenditure. Those firms that did ask questions to assess affordability covered topics such as:
- Interestingly 34 firms asked if the customers had any equity in their property. Whilst equity is an important consideration when identifying an appropriate product we still expect the customer's income, expenditure and other resources to be considered. The findings from the mystery shopping shows this question was often asked in isolation (as this question was asked more frequently than any questions in relation to affordability) giving the impression that firms were more interested in the loan-to-value and amount of equity within the property rather than assessing whether customers could afford to enter into the new mortgage. - Three firms advised the mystery shopper how much their income would need to be to be able to afford the amount they wished to borrow. Whilst this is a legitimate question for a firm to answer, we would be concerned if firms were using this to guide customers towards overstating an income in order to be able to obtain the required mortgage amount. |
| Suitability | ||
|---|---|---|
| Rule/Guidance/ Evidential Reference |
Implications of our rules, guidance and evidential requirements | Our findings |
| 4.7.4R; and 4.7.7E | - Regardless of whether a sale is advised or non-advised, the firm is required to have due regard to the interests of the customer and treat them fairly. - In an advised sale, the firm must have reasonable grounds to conclude that the recommended mortgage is appropriate to the customer's needs and circumstances. - The suitability of a self-certification mortgage will depend on the needs and circumstances of the customer. |
- In 36% of files reviewed the firm had either given no reason, or it was unclear from reviewing the customer file, why a self-certification mortgage had been recommended. - From the self employed files reviewed 15% of the cases had accounts available to verify income and from the employed files reviewed, in 16% of the cases income could also be proved [by other means]. However, self-certification mortgages were still recommended with no other reasons as to why self-certification was appropriate. 58% of the files reviewed involved self-employed clients. In 15% of these cases accounts were available and in a further 27% of cases it was unclear from files whether accounts or other forms of income verification were available or not, calling into question the suitability of the product recommended. In situations where income can be proved we would expect the firm to recommend a 'full status' mortgage to customers so as to ensure that the least expensive mortgage identified is recommended based on the pricing elements important to the customer. - 42% of files reviewed were for employed clients and in 84% of these cases there was either no reason, or it was unclear if there was a reason, why the client could not verify their income. This may call into doubt the suitability of such recommendations, should the customer be able to verify income then as per the previous point we would expect a 'full status' mortgage to be recommended. |
| Suitability | ||
|---|---|---|
| Rule/Guidance/ Evidential Reference |
Implications of our rules, guidance and evidential requirements | Our findings |
| 4.7.4R; and 4.7.7E | - Regardless of whether a sale is advised or non-advised, the firm is required to have due regard to the interests of the customer and treat them fairly. - In an advised sale, the firm must have reasonable grounds to conclude that the recommended mortgage is appropriate to the customer's needs and circumstances. - The suitability of a self-certification mortgage will depend on the needs and circumstances of the customer. |
- In 36% of files reviewed the firm had either given no reason, or it was unclear from reviewing the customer file, why a self-certification mortgage had been recommended. - From the self employed files reviewed 15% of the cases had accounts available to verify income and from the employed files reviewed, in 16% of the cases income could also be proved [by other means]. However, self-certification mortgages were still recommended with no other reasons as to why self-certification was appropriate. 58% of the files reviewed involved self-employed clients. In 15% of these cases accounts were available and in a further 27% of cases it was unclear from files whether accounts or other forms of income verification were available or not, calling into question the suitability of the product recommended. In situations where income can be proved we would expect the firm to recommend a 'full status' mortgage to customers so as to ensure that the least expensive mortgage identified is recommended based on the pricing elements important to the customer. - 42% of files reviewed were for employed clients and in 84% of these cases there was either no reason, or it was unclear if there was a reason, why the client could not verify their income. This may call into doubt the suitability of such recommendations, should the customer be able to verify income then as per the previous point we would expect a 'full status' mortgage to be recommended. |
| 4.7.13E; 4.7.14G; and 4.7.17R(1)(b). |
- Firms should recommend the mortgage that is the least expensive of those identified as appropriate, taking into account those pricing elements identified by the customer as being most important to him. - Firms must justify why they recommend a self-certification product where it is more 'expensive' (in terms of pricing elements which are most important to the customer) than other appropriate products. - A recommendation can be made on grounds other than price (provided that the reason is recorded as described above), but there is no presumption that such a mortgage is the most suitable of those identified as appropriate (as there would be with a recommendation of the least expensive mortgage). |
- Where proof of income was available firms generally failed to record the reason(s) for recommending a self-certification mortgage where a cheaper full-status mortgage could have been recommended. - Firms were generally unable (in circumstances were income appeared to be able to be proved) to evidence why they had recommended a self-certification mortgage rather than a comparable and less expensive (full status) mortgage that the firm has access to. - 64% of the files reviewed did not adequately demonstrate why the particular product chosen was the most suitable. However, some firms were able to rationalise the recommendation of a self-certification mortgage product by providing further information to us orally about the customer's circumstances which were not recorded on file. Therefore this may suggest that the issue is a lack or record keeping rather than an issue about the suitability of the advice or any consumer detriment. |
| Record Keeping | ||
|---|---|---|
| Rule/Guidance/ Evidential Reference |
Implications of our rules, guidance and evidential requirements | Our findings |
| 4.7.17R | - Where a self-certification mortgage is recommended, the record must include the customer information, including details of the customer's needs and circumstances - The record must also explain why the self-certification product:
|
- In 36% of files reviewed the firm had either given no reason, or it was unclear, why a self-certification mortgage had been recommended. This was the case even though in the majority of cases, firms were using documentation that requested information on customers' needs and circumstances before making a recommendation. - In common with the finding when we investigated the sub-prime market, in 64% of cases there was a lack of evidence to show how the recommended self-certification product met the customer's needs and circumstances. |