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Mortgage Redress
For The Over Indebted
Address:
Barclay House
35 Whitworth Street West
Manchester
M1 5NG
Telephone:
0161 9...
Although a highly competitive industry, consumer groups
reported that the complexity of documentation and wide
variations ...
INDEBTED AND VULNERABLE BORROWERS
Indebted and vulnerable borrowers would most likely, but not exclusively, be blue collar...
Brokers often solicited, or were approached by, borrowers who sought debt consolidation as they had over committed
themsel...
ROUTE TO REDRESS
To determine whether or not a mortgage has been potentially missold, it is necessary to analyse
some basi...
The purpose of the audit report, which is white labelled for the instructing firm, is to highlight potential breaches and ...
Scott Robert is a regulatory compliance and software consultancy specialising in financial services and based in central
M...
THE PROCESS
1
The instructing firm provides Scott Robert with a list of their clients which has already
been filtered to e...
EXAMPLE COMPENSATION RECOVERABLE
Example 1:
In the following example case, a number of breaches to the Mortgage Conduct of...
FAQs
Q. Is this similar to PPI mis-selling?
A. It is similar to PPI in the sense that the client has been mis-sold a finan...
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Mortgage Redress For The Over Indebted 090516

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Mortgage Redress For The Over Indebted 090516

  1. 1. Mortgage Redress For The Over Indebted Address: Barclay House 35 Whitworth Street West Manchester M1 5NG Telephone: 0161 914 5727 Email Address: enquiries@scottrobert.co.uk Website: www.scottrobert.co.uk
  2. 2. Although a highly competitive industry, consumer groups reported that the complexity of documentation and wide variations in the information given to consumers by lenders were leading to confusion and a lack of understanding about which products were most suited to their circumstances. HM Treasury believed that statutory regulation would improve consumer protection by ensuring that borrowers receive better quality and clearer information about mortgages, enabling them to make informed choices about mortgage products. Regulation came into force on 31st October 2004 and apply to all stages of a mortgage product’s life, from first contact to enforcement or repayment. As part of the regulation, individuals giving mortgage advice to the public are required to demonstrate their competence by obtaining the industry qualification Certificate in Mortgage Advice & Practice (CeMap). In reality, this did not prevent wide scale mis-selling of products as many advisors, particularly within the subprime market, prioritised personal remuneration over best advice for their clients. Mortgage lending was at its peak in the period from 2004 until early 2008 with over 21,000 mortgage products available to select. The lack of confidence in financial services followed what is referred to as the ‘credit crunch’ for the securitisation of mortgage backed securities which created stagnation in lending as many lenders who did not want to hold loans on their own balance sheets, were compelled to do so. Thus, lending ceased rapidly in the sub-prime sector during late 2007 and early 2008. Borrowers were therefore trapped as the availability of further borrowing from existing lenders or alternative lenders was unavailable. Questions started to be asked regarding the suitability of the recommendation of the existing mortgage products. The initial cases of mortgage misselling (MMS) started coming to light around 2010 but there were not many claims management or law firms with the appetite to take them on at the time due to lack of expertise, and many firms were preoccupied with the high volume and lucrative PPI misselling market. Many of the early MMS cases that were submitted were done so on weak or incorrect arguments, and were poorly presented resulting in very few being successful. The legal firms which have remained in the MMS market have gone through a long learning process and now are in a strong position as the MMS market matures. They are successfully running good quality cases. Prior to 30th October 2004, mortgage providers (but not mortgage intermediaries) were subject to the Mortgage Code, a system of self-regulation by the industry. Background 2 Mortgage Redress for the Over Indebted Scott Robert
  3. 3. INDEBTED AND VULNERABLE BORROWERS Indebted and vulnerable borrowers would most likely, but not exclusively, be blue collar or manual workers and be financially unsophisticated and therefore reliant upon the professional advice given to them by their advisor. They may have been declined by High Street lenders for having a County Court Judgement (CCJ), defaults, or arrears on other credit agreements e.g. personal loans, hire purchase, or credit cards. In order to obtain a mortgage, these borrowers would need in the majority of cases to seek advice from a mortgage intermediary firm that had access to the subprime market. It was common practice for some unscrupulous brokers to place vulnerable clients with clean credit histories on sub-prime products to earn higher fees. Brokers could receive up to 4% of the loan size; many were also charging applicants’ fees for their services too. It was not unusual for the rewards