A warning sign

It is always easy to kick a market when it’s down and the non-conforming sector has been covered in more than its fair share of footprints over the years as regulators and commentators have criticised its ability to genuinely serve borrowers.

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However, despite the fact that the latest review into the market by the watchdogs at Canary Wharf unearthed some significant problems, many feel these are only skin deep and do not reflect the wider market as a whole. Certainly there is a feeling that significant improvements have been made, especially over the last five years, and that the underlying potential for serious consumer detriment is as low as it has ever been.

So what are the problems, how serious are they and more importantly what are firms doing to eradicate them?

Record-keeping

The biggest criticism of the intermediary sector is one it has been dealing with since the dawn of time. Record-keeping continues to be abysmal and the unfortunate thing is that, in the majority of cases, poor record-keeping is not an indication of poor advice.

However this does not excuse the fact that client information is not adequately kept up-to-date and explanations of the advice given are not well documented.

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The basic truth of the matter is that record-keeping is boring, tedious and time-consuming. It does not earn advisers money and there are more profitable ways to spend the day whether it be advising new clients, servicing ongoing cases or chasing up new business.

However firms must be aware that record-keeping is not optional. For firms seeking to be authorised by the Financial Services Authority (FSA), there is no box on the application, which states: ‘Tick here if you do not want to keep client records.’

Although this is an attitude that dates back to before regulation, it is not one which is acceptable in the market today, as James Cotton, mortgage specialist at broker London & Country, explains: “Record-keeping is an absolute fundamental and brokers need to keep things written down. If it isn’t written down, then ultimately it didn’t happen and this is a golden rule that firms must take on board. Otherwise people will simply assume the worst.”

Given that there are already enough people prepared to think the worst of the non-conforming market, making life easier for such detractors is not the correct option. Indeed, Cotton goes further and believes that if record-keeping was up to speed, many of the criticisms levelled at the market would disintegrate.

He believes that, fundamentally, intermediaries in the non-conforming market are doing a good job for clients. He comments: “You just wonder how much better the results would look if the record-keeping was better, as without it people simply assume the worst.”

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A motivating factor

The good news is that record-keeping is not a problem that is difficult to deal with or beyond any firm in the mortgage industry. The fact that the regulator is now taking enforcement action against those who refuse to keep their paperwork up to speed should also help act as motivation to others who have fallen behind.

The biggest challenge is getting firms working from a paper-based model to understand the importance of taking the time to introduce and learn how to use new systems. It is not going to be easy to persuade some practitioners of the need to invest in such a switch, but those who don’t are likely to pay a much higher price in the long run.

Indeed there seems to be no real choice for brokers on this issue if they want to be part of the mortgage landscape into the future. Certainly this is the lines along which Andy Frankish, managing director of Mortgage Talk, is thinking. He says: “Using an electronically based administrative system will be a fundamental change in strategy for some firms and it takes time to get used to, but it is a necessary thing to do if firms want to keep on top of things and be able to justify the advice they give.”

Smaller firms should also take the time to think on a more selfish basis and realise that as they evolve they are unlikely to realise their potential if they have not invested in the type of systems that help place their businesses on a solid footing.

Who wants to buy into a firm that has no idea of its clients or the advice it has given over the years? How can a business grow under such circumstances and why would anyone want to live in fear of the FSA coming to call? Surely things are difficult enough as they are?

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Although record-keeping has always been poor, the growing use of IT must improve matters as we move forward and under the threat of sanctioning from the FSA, even those firms who have been dragging their feet should improve their game in the months ahead.

In bringing record-keeping up to scratch, brokers will also be forced to make sure that they have carried out the appropriate levels of assessment when it comes to a client’s needs and their ability to pay the mortgage.

If a broker knows that the administration system they use will not let them past a certain point in the application until they have recorded such details, then it will simply become a matter of course to cover these things in client interviews.

It is now up to IT providers and brokers to make sure the systems they develop get better and better at forcing users to create full and accurate records and the more firms move to an electronically based environment the easier this will become.

Take pride in your work

Given how thinly stretched the FSA is when it comes to having foot soldiers on the ground, it is also becoming increasingly important for practitioners to take a pride in what they do and shine the light on those that fall short of the required standards.

This will benefit the industry as a whole and compliant firms at an individual level, as Frankish explains: “Most of the things we do to put systems and controls in place cost money, time and resource and so why should another firm get away with not doing the same? It annoys me if there is not a level playing field and these firms can spend more time doing things like advertising or winning new clients.”

This is something everybody would like to be doing, although not at the expense of being compliant, in Mortgage Talk’s case. Frankish says informing the FSA of these firms is not so much about whistle-blowing, but more about policing the industry and making sure it is seen as being as professional as possible.

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Consumer detriment

Despite the criticism, the FSA did not highlight any examples of significant consumer detriment, although to simply believe they have not occurred is not the attitude to take. However there is no reason to believe that the number of incidents in which consumers have seriously lost out on the back of poor broker advice or bad lender practice is large.

Alan Cleary, managing director of edeus, says improved competition in the market has reduced the opportunity for badly run lenders and brokers to take advantage of clients in the non-conforming sector.

As he says: “I think over the last five year, the competition created by the significant influx of new lenders has helped massively and the detriment to consumers is not as big as it might have been five years ago.”

Indeed, although Cleary is happy to accept that many practitioners are not getting things 100 per cent right, he says the encouraging fact is that they are only misfiring rather than completely malfunctioning.

“Competition in the lending and intermediary sectors have also benefited the consumer and so it is only a small minority of brokers and lenders that will be doing something that is truly detrimental to the consumer, although the review highlights the fact that a majority are not quite getting it right.”

Although the report criticised lenders for not taking sufficient care to ensure they were lending responsibly, not everyone feels that this is necessarily justified. Phil Rickards, head of sales at BM Solutions, says there are a number of initiatives in place which help protect borrowers and make sure the lender can justify its decisions. Indeed, he says each and every non-conforming mortgage is reviewed on an annual basis to ensure that it is suitable going forward.

However, not only are mortgages reviewed throughout their term, but also just after their inception. Rickards explains: “As part of our processes we instruct a customer care visit after completion and an external company will go and visit the client to make sure they understand the undertaking they have signed up to.”

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Whether this is something that is adopted more widely in the future remains to be seen, but certainly if the system is robust and does as Rickards suggests, it should go a long way to ruling out the possibility of clients taking on unaffordable mortgages.

Taking business seriously

Other lenders such as Platform seem to be taking their business equally as seriously and Toby Nelson, PR manager at Platform, says: “We have reasonability and affordability checks in place and a requirement to receive acceptable reasons for remortgages before an application can proceed.”

On a wider level, Nelson says the fact that the likes of Platform have signed up to cross industry groups such as the TCF Forum run by Frank Eve Consulting, shows a desire to get things right and create an environment in which information can be effectively shared not only between lenders, but also with their intermediary partners.

Certainly lenders cannot afford to take their eye off the ball when it comes to monitoring their business and ensuring that cases meet the criteria they have stipulated and that borrowers are getting decisions which are consistent. If there is any doubt as to how important this is, then one only needs to look West to the US and see how dangerous badly managed quality assurance can be.

The non-conforming market should take the research published by the FSA as a warning shot across its bow and accept that there are several issues that it needs to deal with.

It should also accept that in adopting new operational models and investing in IT there is a lot it can do to improve on some of the historical problems it has battled over the years.

Given the work and investment that many firms have made, there is likely to be a greater drive to force those unprepared to make the necessary changes out of the market. In combination with the other improvements, this will hopefully lead to more positive headlines in the future.

Firms still found wanting at that time will have run out of excuses.