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FSA/PN/121/2005
14 November 2005

• Lenders responding to messages from the FSA and strengthening systems and controls on self-certification mortgages
• No systematic fraud found by brokers relating to income inflation
• Significant failings found relating to affordability and suitability checks by brokers

The Financial Services Authority (FSA) today reported a mixed result following the completion of its research and mystery shopping work on self-certification mortgages.

The FSA welcomed the improvements made by lenders in the way they operate their self-certification mortgage business since the FSA issued a "Good Practice Guide" in February 2004.

The review work found that in general lenders have strengthened systems and controls leading to increased detection rates for fraudulent applications; made improvements in the quality of information transferred to underwriting departments; and improved identification of staff training needs for self-certification business. Additionally a number of lenders have had to take specific corrective action as a result of FSA supervisory work.

Clive Briault, FSA Managing Director of Retail Markets, said:

"We welcome the improvements made by lenders in the area of self-certification. But in the light of competitive pressures, tighter margins and rising arrears levels, we expect lenders to remain vigilant and to ensure that their systems and controls are regularly reviewed."

The FSA also reviewed sales and advice on self-certification mortgages by small brokers. Mystery shopping of 41 intermediaries found that there had been no systematic fraud regarding inflation of income to obtain a larger mortgage. However three firms were prepared to discuss with clients how they could inflate their salary in this way and we have followed this up with the firms concerned.

In supervisory visits the FSA found that in 47% of 249 cases reviewed the firm was unable to demonstrate that it had appropriately assessed affordability. And in 36% of cases no reason was given, or the reasoning was unclear, as to why a self-certification mortgage had been recommended.

Clive Briault said:

"The findings on sales and advice from brokers show significant weaknesses which are disappointing. Further work needs to be done not only on affordability and suitability checks but also on the record keeping of the advice given. But it is encouraging that we have found no evidence to suggest that salary inflation is widespread or systematic within the broker industry."

"We will be working with the firms reviewed and today are publishing a summary highlighting examples of good and poor practice, designed to help intermediaries to understand and meet with our requirements."

Notes to editors

1. Self-certified mortgages cater for people who may be self-employed or employed and are unable to prove their income.
2. The review into the self-certification operations of lenders was conducted using questionnaires completed by ten lenders who account for around half of the current total UK residential mortgage market.
3. The review into lenders operations also investigated non-verified prime lending. Again, improvements in systems and controls were reported in this area of business. Full results can be found on the FSA website: Results of thematic work [PDF]
4. The review into brokers focused on 39 small firms and looked at 249 cases. This was backed up with mystery shopping of 41 intermediary firms. We have also taken into account other project work conducted this year, for example on sub-prime mortgages.
5. Information for mortgage intermediaries on our self-certification research is available on the FSA website.
6. The FSA regulates the financial services industry and has four objectives under the Financial Services and Markets Act 2000: maintaining market confidence; promoting public understanding of the financial system; securing the appropriate degree of protection for consumers; and fighting financial crime.
7. The FSA aims to promote efficient, orderly and fair markets, help retail consumers achieve a fair deal and improve its business capability and effectiveness.