at completion to be thousands of pounds. Many brokers recommended unnecessary remortgages which resulted in borrowers incurring large fees, when a more cost effective secured loan would have been a better option. Borrowers have also been misled into believing that the mortgage offered by their broker was superior, as a lower monthly payment was emphasised as demonstrating an improvement on the existing arrangements. This monthly saving was inevitably achieved by the new terms being quoted on an interest only basis, even though the existing mortgage may have been a repayment mortgage. This would be typically recommended without any discussion of how the debt would be repaid at the end of the term or explanation of the implications of an interest only mortgage. Vulnerable borrowers have also been misled into consolidating previously unsecured debt into their mortgage and in many cases into an interest only mortgage. No consideration will have been given to the greater overall cost in paying these debts over twenty-five years, for example, as opposed to the three or four years remaining on the original contract. Similarly no discussion would likely have been undertaken regarding the reduction in equity and the consequences of the borrowers potentially being unable to meet the larger mortgage payments and putting their home at risk. 3 Mortgage Redress for the Over Indebted Scott Robert
  4. 4. Brokers often solicited, or were approached by, borrowers who sought debt consolidation as they had over committed themselves with excessive unsecured borrowings. In desperation to resolve their immediate day to day cash flow issues, as well as their general financial unsophistication, borrowers would likely be receptive to any advice offered that would alleviate their situation. A professional advisor should consider whether any consolidation would disadvantage the borrower on overall comparative costs, reduction in equity and whether the new mortgage arrangements would be affordable. INDIVIDUAL VOLUNTARY ARRANGEMENTS AND MORTAGE MIS-SELLING Many mortgage brokers, who would only be remunerated upon the completion of a mortgage, advised unaffordable debt consolidation remortgages where in the majority of cases the more appropriate advice would have been to seek independent professional debt advice. Such advice inevitably began a cycle of remortgaging incurring large fees and penalties on each occasion as borrowers, unable to meet higher mortgage costs, reactivated accounts previously consolidated or sought new ones. Ultimately as house prices reduced and lenders withdrew from the subprime market the cycle of remortgaging ended. At this point, the inevitable route to debt management, IVA or bankruptcy would begin with borrowers in greater debt than originally. Had borrowers been properly advised originally, they would have retained their original lower mortgage balances which would most likely have been on better terms, and retained more of the equity in their homes. 4 Mortgage Redress for the Over Indebted Scott Robert
  5. 5. ROUTE TO REDRESS To determine whether or not a mortgage has been potentially missold, it is necessary to analyse some basic information relating to the mortgage which will indicate the probability or not of a mis-sale. This basic information will typically comprise of the date of the mortgage, the monthly payment amount as a percentageof the amount borrowed and the name of the lender which will identify subprime cases. By undertaking this initial process, costs will not be incurred on cases that have no potential to proceed and will demonstrate the claim process is suitable and appropriate for the client for those cases identified to go forward. Mis-Sale Analysis Initial Assessment Upon receipt of all the required papers including a mortgage application form offer letter, and broker’s record of suitability, an initial assessment is made to ensure the claim is worth pursuing further. Letter of Authority The claimant will sign a letter of authority from the representing firm which will be submitted as a DSAR to the mortgage lender or broker. The lender has forty days to return the file of relevant papers for evaluation by the auditing team. Those cases considered viable to pursue are then audited by an experienced mortgage auditor to produce a full and detailed liability report. This is a compliance requirement and ensures the claim process is suitable and appropriate for the client. The report will also indicate an approximate quantum value of the claim. The compensation amounts vary according to the particular circumstances of the case but most to date have settled around £22,000 to £30,000. Although there have also been large settlements in excess of £60,000 too. Liability Audit The completed report with exhibits is passed to the designated legal firm, who will make the complaint for compensation to the broker or broker’s network if still trading, and ultimately to the Financial Ombudsman. If the broker and network are no longer in existence then the claim will be made to The Financial Services Compensation Scheme (FSCS) Redress 5 Mortgage Redress for the Over Indebted Scott Robert
  6. 6. The purpose of the audit report, which is white labelled for the instructing firm, is to highlight potential breaches and high risk related issues for regulated mortgage contracts. Since 2004 brokers recommending mortgages to owners of residential property (where the mortgage is a first legal charge on a residential property) has been an activity regulated first by the Financial Services Authority and then by The Financial Conduct Authority (FCA) from 1 April 2013, through the Authority’s Mortgages and Home Finance: Conduct of Business sourcebook (MCOB). MCOB contains a series of rules which authorised brokers and lenders are required to comply with in their performance of recommending suitable mortgage products to consumers or otherwise assessing a consumer’s ability to repay any recommended mortgage. The purpose of the rules is to ensure that consumers make informed choices about the mortgages they enter into. Rule 4.7 of MCOB states that mortgage advice must be “suitable for that customer” and that advisers “must make and retain a record” of it being suitable. MORTGAGE MIS-SELLING AUDITS • Clients being recommended unaffordable Interest only mortgages or re- mortgage, or where there’s an inadequate repayment vehicle • Clients in financial difficulties who have been advised to consolidate debt when they should have entered IVAs or debt management instead • Clients who have been advised to consolidate debt which has proven to be more expensive overall than if left unconsolidated Clients recommended unaffordable mortgages who then get repossessed • Clients recommended unaffordable mortgages past retirement • Clients recommended affordable but unsuitable mortgages (i.e. wrong product) • Clients recommended an inappropriate more expensive subprime lender, particularly Right To Buys • Capital raising on residential home for BTL investment or investment into foreign investment • Self-certified for self employed • Self -certified applications for employed applicants The primary areas of mis-selling highlighted in the report are typically: • Which were advised sales pre 31st October 2004 • Post 2013 mortgages • Buy To let applications (unless funds were raised on the applicant’s residential property) • Secured loan applications • Those IVAs where insufficient funds have been receive to facilitate the MMS Mortgages which are unsuitable for auditing are those: The audit report will form the basis of the solicitor’s claim work and may be used in evidence. 6 Mortgage Redress for the Over Indebted Scott Robert
  7. 7. Scott Robert is a regulatory compliance and software consultancy specialising in financial services and based in central Manchester. The team consists of a mixture of industry professionals, ex-regulators, and legal professionals. That broad range of experience across multiple markets and sectors makes Scott Robert unique in its ability to take new regulated products to market for its clients driven through innovative software solutions. Scott Robert’s expertise includes the compliance requirements relating to residential mortgage contracts and with this is offered an auditing service to professional advisors who represent claimant homeowners with mortgages. This includes claims management companies, insolvency practitioners, solicitors and other organisations who require their services. All mortgage auditors have substantial experience of the regulated mortgage market and are fully able to ascertain where incidences of inappropriate mortgage advice may have been given to borrowers. ABOUT SCOTT ROBERT Will O’Brien is the senior auditor. He is qualified in The Financial Planning Certificate and has Full CeMap and CeRGI qualifications, and has spent 28 years in the Financial Services sector. His previous roles have included unsecured and secured underwriting within high street bank and money shop environments, Regional and National Sales Management, sales of insurance, investment and pension products and lead generation as an in-house bank financial adviser. He has also worked as a whole of market mortgage and insurance broker with responsibilities for sales and compliance training of advisors prior to and post 2004 regulation. Since 2010 he has been analysing lender and broker mortgage files on behalf of several solicitor firms and claims management companies, personally producing over 800 in depth liability reports which highlight the actionable breaches of the mortgage sales process. These reports also include an initial quantum calculation of loss, where requested. His reports have resulted in successful claims against brokers and networks either through litigation action or through the Financial Ombudsman. A recent partnership with a large Liverpool solicitor firm has resulted in significant claims successes in cases submitted to The Financial Services Compensation Scheme (FSCS). 7 Mortgage Redress for the Over Indebted Scott Robert
  8. 8. THE PROCESS 1 The instructing firm provides Scott Robert with a list of their clients which has already been filtered to exclude those cases deemed unsuitable by the instructing firm, for example because the IVA is too new to support the report costs. 2 Scott Robert filters the list further to exclude cases which fall outside of the basic criteria for example mortgages advised prior to regulation taking effect in 2004. 3 Scott Robert advises the instructing firm of those cases considered worthwhile to take forward and Letters of Authority (LOAs) are obtained from clients to facilitate the application for a Data Subject Access Request. (DSAR) 4 Upon receipt of the LOA, Scott Robert submits DSAR to the appropriate lender or advisor. 5 Upon receipt of the DSAR information, Scott Robert will analyse the information to identify the advising firm and, if the firm is still trading, a further DSAR will be submitted to it. 6 Qualifying cases with all available DSAR to hand will be subject to further analysis and production of the liability report. 7 In receipt of the report the instructing firm is then able to initiate the introduction of the client to the nominated solicitor. 8 The solicitor will take the necessary action to pursue the claim whether against the advising firm or network (if trading), The Financial Ombudsman Service (FOS) or to the Financial Services Compensation Scheme (FSCS) if the advising firm no longer exists. 9 Whilst claims are progressing, the solicitor will provide monthly reports to the instructing firm indicating status of the firm’s cases. 10 Once a claim is settled, the claim amount net of solicitor’s costs is remitted to the instructing firm to appropriate to the client’s IVA as deemed by the Insolvency Practitioner. 8 Mortgage Redress for the Over Indebted Scott Robert
  9. 9. EXAMPLE COMPENSATION RECOVERABLE Example 1: In the following example case, a number of breaches to the Mortgage Conduct of Business rules were identified and highlighted in the report. Case Summary The broker advised the clients to remortgage in April 2006. At the time of the advice the clients had a capital repayment mortgage with Preferred with an outstanding balance of £76,847 including arrears. This mortgage had completed only 12 months earlier and had a remaining term of 16 years. The clients were experiencing financial difficulties and wanted to reduce their monthly outgoings. The DSAR included the lender application form indicated erratic mortgage payments and arrears throughout the preceding 12 months. Assuming the broker undertook a fact-finding exercise before his recommendation, It ought to have been clear to him that the clients should not increase their secured indebtedness and should have sought independent debt advice regarding their unsecured debts, and have prioritised their mortgage payments. The broker recommended an interest only remortgage over 21 years at a marginally higher rate than the existing by 0.5% The broker exacerbated the situation by recommending consolidating £8,000 of unsecured debts and adding the inevitable fees and charges which would be incurred in this situation. The new mortgage amount represented an increase on the existing by £16,903. Of the £16,903, £9,769.85 was the total of associated fees in respect of the new mortgage, £8,000 was unsecured debt consolidation. Within the £9,769.85 the broker fee charged was £3,595 and £4,789.85 the early redemption penalty applied to the existing mortgage incepted 12 months earlier. Mrs xxxx was aged 57 at the time of the advice and will be aged 78 at the end of the recommended term, her partner will be 77. Within the DSAR there is no indication of anticipated retirement ages nor how the mortgage payments would be met in retirement. The best advice would have been to advise the clients to seek independent debt advice regarding the two unsecured accounts and not increase their secured borrowings by remortgaging, consolidating previously unsecured debts and incurring large fees and charges in the process. They should not have been advised to switch from a repayment mortgage to an interest only mortgage without any suitable repayment strategy in place. Result Of Claim As the advising broker is no longer trading, the solicitor acting submitted this complaint and report to the FSCS resulting in an offer of compensation of £60,224.96. The FSCS offer letter states “The compensation aims to put you in the financial position you would have been in if you had not received the firm’s mortgage advice. The compensation covers losses already made and settlement of the mis-advised mortgage, including any penalties payable to the lender. It does not aim to cover future or assumed losses” Example 2: A client wished to invest into an off-plan foreign property and was required to put down a 30% deposit under the terms of the proposition to invest. Case Summary The client was introduced by the property company to a broker who advised her to remortgage her unencumbered residential property in order to raise £50,000, of which £36,000 was required as the deposit. The property was never built and the client consequently lost her deposit. Result Of Claim As the advising Broker and the Network are no longer trading, the solicitor acting submitted this complaint to the FSCS resulting in an offer of compensation of £49,858.12. The FSCS Offer states “We have looked at your claim against PMP Network Ltd. (The Firm) and found it eligible for compensation. The compensation aims to put you in the financial position you would have been in if you had not received the investment advice”. 9 Mortgage Redress for the Over Indebted Scott Robert
  10. 10. FAQs Q. Is this similar to PPI mis-selling? A. It is similar to PPI in the sense that the client has been mis-sold a financial product and service and that the claim is brought under the Financial Services and Markets Act 2000. However mortgage mis-selling is not as wide spread as PPI mis-selling as it largely affected the sub-prime sector. