Download Paradigm Mortgage Target – Summer 2010

January 2013 - Target (Printer Friendly Version)
Editorial
Happy New Year and welcome to a brave new world! In this first issue under RDR rules we kick start
the year with news of four, RDR related FSA thematic reviews, the first of which will commence at
the end of this month.
We also include an article regarding how non CF30 advisers can only advise on protection under
ICOBS rules, cover off the recent FSA finalised guidance on incentive schemes, provide a summary
from the FSA’s recent MMR workshop and supply you with details of recent changes to the
Paradigm Academy pages on the Paradigm website and details of Paradigm assistance with a firm’s
risk plan.
For queries regarding Target, please contact: [email protected]
Contents
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FSA to conduct four RDR Thematic Reviews
Advising under ICOBS – Important information for non CF30 advisers
FSA Finalised Guidance – Incentive Schemes & mis-selling
Paradigm Risk Plan assistance
Paradigm Academy
FSA’s MMR Workshop
FSA TO CONDUCT FOUR RDR THEMATIC REVIEWS
Firms should be aware that the retail distribution review (RDR) deadline of 31 st December 2012 was the
beginning, not the end, of a long road to reforming financial advice.
Now that we are through the implementation period the regulatory work now starts in assessing how firms
are adopting the new RDR requirements. To this end the FSA has this month announced FOUR thematic
reviews that will take place in 2013.
The four reviews will focus on the following:
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Professionalism – Are advisers correctly qualified and registered. Is correct CPD being undertaken
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charging structures – Do they meet the new requirements and TCF
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description of advice – Is “independent” or “restricted” being described correctly to clients
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non-advised sales – are ‘non-advised’ sales being used as a means to continue to receive
commission on legacy business or to circumvent the need to be QCF Level 4 qualified
Starting with professionalism at the end of January, the reviews will be conducted in three cycles over the
course of 2013 using a different selection of firms for each cycle. The regulator will then publish research
findings and a formal review in 2014. However, the regulator will share its findings and publish good
practice at the end of each cycle during the course of this year.
The information obtained from the thematic reviews will be obtained using surveys, firm visits, file reviews
and, where necessary, mystery shopper exercises.
The regulator has made it clear that advisers must continually check their proposition to ensure that it
delivers the right outcome for clients with the FSA using consumer outcomes as the benchmark by which the
FSA will judge the success or failure of the RDR.
Paradigm will be providing a summary of the FSA’s findings at the end of each cycle and we will also be
discussing this area as part of our Best Practice Workshops which we will be running in May and November
of this year.
ADVISING UNDER ICOBS – IMPORTANT INFORMATION FOR NON CF30 ADVISERS & MORTGAGE
ADVISERS
Following the FSA requirement to deauthorise CF30 advisers who did not meet the 31st December 2012
deadline for QCF Level 4 qualification, some firms have repositioned these advisers as protection advisers
until they achieve the required level of qualification in order to reapply for CF30 status.
For those firms to which this is applicable, we would draw your attention to the following:
As a means of maintaining a clean method of providing advice and utilising common systems and controls in
the advice process many partner firms elect to write pure protection business by using Conduct of Business
Rules (COBS) rather than Insurance Conduct of Business Rules (ICOBS) rules and treating the business as
if it has the same requirements as an investment, for example; using a Client Agreement and a Fact Find to
establish need followed by a suitability report.
Examples of Pure protection policies include Term Assurance, Critical Illness, Income Protection policies,
Accident, Sickness and unemployment benefit and Payment Protection Insurance.
When a firm elects to write pure protection business in this manner, the election to do so should have clearly
been documented in the firms Business and Compliance plan or other suitable report.
The election has the effect of making the administration and suitability requirements of the pure protection
contract the same as a life policy, which is a designated investment, and therefore subject to the majority of
COBS rules. The opportunity to make this election has been very useful for firms as is it means clients only
receive a single suitability report rather than a “suitability report” for recommendations which are designated
investments and then a separate “demands and needs” statement for the protection side, thus reducing
client confusion.
We believe that a number of firms have already made this election, and will now have to make a number of
changes to their procedures as we show you below.
With the advent of RDR, retail investment products (RIPs) and the requirement for an adviser to have
a level 4 qualification to continue giving investment advice on RIPs has created an anomaly for
those advisers who are not level 4 qualified but want to advise and document suitability using COBS
election for pure protection policies.
