The Loan Company (trading as Greenhill Finance) fined £31,500

The Loan Company (TLC) was fined £31,500 for breaches of Principle 3 (management and control), Principle 7 (communications with customers), Principle 9 (customers: relationships of trust) and theMortgages and Home Finance: Conduct of Business Rules (MCOB). The breaches related to TLC’s failure to establish andmaintain effective systems and controls in relation to its sales and advice procedures and its failure to ensure that such mortgage brokerage was conducted in accordance with FSA requirements. In addition, TLC failed to take appropriate steps tomonitor and review client files, and failed to gather and record sufficient information to support the assessment of the suitability and affordability of recommendedmortgage contracts, despite similar concerns over record keeping having been raised by the FSA in a thematic visit in 2005. The FSA found no evidence to suggest that TLC’smortgage business was being assessed to ensure that it was compliant, nor that there was any internal systemin place to assess affordability. TLC’s training and competency regime was also deficient – although advisers attended regular training sessions the firmhad failed adequately to assess andmeet their specific training needs. A particularly serious feature of TLC’s breaches, given thatmost of its business was conducted over the telephone, was its failure to provide key information to its customers as to fees, key features, and/or the consequences of remortgaging with the recommended mortgage product. Nor did TLC provide customers with any kind of recommendation document summarising why the product was suitable for them. In two cases the FSA even found that customers had been advised not to fully disclose their level of indebtedness and arrears, to ensure their acceptance by the proposed lender.

Next GenerationMortgages Limited fined £10,500

Next GenerationMortgages Limited (NGM) was fined £10,500 in respect of breaches of Principle 7, Principle 9, MCOB, and the Dispute Resolution: Complaints Handbook (DISP). NGMhas also agreed to vary its Part IV permission to cease advising on or arranging self certifiedmortgage contracts. The FSA found that in failing to tailor its suitability letters to each customer’s circumstances, NGMhad failed to communicate with its customers in a clear, fair and not misleading way, in breach of Principle 7. NGMhad also failed to ensure that its advisers gathered and recorded sufficient information about its customers or the suitability of the recommended product, therefore failing to demonstrate that it had taken reasonable care to ensure the suitability of its advice (in breach of Principle 9). Particular failings included a lack of evidence that customers’ incomes had been verified, that key information was not being gathered, that the advisory process was not clearly documented and that compliance checking was random, not systematic. Complaints communications were defective and NGL’s systems failed to generate effective management information tomonitor whether customers were being treated fairly. Again, these failings persisted despite weaknesses having been identified during a thematic visit in 2005.

Homebuyer Securities Limited stopped fromtrading

In themost severe of the three notices, the FSA has cancelled Homebuyer Securities Limited’s (HSL) Part IV permission, thereby preventing it fromtrading. The FSA has taken this extreme action due to its conclusions that HSL is failing to satisfy the Threshold Conditions required to be met in order for authorisation to performregulated activities to be granted. In particular, the FSA has concluded that HSL’s business does not have adequate human resources to performthe regulated activities that it carries on, and that HSL is not a fit and proper person and it fails to ensure that its affairs are conducted soundly and prudently. Of particular concern to the FSA was the fact that only one employee of HSL was actually qualified to givemortgage advice. Nor did NSLmaintain adequate records of each adviser’s training and competence, or of the compliance monitoring it carried out to ensure quality and suitability of the advice given was assured.

Next Steps

In addition to the fines that NGMand TLC have been ordered to pay, and the cancellation of HSL’s permission, all three firms have been required to conduct a past business review to identify whether any customers have suffered losses as a result of receiving unsuitable advice. Furthermore, NGMand HSL have takenmore extreme steps as a result of their failings: NGMhas agreed to stop selling self-certificationmortgages and HSL has agreed that its director will never work as amortgage broker again.

Increasing awareness of risk in sub-prime practices

The notices issued in respect of TLC and NGMmake it very clear that the fact that these firms’ principal customer base was sub-prime impacted heavily on the severity with which the FSA treated the breaches outlined above. This is due to the fact that customers in the sub-primemarketmay be particularly vulnerable andmay be experiencing (or have experienced) acute financial difficulties. Although HSL’s activities did not concern the sub-primemarket, the majority of their customers were council tenants purchasing their first home under the Right to Buy scheme and, as such, they were also considered to be financially vulnerable. Therefore, HSL’s failure to take reasonable care to ensure that the advice provided to customers was suitable was viewed as sufficiently serious to warrant stripping the firmof its permission to carry on authorised activities.

One of the FSA’s four statutory objectives is securing the appropriate degree of protection for consumers. It should not come as a surprise therefore that failings in respect of financially vulnerable consumers should result in harsh penalties for the firms concerned. In the words ofMargaret Cole, FSA Director of Enforcement:

“Any firms who place their customers at risk of receiving unsuitable advice through inadequate business processes can expect strong action fromthe FSA”.

However, the FSA is not only concerned with the impact of the sub-primemarket on consumers, it is also aware of the risks thatmay arise for firms practising in this area. In their Financial Risk Outlook for 2007, the FSA noted that:

“a deterioration in the returns on personal lending as a result ofmounting arrears, particularly in the sub-prime sector, could lead to increased credit losses for these firms” (emphasis added).

Given the FSA’s further objective ofmaintainingmarket confidence, it will not want to see firms suffer as a result of diversifying their interests intomore high-risk areas, such as the sub-prime sector, and then engaging in poor practice which could leave themopen to increased losses. The FSA will therefore want to ensure that all firms are aware of the importance that they place on ensuring compliance in this sector, which will be effectively reinforced with the publication of these final notices.

Increasing action by the FSA

In July of this year the FSA published its findings in respect of the UK sub-primemortgagemarket, and made it very clear that it would not delay in taking action against those firms found to be engaging in bad practice. Although the penalties imposed in August on the first of the firms referred to Enforcement following the FSA’s investigations provided a timely illustration of themessage of deterrence the FSA is keen to spread, the final notices did not specifically focus on the fact that the firms in question operated in the subprimemarket.

Now, with the publication of these final notices, accompanied by a press release which focuses on the fact that it is the firms’ failings in the sub-primemarket which are being punished, it seems that the FSA is increasingly willing to shine a light on poor practice within this area and act accordingly to ensure that such practices are quickly removed.

In light of the sub-prime crisis currently sweeping the US, the FSA will be keen to act swiftly to penalise those failing to meet its standards, and perhapsmore importantly, will want to be seen to be taking a hard line so as to deter those firms operating in themarket and to reassure consumers that their interests are being protected.