The Financial Conduct Authority (the Authority) has issued final notices banning two former directors of Which Mortgage Limited in respect of their failure to act with due care and skill to ensure that the firm had appropriate controls to verify mortgage applications which were submitted to high street lenders. The case serves as a timely reminder of the Authority’s regulatory expectations regarding verification of income and employment details, and monitoring of intermediaries by lenders.


The two men, father and son, were the directors of, and mortgage advisers at, Which Mortgage, a mortgage and insurance intermediary firm based in Glasgow. About a third of the firm’s business consisted of residential mortgage contracts. A high street lender raised concerns with the firm about the submission of a payslip in support of a mortgage application made by a client which appeared to contain false and misleading information. The lender rejected the application, removed the firm from its panel of mortgage intermediaries, and reported these facts, and the firm, to the Authority.

The Authority conducted a review and found that 11 of the client files contained payslips in identical format (although each client worked for different employers). Information obtained from HMRC by the Authority established that each payslip from these 11 files contained false and misleading information about both the clients’ income and employment.

Neither director had carried out any checks to verify the information set out in the payslips received from clients and both accepted that the firm had no effective systems and controls in place to counter financial crime. As a result, the pattern of false payslips, financial information and employment details being submitted by a number of clients went undetected, and fraudulent information was submitted to high street lenders.

The Authority found that both individuals breached Statement of Principle 6 in failing to act with due skill, care and diligence, by failing to ensure that the Firm had appropriate controls to verify information submitted by clients to support mortgage applications which led to the Firm being used to facilitate financial crime.

Interestingly, after the high street lender informed the father that the payslip contained false and misleading information, and the Authority told the firm it planned to carry out a review of the client files, the father reviewed a number of client files to see if these contained similar concerns contained in the rejected application. At that stage he discovered that a pattern of false payslips being submitted by a significant number of his clients.

In an attempt to disguise the firm’s negligence, he downloaded blank template payslips from the internet, entered the financial information contained in the original payslip provided by each client, and replaced some of the false original payslips. Needless to say, this novel approach to risk mitigation failed to impress the Authority, which classed his conduct as a level 4 breach and imposed a fine based on 30% of his relevant gross income. On the basis that the resulting amount was not sufficient to deter him, and more importantly others, from committing further or similar breaches, the Authority then tripled the penalty (an early settlement discount was subsequently applied).

Both individuals were banned, the son from performing any SIF function on the grounds of lack of competence and capability, and the father from performing any function in relation to a regulated activity, on the basis of a lack of competence, capability, honesty and integrity.

A point for lenders to consider

It is interesting that although one high street lender had flagged a suspect payslip (which then provoked further investigation), it seems that other lenders may not have identified the same issue, even though the forged payslips were apparently identical - the Final Notice refers to the conduct having led to high street lenders offering mortgages to customers on the basis of false and misleading information.

It is clear that the regulatory expectation is that lenders should be taking steps to satisfy themselves of a intermediary’s suitability on an ongoing basis, and should also be using the HMRC’s income verification scheme in cases where they reasonably suspect, following their own rigorous checks, that mortgage fraud may be taking place. That scheme enables lenders to submit to HMRC, using a secure electronic platform, information submitted by borrowers to be compared with that submitted for tax purposes, for a fee. HMRC checks the income details declared to lenders against information provided in income tax and employment returns, and advise lenders whether or not the details correspond, to help them assess the risk and inform their lending decisions.

Further good verification and broker-monitoring practices for lenders are considered in the FSA’s 2011 paper which feeds back on its thematic review of lenders’ systems and controls to detect and prevent mortgage fraud. These include:

  • Quality assurance of broker submissions – enhanced scrutiny of a sample of broker applications
  • Requiring certified copies of the applicant’s identity documents and bank statements from the broker, but asking the customer to provide originals in a sample of cases
  • Fresh reviews of a mortgage application if the borrower subsequently falls into arrears
  • A risk-sensitive process for subjecting property valuations to independent checks
  • Enhanced due diligence including open source Internet searches, and face to face meetings with brokers
  • Identifying third parties the lender will not deal with, drawing on a range of internal and external information
  • Only reinstating third parties to a panel after termination after fresh due diligence checks
  • Checking whether third parties maintain professional indemnity cover
  • Rotation of relationship management staff
  • Controls to detect brokers ‘gaming’ their systems, for example by submitting applications designed to discover the firm’s lending thresholds, or submitting multiple similar applications known to be within the firm’s lending policy
  • Verifying that funds are dispersed in line with instructions held, particularly where changes to the Certificate of Title occur just before completion.

The regulator also encourages engagement with its “Information from Lenders” scheme, which it considers to be “one yardstick by which to judge a lender’s ‘state of readiness’ to confront mortgage fraud”.