ARROW visits: hot topics in the mortgage market

Updated September 2011

It is no secret that the mortgage market has been a key focus for reform by the Financial Services Authority (FSA) in recent years. With the latest Mortgage Market Review (MMR) publication now expected imminently it continues to be a central theme of review. The FSA's stated objective is to create a more sustainable and flexible market that works better for consumers, and already we are seeing more intensive supervision of the market.

There are a range of so-called 'hot topics' relating to the mortgage market that should be borne in mind by firms. We have selected a few of those that we consider key when preparing for an ARROW visit.

Unfair terms

The FSA has been paying close attention to unfair mortgage terms. This has been something we have found our clients to be very tuned into, and we have been instructed to carry out a number of reviews of mortgage terms and conditions as a result. In the Retail Conduct Risk Outlook 2011/2012, the FSA specifically referred to terms allowing variation of interest rates and terms demanding immediate repayment in the case of minor breaches as being potentially unfair.

The FSA expect firms to keep abreast of undertakings and recent unfair contract term developments to ensure mortgage conditions continue to be compliant. If your current conditions are more than a couple of years old then the risk of them containing an unenforceable term is high. We have seen the FSA decide that conditions that were once common usage are no longer considered fair.

We also recommend that firms carry out historical reviews of their mortgage documentation, with the principle of Treating Customers Fairly in mind, to ensure they are not relying on any terms that could be considered unfair.

Financial crime

The FSA continues to be concerned with the robustness of firms' systems and controls for combating financial crime. In June of this year, a proposed guide to dealing with financial crime was published which aims to improve firms' understanding of the FSA's expectations in this area. Firms have been asked to comment by the end of the month, and with the final guide expected by Q4 of this year, it is something the FSA is likely to take into account in upcoming ARROW visits and in moving on to enforcement actions.

The FSA is now designing its operating framework for its Core Financial Crime Programme. Retail, wholesale and overseas banks can expect a more intensive and intrusive supervisory approach which will focus on the risks inherent in each bank's business model rather than simply on the systems and controls to manage those risks.

PEPs

The focus on fighting financial crime feeds into another very topical issue: the FSA's work on Politically Exposed Persons (PEPs). The FSA recently published a thematic report in relation to banks' management of anti money laundering. The findings identified that a primary concern for the FSA is banks' relationships with high risk customers and PEPs.

During ARROW visits, firms will be expected to show effective measures are in place to identify PEPs and that robust enhanced Due Diligence is applied in high risk situations. The FSA will also expect to see that staff are fully trained, particularly Money Laundering Reporting Officers in relation to its PEPs.

Affordability assessments

The 'phase two' implementation of the MMR will see longer term reforms to the mortgage market, and a big part of this will be the way lenders assess borrowers' affordability. Lenders will be expected to verify borrowers' income in all cases, carrying responsibility for robust affordability assessments in all applications (including intermediary distribution channels). The rules around affordability assessments and the extent to which this will be implemented are expected to be set out in the latest delayed MMR publication.

If you would like some advice in relation to any of the issues raised in the MMR or assistance with an impending ARROW, please contact Suzanne MacDonald.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at September 2011. Specific advice should be sought for specific cases; we cannot be held responsible for any action (or decision not to take action) made in reliance upon the content of this publication.

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