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

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

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)

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

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

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

Disclosure documentation Work undertaken Q surveyed 500 firms and reviewed mortgage lenders and intermediaries documentation Q Mystery Shopping exercise undertaken Industry has made considerable efforts But widespread misunderstanding and inaccuracies

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

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

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 Lifetime Mortgages

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

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

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

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

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