Mortgage Regulation: The Story so Far

1. Mortgage Regulation: The Story so Far 4 October 2005 Charles Woods, Manager, Mortgage and Credit Unions Department, Small Firms Division

2. Introduction • Background • Supervision priorities for 2005/06 • Early results of thematic work • Our current focus

3. Background • Data and market intelligence driven • Select higher risk issues, or those common to many firms • Determine outcome and follow up action • We will also deal with problems in individual firms (crystalised risk)

4. Supervision priorities for 2005/06 • Policing the perimeter • Follow up authorisation issues • Disclosure documentation e.g. IDD and KFIs • Financial promotions • Lifetime Mortgages • Sales practices for selected products • eg: sub prime, self cert • Treating Customers Fairly • Submission of data to FSA

5. First impressions • Industry has adapted to statutory regulation • Some business models have not been economic • Firms keen to learn and raise standards • Knowledge of requirements is patchy • Some teething problems • Many examples of good practices • Record keeping standards should be higher • We have taken action against some higher risk firms

6. Perimeter issues Work undertaken • Contacted 600 firms and visited 450 Key findings • Nearly all firms visited aware of regulations and operating legally • Mortgage industry is largely self regulating as FSA number required to do business • Some confusion over what an introducer can do • Please keep us informed

7. Disclosure documentation Work undertaken • Q1 2005 surveyed 500 firms and reviewed mortgage lenders and intermediaries documentation • Q2 2005 Mystery Shopping exercise undertaken • Industry has made considerable efforts • But widespread misunderstanding and inaccuracies

8. Disclosure documentation key findings • IDDs – 80% of firms had 5 or more errors • Departure from prescribed format and text • Inclusion of additional information • Lack of clarity regarding fees, commissions and charges • Although errors may be minor, taken together they undermine purpose of the documents • Less is more – 50% of firms produced KFIs of 5 pages or fewer • Mystery shopping - 28% of firms failed to provide an IDD or KFI • Firms need to review their documentation

9. Financial Promotions Work undertaken • Thematic work and review of individual promotions • Visits to look at systems and controls Key findings • Prominence and small print • No APR or inaccurate calculation • Absence of, or wrong, risk warnings • No mention of fees, where required • Incorrect terminology e.g. mortgage indemnity guarantee • Check your marketing, use guidance on FSA website www.fsa.gov.uk/smallfirms

10. Lifetime Mortgages Work undertaken • 42 mystery shops, visits and desk-based research Key findings • Poor Know your Customer (KYC) • Insufficient information given to consumers • FSA concerned that customers borrowing at 7% and reinvesting at 3.5% • Not ‘toxic’ product but we will do further work • Ensure advisers are giving appropriate advice

11. Sub prime and Debt consolidation Work undertaken • Visited 31 firms, 210 files reviewed Key findings • 60% of cases insufficient info obtained to ensure suitability • 80% of cases failed to show how product met customer’s needs and circumstances • 67% of cases failed to take account of other factors in debt consolidation cases • 58% of firms aiming to review a sub-prime product once credit rating improved • 65% of firms issuing suitability letters

12. Sub prime and Debt consolidation • Review record keeping processes • Use fact find • Complete checklist to demonstrate additional considerations

13. Next steps for you • Please keep us informed • Firms need to review their documentation • Check your marketing, use guidance on FSA website • Ensure advisers are giving appropriate advice • Review record keeping processes • Use a fact find • Complete checklist to demonstrate additional considerations

14. Our current focus • Quality and suitability of advice • Sales practices for selected products • self cert • Submission of data to the FSA • The role of introducers • Further work on lifetime mortgages • Further work on disclosure documentation

15. Summary • FSA has clear priorities • Firms are adapting to statutory regulation • Most firms want to learn and raise standards • New regulations not understood by all • Firms should review their own procedures • Assistance is available, esp website • But we will act against wilfully non-compliant firms