Paradigm believes it should draw to your attention to this because treating a pure protection policy in this
way (i.e.) writing them under COBS rules effectively makes them a RIP for administration and regulatory
purposes and any adviser who is either not authorised or deregistered as CF30 cannot advise the clients
using this COBS method as it would break the rules regarding qualifications and advice.
We conclude that if an adviser is not a level 4 CF30 Investment Adviser, Pure Protection should now be
advised under the ICOBS regime only.
In addition, if a mortgage adviser is not authorised for investments, the only course of action is to
write protection under ICOBS. From experience we see most mortgage firms use the exchange
and download the protection demands and needs from that, confirming then those demands and
needs in the mortgage suitability which in most cases, like mortgage brain, has a default section
on this.
Advisers who are level 4 qualified can still use COBS.
Summary
An adviser who has reached a level 4 qualification can still elect to write pure protection policies under
COBS rules. This election should be noted in the firm’s Business & Compliance plan or other suitable report.
For any adviser not meeting the level 4 qualification, they may not now continue to elect to write pure
protection policies under COBS and write such policies under ICOBS.
Please see a summary of the changes required
Advice process
COBS
A level 4 qualified adviser may
elect to write pure protection
cases under these rules
Disclosure
Client Agreement
Fact Find
The firms current Fact Find
Research
As per Client Agreement
Disclosure
Use a Suitability Report Letter
Suitability Report
ICOBS
An adviser who has not
reached level 4 qualification
must make the following
changes to their advice process
for pure protection cases
An Insurance Disclosure
Document (IDD) should be used;
please see Chapter 4 of the
Paradigm compliance manual for
links to the “build your own”
section of the FSA website.
(Paradigm also provide a suite of
disclosure material to accompany
an IDD within Chapter 4)
The adviser may continue to use
the Fact Find or a “Demands and
Needs Statement” (see Chapter
3C appendix 6)
As per IDD
The adviser must now issue a
Demands and Needs Suitability
Report (please see Chapter 3C
appendix 6)
FSA FINALISED GUIDANCE – INCENTIVE SCHEMES AND MIS-SELLING
The Financial Services Authority (FSA) has published final guidance that will help financial firms avoid
creating and operating incentives schemes that drive mis-selling.
In September 2012 the FSA published a review of sales incentives and asked for feedback on proposed
guidance. At the same time Paradigm issued Target Risk Awareness 6 which summarised the review and
provided good and poor practice examples.
The guidance remains largely unchanged but the FSA has clarified the wording in some areas and provided
further examples of good and bad practice. The guidance applies to all firms that deal with consumers and
have sales staff or advisers who are part of an incentive scheme. The finalised guidance can be accessed
here:
http://www.fsa.gov.uk/library/policy/final_guides/2013/fg1301
Many responses to the original review raised the issue of how firms use performance management and
target setting; some saw this as more likely to increase mis-selling than financial incentives. The guidance
makes it clear that firms need to manage these risks as well, and the FSA is considering what additional
work it will undertake in this area.
Martin Wheatley, managing director of the FSA and CEO-designate of the Financial Conduct Authority
(FCA), said:
“Finalising this guidance is important because it gives financial firms a clear idea of what we expect from
them and how they should manage their incentive schemes. It also marks a key step in changing the culture
of viewing consumers as a sales target to somebody to serve. I have been encouraged by a number of
firms that have already overhauled their reward structures, but I want to see others following suit. When I
speak to the bosses of the banks they tell me they want to change, and this is good, but real cultural change
will only happen if attitudes shift throughout an organisation from the CEO to the frontline sales personnel.”
The FSA is planning to widen its review of sales incentives and will review how firms are acting on its
guidance. The FSA will be assessing high street banks and other firms in addition to the 22 firms that were
originally assessed.
Martin Wheatley added:
If they have not done so already, firms need to look at this guidance now, work out how it applies to them
and what they should do differently. We remain open-minded about whether or not new rules are needed to
ensure consumers get a fair deal, but the answer to that question will ultimately come from the industry’s
response to this piece of work.”
The review published in September 2012, which encompassed banks, building societies, insurers, and
investment firms, uncovered a range of serious failings, such as:
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most incentive schemes were likely to drive people to mis-sell and these risks were not being
properly managed;
firms failing to identify how incentive schemes might encourage staff to mis-sell, suggesting they
had not properly thought about the risks or simply turned a blind eye to them;
firms failing to understand their own incentive schemes because they were so complex, therefore
making it harder to control them;
firms relying too much on routine monitoring of staff rather than taking account of the specific
features of their incentive schemes;
sales managers with clear conflicts of interests, such as a responsibility to manage the conduct of
sales staff whilst themselves able to earn a bonus if their team made more sales; and
Firms not doing enough to control the risk of mis-selling in face to face situations.
So serious were the failings at one firm that it was referred to the FSA’s enforcement division.
PARADIGM RISK PLAN ASSISTANCE
Some Paradigm firms have been asked to produce a risk plan when buying or renewing Professional
Indemnity Insurance or when applying for FSA authorisation.
Paradigm would comment that there is no specific rule that requires firms to have such a document, and we
believe that business owners and senior managers should hold regular meetings to discuss risks within the
business. Minutes of these meetings should also be held.
However, if firms do feel that they need/ want a Risk plan, there are many opinions about what this should
look like. The FSA version seen by Paradigm is simply a list of risks identified by the firm with an action to be
taken by the firm to mitigate that risk.
In order to assist firms, Paradigm has provided a Risk Plan Template in Chapter 5 (appendix 15 of the
Compliance Manual) for those firms who require it.
Please contact your Paradigm Business Consultant should you require assistance in completing / adapting
the plan for your firm’s individual needs.
NEW LOOK TO PARADIGM ACADEMY WEB PAGES
We have revised, refreshed and updated the “Academy” pages within our website. Our revised pages now
contain links to learning and testing material for:
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Complaints Training & Assessment
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Money Laundering Training & Assessment
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The compliance requirements around the use of a WRAP
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The compliance requirements around the use of Structured Capital at Risk Products (SCARPS)
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The compliance requirements around the use of Unregulated Collective Investments (UCIS)
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Staff Declarations
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This new material will be kept up to date for firms to use with adviser and administration staff.
We retain our guidance and links to the following CII exams;
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CF, 1, 6 and 8
J09 Certificate in Para-planning
J10 Certificate in Discretionary Management
J11 WRAP and Platform Services
ER (Equity Release)
GR (Group Risk)
And we still provide material for the R01 and R02 examinations.
We believe many firms will now turn their attention to attaining Chartered Status and our pages cover the
routes available via the CII and IFS.
Please browse and see what material is of interest to you specifically. Our links to key websites are also
retained, for example JP Morgan links to their Academy, Vanguard with links to learning and study material
for Exchange Traded Funds (ETF).
We hope the new look site will be of help you and please don’t hesitate to speak to your Business
Consultant or myself directly should you have any queries or suggestions on what further material you would
like us to provide for you.
Graeme Stewart
Principal Consultant
[email protected]
07825 613004
FSA MMR WORKSHOP
Paradigm recently attended the FSA’s Mortgage Market Review (MMR) Workshop and, whilst the MMR
does not take effect until 2014, we thought that firms may appreciate a high level, bullet point type summary
of the FSA’s thoughts around the area of mortgage advice.
MMR Core Objectives:
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To create a sustainable market place
To create a market place that is flexible for its Customers and has their best interests at its core.
MMR background:After a 18mth consultation period involving Key Stakeholders the rules for the Mortgage Market Review
were published in October 2012.
The MMR will become policy in April 2014. Until then MCOB rules will still apply.
One exception to this is MCOB 11.8.1E which is the rule covering Borrowers trapped in mortgage deals by
previous legislation or Lender’s underwriting criteria commonly termed as “Mortgage Prisoners” This rule
will be available to follow immediately for Lenders.
Key Areas:
Advice and Execution only
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Sales Standards and Disclosure
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Affordability and Interest only
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High Net Worth, Business lending and Professional Persons
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Niche Markets – Equity Release, House Purchase Schemes, Sales and Rent Back
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Bridging Loans
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Contract Variations and Transitional arrangements
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Mortgage Credit Directive – EU Directive
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Next Steps and Action Plans
Advice and Execution Only
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The Non-Advised Process has now been removed and Brokers/Retail Banks will now not be able to
offer a Non-Advised Sale.
Advice must be given where there is open dialogue with a Client which includes; face to face,
telephone and email discussions.
Brokers/Banks can still give out general information and collect general information from Clients
without steering them to a particular product
Know Your Client and due diligence is still applicable within the Sales process
All Mortgage Sellers will need to be Level 3 or have equivalent CeMAP qualifications even if they
are dealing with “execution only” transactions. Existing Brokers have until 2014 to get the relevant
qualifications. There are no immediate plans to introduce further qualifications for Mortgage
Advisors before 2014 however this will be reviewed post implementation of the MMR.
Staff who are not qualified will need Supervision within their place of work. Owners of Financial
Businesses will need to ensure there are sufficient Supervisory personnel in their practices to
support this.
Execution only
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Applicable only if no spoken or interactive dialogue has taken place
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High Net worth, Business loans and Mortgage Professionals can opt for execution only but certain
standards apply – please see later notes
Clients have to elect to proceed on an execution only basis
If the advice given by a Mortgage Seller is rejected by a Client then they can opt to proceed on an
execution only basis. The case will need to be clearly and appropriately documented to show that
this process has happened. An example of this is a Mortgage Seller recommends a 25yr term for a
product but the Client rejects this in favour of a 20yr term.
Product switches or variation on an existing deal can also be treated as execution only as long as
there is no further borrowing.
Execution only is NOT available for vulnerable clients and these are classed as; clients
consolidating debts, Equity Release Clients, Sales and Rent Back and Right To Buy
Additionally there are standards that need to be met when conducting business on an execution
only basis. For example a firm will need to have a policy that outlines how much business they
intend to do on an execution only basis and a relevant action plan if this is exceeded. KPI ‘s can be
used to track and trigger relevant action plans.
Sales Standards
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Firms must act in the best interests of the Customer at all times and this also applies to execution
only clients
Must assess that the Clients personal and financial status meets the Lenders criteria and eligibility
for a mortgage loan
MMR strengthens the obligation on Brokers to consider the appropriateness of a product for a
client.
Further Advance disclosure must be made – Re-Mortgaging versus and existing lender product
must be considered but the FSA are not asking Brokers to compare direct deals within these
guidelines.
Positive Selection by the Client to roll fees and charges into the loan – this must not happen
automatically, customers must elect to do this and this must be clearly documented to show this
has happened and the Client understands the consequences of adding fees to their loan. Ticking a
box is no longer acceptable. Suitability reports can discuss why fees are rolled into the loan and
that the client accepts and understands the consequences of this but this is too late after the event
and the fact find is considered a more appropriate place to document the Client’s understanding.
Client to sign the fact find to agree their understanding.
All relevant records must be kept for 3yrs
Disclosure
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Messages on disclosure to Clients must be “clear and prominent”
Brokers must discuss which product range is offered and the use of Independent or restricted is no
longer required. For example A broker can say that they offer a wide range of products from the
mortgage markets but they do not advise on product that are available direct from Lenders.
Brokers must discuss how they are remunerated by fees or commissions or a mixture of both and
also include if these are refunded at any stage.
Firms can still use an IDD to present disclosure but it is no longer a requirement
KFI trigger points reduced to the following:o Before the Client submits an application
o When advice takes place
o When a Client requests a KFI
o When proceeding on an execution only basis
KFI no longer needs to be given out if giving general information on products for a Client to
compare. If a Broker is directing a Client to a specific product and giving advice then a KFI will
need to be distributed.
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If a product is withdrawn and a new KFI is required but not available to produce or a KFI is not
correct due to limitations of a Lender’s system then as long as a Broker has documented that
he/she has made reasonable attempts to obtain a correct and up to date KFI on the file then this is
acceptable.
New IDD templates will be available from 2014
Affordability/Interest only
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Lenders are now responsible for proving affordability of a loan.
Intermediaries must check that their Clients meet the eligibility criteria given by that Lender
There will be no more fast track or self-certification processes
Expenditure will take the form of 3 types and are detailed in the FSA handbook. These will be
committed expenditure such as loans, credit card, and child support. Basic essential expenditure
such as utility bills, council tax, insurance. Basic quality of living costs such as, clothing, household
items.
Interest only
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Borrowers will need to have a credible strategy to repay a mortgage loan and this must not be
speculative such as reliance on property price increases or future family inheritance.
Brokers will need to collect details of the Borrowers repayment strategy and use a common sense
approach to its suitability. They must also check Lenders criteria to ensure that the Client is
meeting the eligibility for interest only.
There is no obligation for a Broker to recommend a suitable repayment strategy such as an ISA, it
is down to the Lender to decide if the strategy is acceptable
Lenders will be responsible for the assessment of these strategies and whether they are an
acceptable means to repay the loan.
High Net Worth/Business Loans/Mortgage Professionals
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High Net worth Clients are defined by the FSA as a Client who has a NET income of £300,000 or
NET assets of £3 million. A Client cannot combine joint income to achieve this level and Lenders
will decide on what assets can make up the £3 million portfolio.
Business Loans are defined as loans solely for the purpose of business finance and secured as a
first charge on a Borrowers main residence. A business plan must be in place to show the purpose
of the finance.
Mortgage professionals are defined as a Client who has worked for at least 1yr in a professional
position with knowledge of home finance. They must provide documentary evidence to support this
fact.
Niche Markets – Equity Release/Home Purchase Plans/Sales and Rent Back
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Equity Release – Must be given advice and Client cannot apply for these products over the
internet. However a Client can reject the advice of a Broker and proceed on an execution only
basis. This would need to be clearly documented.
Home Purchase Plans – This falls into mainstream rules but a Broker must demonstrate why these
are more suitable for the Client rather than a standard mortgage. For example this might be
because of the religious beliefs of the Client
Sales and Rent Back – These Clients must be given advice there is no option to reject the advice
and opt for execution only.
Bridging Loans
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Defined as a 12mth loan or less
A Broker must consider why a standard loan is not more appropriate for the Client
Affordability assessment is not required if the interest payments are rolled up.
Repayment strategy is still assessed
Must re-assess affordability and repayment strategy if the term is extended
Client’s must positively select to extend the term
Must maintain adequate records
Contract Variations and Transitional Arrangments
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Contract Variation – has a new flexible approach for Lenders. There will be no requirement to
assess affordability by the Lender if there is no further borrowing or no material change that would
impact on affordability like a transfer of title into single names or extending a term beyond the
normal age of retirement.
Transitional arrangements – allows Lender to waive some affordability and interest only rules if the
transaction has no additional borrowing or it is in the best interests of the Client.
Exceptions to the additional borrowing rule is where the Client may be rolling up product fees to the
loan or where essential repairs to the property are needed to maintain living standards.
Some Lenders may not adopt these transitional arrangements post 2014 as it is Lender discretion.
Lenders will always check that the Client fits on the new MMR rules before using transitional
arrangements to accommodate the Borrower. This will avoid a Lender advertising that they just
use transitional arrangements and gaining an unfair business advantage or presenting additional
risks to their business.
Mortgage Credit Directive
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FSA continues to work with the EU Directive and the MMR will be allowed to continue and will align
where relevant with the EU directive
EU directive differs on Buy to Let Lending where they are calling for this to be regulated. FSA are
not in agreement for this sector to be regulated and maybe allowed to maintain this as a nonregulated sale.
Secured Lending will be regulated under the EU directive and the FSA agrees this should happen
CF31 – Control Function 31 is the individual registration of Mortgage advisors initiative and the FSA
are keen to proceed with this directive but due to scope this will be part of the general reforms.
There is s thematic review of Interest only products being carried out.
Next Steps
Broker Firms
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Review MMR policy statement
Create a plan/gap analysis
Agree roles/responsibilities within your firm for changes and MMR implementation
Consider new training requirements
Apply for variation of permission now if required
Consider provisional changes that you will need to make on the following:Processes and procedures
Systems and controls
Business model
FSA
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Supervisory Strategy will be reviewed in the 2nd quarter 2013
Supervisor training – FSA to train all their Supervisors for MMR implementation
Readiness and Tracking – FCA/FSA will deploy their 1st survey in May/June 2013 to assess where
Brokers are at with their planning and what further support is required in order for them to be ready
for MMR. A 2nd survey will be deployed in December 2013 to see that Broker Firms have reached
the desired level of readiness for MMR
FCA will organise desk based reviews and visits for larger firms and lenders to check plans and
readiness for implementation of MMR
On-going education of MMR internally and externally
On-going external Stakeholder engagement e.g. trade bodies
If firms are not MMR ready swift action will be taken on these firms by the FCA
Dedicated MMR page on the FSA website will contain all the Q&A sessions generated by the
workshops