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Industry in depth
Cover your back
7 April 2007
Paul Holden looks at the role of FSA enforcement and how brokers can stay in the regulator’s good books
If you listen carefully, you just might be able to hear a dull roar in the far off distance; this is the sound of the Financial Services Authority’s (FSA) own ‘Niagara Falls’. Most brokers seem content to float along in their canoe, without a paddle, let alone an outboard motor. However, every day the roar gets a little louder – eventually many brokers and their ‘canoes’ are going to plummet right over the edge.
A lot has been written about FSA enforcement, however, the chances are the majority of brokers are already acting in a highly compliant manner with the principles of ‘Treating Customers Fairly’ (TCF) as the bedrock of their businesses. The problem lies in that although the vast majority of brokers do operate in the correct manner, they invariably fail to keep adequate records. This leaves them open to accusation by the client or the FSA of not adhering to the rules, and because they cannot prove otherwise, they may well fall foul of FSA enforcement. If you’re unsure, the phrase ‘if it isn’t recorded, it didn’t happen’ could be applied.
From talking to brokers, I know that the majority believe the FSA will only take action against larger firms. This is hopeful at best. We are dealing with a government department and it doesn’t care whether you have been in the industry for 15 years and have hundreds of satisfied clients, it still has quotas and targets. You have to assume that if it can find fault with your business, it will.
Solutions
So now that we know what the problems are, let’s take a look at the solutions. The first and most obvious solution is to run your business in line with guidelines and TCF rules. The next key area is record-keeping.
To run a compliant and efficient office, you simply must have a back office system, and I’m afraid that doesn’t mean a filing cabinet. What is needed is a software system comprising a database, a diary system, a means of storing documents electronically, storing client factfind information and tracking the mortgage advice and application process, making notes against the client file, setting reminders and tasks for you and the staff that work with you.
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If you are selecting a back office system, ask yourself where you want the data to be stored – on your PC or server in the same way the sourcing systems are stored, or on a web-based system, where the server is owned and run by the software provider.
Good practice process
The following are the areas that I believe advisers should cover from the very outset, which is good practice if nothing else. On first contact with a new customer, give out your business card and Initial Disclosure Document. If meeting the customer face-to-face, ask the customer to sign confirming they have received the IDD. If the first contact is by telephone, send the IDD by e-mail and save the sent e-mail to your lead file in your case management software. If you give any advice over the telephone, install call recording from just £100 will prove what was said by you and by your prospect.
When you meet your client, complete a full factfind, scan a copy of their proof of identity and residence and save all of these to their file in the case management software. Ask your client to provide a copy of their payslips, or if self-employed, their company accounts. Take scanned copies of the client’s bank statements and all other financial documents, and save them in their client file.
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When sourcing the most suitable product for your client, keep electronic copies of all sourcing summaries, and when you produce a Key Facts Illustration, keep a copy in the client’s file in your case manager.
Ask your clients about options to protect the mortgage and their income and if you give your advice verbally, always follow up with a letter. If you give advice on the telephone, or even if you just speak to your client on the telephone why not record the call?
All correspondence, sent to any party related to a mortgage application, whether successful or not, should be generated from your case manager. This avoids random documents being produced on one or more PCs and being over-typed, not saved or lost. Save every e-mail that you send and receive to the client file. Scan every piece of incoming post that relates to the enquiry, advice process, application or legal process.
When the property is surveyed, ask for a copy of the surveyor’s report, read it, check it and scan it to the case manager. When the offer is received, read it, check it, and scan it to the client file. At this point pick up the telephone, go through the mortgage offer with the client, explain the features of the product, and explain the restrictions, the tie ins, and the penalties. Ask your client whether they are happy with the offer – do they understand the terms and conditions, is there anything that they don’t understand or is there anything that they are not happy with? Record the call.
Contact the solicitor and check they have a copy of the offer. If the mortgage is for a purchase, ask them when they anticipate the exchange of contracts, and for a remortgage when will completion be scheduled for. If you are due a fee for the work you have done, ask the solicitor when your fee will be paid and record the call.
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Ring the estate agent – the vendor’s and purchaser’s, if you have the details – inform them that the mortgage is offered, ask them if there is any other information that is required, give your details, and record the call.
Backing it up
Now you have the entire transaction logged and recorded in electronic format, you must back up your case management software. I suggest you use an off-site back up facility. Don’t use tapes or external hard drives; not because they don’t work – they do, but because you will forget to back up, or be off sick or be too busy. You will forget, at some stage your PC, laptop or hard drive will fail, be stolen, or have coffee spilt on it. Your business will struggle, it may even fold, and the FSA may hold you to task for lack of data back up. Off-site back up costs £125 per year for 4,000 MBs of storage. Offsite back up is not dissimilar to the Terminator – it is programmed for one purpose only, it does not fail, it does not take the afternoon off, it does not forget. Every day you’ll receive an e-mail telling that the back up was successful. Nothing is left to chance.
Looking at lifetime
For brokers who have chosen to give advice on equity release or lifetime mortgages, there is one final area you must consider. By the very nature of advising elderly clients, certain aspects of the advice have an enormous bearing on whether it is appropriate or not. These details may be obvious to the adviser, and hopefully to the client as well, at least during the interview. However, will the detail be so easy to recall three, five or more years later? If an elderly client releases equity and enjoys their twilight years, it’s only when they pass on that the beneficiaries of the estate realise the money they are due to inherit is reduced. It’s not hard to believe that they will ask probing questions but if you’ve confirmed all advice in writing, copy the advice and report to the client’s solicitor, ask the solicitor to be present at the presentation meeting, and record the interview, you’ll have your back covered.
I may seem like a bit of a talisman for call recording and the use of technology throughout the sales process, but I make no apology for this. The FSA won’t shy away from investigating any firm and if you want to ensure you’re upholding the letter and spirit of TCF, this attention to storing evidence is a good place to start.
Kay Leslie – Network Services Director, Pink Home Loans
The UK mortgage industry has been regulated by the Financial Services Authority (FSA) for well over 2 years, and if the market was in any doubt, they definitely mean business. Following the regulator’s recent review of 250 firms’ advice processes, they found that several had ‘failed’ and would therefore be facing ‘enforcement’ action. Numerous fines have also been issued over recent months, to the likes of Nationwide Building Society, HCML, and GE Capital. And furthermore, the recent launch of a ‘The Financial Crime and Intelligence Division’, is a clear indication to brokers and lenders, as to the repercussions of mortgage fraud.
So, what can be done to stay in the ‘good books’ of the FSA? Well, depending on whether the firms’ members are directed authorised (DA) with the FSA, or are appointed representatives (ARs) of a network, they will clearly have an influence on the approach that they take to ‘cover their backs’.
ARs must work closely with their principal to ensure that they operate within FSA guidelines and principles. Whilst this doesn’t take the stress out of the reality of everyday life in a regulated environment, it does mean that ultimately the responsibility lies with their principal. Networks should be constantly supporting their ARs and providing them with information and guidance so that they stay fully informed and remain compliant.
The harsh reality for directly authorised intermediaries is lots of reading, stress and responsibility. And the fact remains that the FSA will come knocking and if you are not ready when they do, the consequences could lead to enforcement action.
That said, being directly authorised doesn’t have to be all doom and gloom. One of the benefits for firms which have chosen this route, is that they can also choose which direction they want to take in as far as how they interpret the FSA’s principles based approach to regulation. Depending on the firm’s skills and resource levels, this could either work to their favour and mean that they develop their own unique selling points and sales processes, or this could work against them if they do not meet the FSA’s expectations.
For those DA firms with limited resources, outsourcing some of this compliance activity could be an option. However, firms should take great care when selecting a compliance support provider to ensure that they have a true understanding of how the firm operates and its requirements. Ultimately, the firm will still take full responsibility for all compliance related activity, even if they outsource some of it.
Whatever the status of the firm, keeping up to date with the latest FSA papers and deadlines can be tough, not to mention staying on top of developments with HIPs, Consumer Credit and the Information Commission. At times it must seem daunting, particularly when the priority for all good brokers has to be servicing their clients and making money to keep their businesses thriving. Signing up to daily news bulletins and utilising industry websites, including AMI’s and the FSA’s can be useful aides. The FSA also hold regular, regional training events, which are free and there is always the option of booking onto one of the FSA training programs, which although chargeable, will be less costly in time and money than facing enforcement action.