Client Briefing: Compliance, Conduct and Risk Bulletin May 2015

A recent article by Ray Boulger, senior technical manager at John Charcol has suggested that the Financial Conduct Authority has let older borrowers down by failing to persuade mainstream lenders to cater for people approaching retirement.

Boulger states that he regards it as regulatory failure as the FCA has failed to convince lenders that the Mortgage Market Review (MMR) does not prevent lending to older borrowers as long as affordability can be proved.

Boulger questioned the logic of not lending to older borrowers generally, as he said: "If you can prove your income it does seem like nonsense”.

"If the person dies what's going to happen? The executors will either sell the property or there will be a delay for a few months before the mortgage is repaid”.

Find out more: Mortgage Introducer - FCA has failed older borrowers

The Financial Ombudsman Service (FOS) has upheld a complaint against HSBC for unfairly rejecting a mortgage application on the grounds of age.  This is the first case of its kind.

The Bank said it was entitled to apply a maximum age policy and that it did so to mitigate the reputational risk of allowing customers to borrow into retirement.

The FOS has said that HSBC’s risk assessment was “flawed” and “inadequate” and needed to consider individual circumstances as opposed to untested assumptions and stereotypes in respect of age.

Lenders must look at the individual circumstances of each borrower in order to treat customers fairly.

The FCA has warned that banks risk scrutiny of the efficacy of their compliance procedures as a result of their practices of excluding entire categories of customers from their services because of perceived money laundering risks.

The regulator said that money transfer services; charities; and fintech companies have found it difficult to access financial services because they are seen as higher risk.

The FCA has stated that banks should use “judgement and common sense” to ensure that their anti-money laundering compliance procedures did not create consumer protection or competition issues.

Although FCA regulations prevent firms from entering business relationships if the firm does not believe it can manage the associated money-laundering risk, it is opposed to dealing generically with whole categories of customer.

The FCA accepts that each bank or firm will have to make decisions based on commercial factors, but expects firms to recognise that the risks associated across a single within a single broad category of customer vary greatly. It has also indicated that failure to recognise this point may result in enforcement action.

Find out more:  Out law- FCA effective anti-money laundering strategies should not include 'wholesale derisking'

Recent restructuring has seen the FCA separate its authorisations and supervision arms to retain sector focus as part of structural changes to increase flexibility and evolve its supervisory model.

The changes are designed to allow the FCA to maintain a sustainable model of regulation for the 73,000 firms it now supervises, and adapt to already stretched resources in supervision.

It is anticipated that the FCA will re-evaluate in the coming months how it classifies firms; how to take a sectoral approach to supervision of large firm groups; and how it can make more use of cross-firm work for large and small firms.

Find out more: Financial Conduct Authority (FCA) sets out sustainable model of regulation

Figures released by Key Retirement Solutions, a UK firm specialising in wealth management for retirees, show an increasing trend among retired homeowners to use their property wealth to clear debts, including loans, credit cards and mortgages.

The first three months of 2015 show continuing strong growth with total property wealth released rising to nearly £341 million from £330 million last year. The average amount released to boost retirement income increased nearly nine per cent to £66,730 in the three months compared with £61,200 previously.

The figures also show a shift in the use of wealth. Around 31% of customers – compared with just 26% in 2014 – used some or all of the money they released to pay off unsecured debts such as credit cards or loans. 23% used some or all of their money to clear outstanding mortgages. This is an increase from 21% in 2014.

The numbers show that a large and increasing number of retired people turning to equity release are doing so to address unmanageable debts persisting after retirement.

Find out more: Pensioners target debt repayment as equity release grows

Deloitte has recently published a paper detailing MI reporting principles to be followed in order to achieve strong and effective conduct risk.

Among these principles, MI reporting should be outcomes-focused, identifying what a good outcome would be for the target end client, as well as the inherent risks of the product or service. MI should also be holistic and analysed in different ways to identify trends e.g. increases in complaints over time for a product; trends across products and business lines e.g. looking at breaches of conflicts of interest policies in different parts of the business and looking at a range of indicators from to identify patterns. MI reports should look forward and flag up potential and emerging conduct risks in addition to crystallised risks.

Other principles identified in the paper are that MI reporting should be linked to strategy, culture and risk management framework; efficient and proportionate; accurate and timely; measured and reported on at an appropriate frequency; comprehensible and traceable; supportive of open communication and challenge and acted upon and recorded.

Find out more: Management information for conduct risk

On 21 March 2016, second charge mortgages are to be transferred from the consumer credit regime to the mortgage regime.

The regime introduces an EU-wide framework of conduct rules for mortgage firms selling both first and second charge mortgages, closely aligned with the UK’s existing mortgage regulation, and is designed to create a mortgage credit market with a high level of consumer protection.

The main provisions include new disclosure requirements, principle based rules and standards for the performance of services (conduct of business obligations, competence and knowledge requirements for staff), a consumer creditworthiness assessment obligation on creditors, provisions on early repayment, provisions on foreign currency loans (including a currency risk warning), and regulation of consumer buy-to-let lending.

The UK Government has decided that second charge mortgage regulation should move from the FCA’s consumer credit regime into the mortgage regime as part of implementing the directive.

Lenders, administrators and intermediaries wishing to carry out second charge mortgage business after this date will therefore have to be authorised and hold the correct mortgage permissions.

The Financial Conduct Authority (‘FCA’) have announced this month that they are now open to accepting applications from second charge firms applying for regulated mortgage permissions.

The FCA now has two different systems in place for allowing second charge firms to apply for the relevant permissions. Firms that are solely involved with second charge mortgages and no other consumer credit business must apply on the ‘Getting Authorised’ section of the FCAs website. Firms involved in wider consumer credit activities are to apply for authorisation using the FCAs ‘Connect’ system. 

Find out more: Financial Conduct Authority Policy Statement