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  • Small Firms
    • Mortgage & other home finance advisers
      • Good practice
        • Mortgage roadmap - thematic review
        • Quality of advice processes
        • Sub prime mortgages

Why should mortgage intermediaries read this?

This is a summary of FSA research into the advisory and sales practices of smaller brokers on self-certification mortgages. The results vary, ranging from examples of good practice beyond our minimum requirements to a small number of cases of potential fraud. We aim to pass on the lessons learnt from these good and poor examples so mortgage intermediaries can make any necessary improvements to their own procedures.

Key findings of the research

It is important not to overstate your customer’s income: this is not a systemic problem, but it was found in a very limited number of cases. This is potential fraud. Those advising or selling self-certification mortgages should review whether they are complying with our rules and make any necessary improvements in:

• affordability checks: considering what facts about your customer’s income, expenditures and resources (and likely changes to these) you should reasonably be aware of;
• suitability checks: checking the needs and circumstances of your customer; and
• recording the advice given: demonstrating why you recommend a self-certification mortgage (particularly where a borrower can prove income and so a cheaper, more appropriate mortgage may be available).

Further details of the research

We visited 39 small mortgage brokers who sell self-certification mortgages and provide advice to customers. From those 39 visits we looked in detail at 249 client files. We also employed NOP World Mystery Shopping to do around 40 mystery shopping exercises to small intermediary firms active in the self-certification market. We also drew on the outcome of our other supervision work in the first year of statutory regulation.

The following results highlight the improvements that need to be made in order to comply with our rules, and the good practice found by the research.

Findings and improvements to be made

Fraud

The mystery shopping exercise indicated that, of the 41 firms contacted, three firms were prepared to discuss with customers the possibility of overstating their incomes to obtain a larger mortgage.

Whilst our research indicates that there are individual firms prepared to abuse the system in this way, there is no evidence to suggest the problem is widespread or systemic. The FSA has and will take action against firms who abuse self-certification products.

Suitability

• Of the 249 customer files reviewed, 36% recorded either no reason, or the reasoning was unclear, why a self-certification mortgage was recommended.
• Where proof of income was available advisers generally failed to record why a self-certification mortgage was recommended rather than a cheaper full-status mortgage.
• 64% of the files reviewed did not adequately document why the recommended product was the most appropriate taking into account the stated needs and preferences of the customer.

When making a recommendation to a customer, one of the key requirements to meet the suitability requirements of MCOB is for mortgage intermediaries to satisfy themselves that they have reasonable grounds to conclude that a consumer can afford to enter into the regulated mortgage contract. Advisers need to consider what facts relating to income, expenditure and other resources they might reasonably expect to be aware about different types of customer (e.g. employed, self-employed), and make a record of those facts. If an adviser fails to address affordability during its advised sales process then it is unlikely the adviser will be able to demonstrate that his recommendation is suitable:

• 42% of files reviewed were for employed customers and in 83% of these cases there was either no reason, or it was unclear if there was a reason, why the customer could not verify their income.
• 58% of the files reviewed involved self-employed customers. 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.
• 47% of the files reviewed did not adequately demonstrate the adviser had appropriately assessed affordability.
• The mystery shopping results show that only in the minority of cases did brokers probe into the customer’s expenditure. It is for firms to decide what information they need to meet the suitability requirement and how to obtain that information. Methods used that we considered acceptable include asking questions about: fixed monthly commitments (such as personal loans); variable household outgoings; and monthly expenditure (such as the amount of council tax being paid).

Examples of good practice

Our guidance states that advisers can generally rely on information the customer provides unless they have reason to doubt it on a common-sense view. Some advisers incorporate ways of checking the plausibility of a customer’s stated income into their procedures, such as checking bank statements or old payslips. As a minimum, some firms check a customer’s stated employer or self-employed status. In other words, they build into the sales process a prompt to consider the plausibility of information provided during the collection of customer information. Other advisers carry out in-depth calculations to assess income against outgoings and document these calculations on the customer file in the form of either a fact-find style document or a separate income and expenditure table.

Generally, advisers who use such procedures are also able to demonstrate that they satisfy our broader affordability requirements.

See Detailed feedback for firms on our self-certification research for further information.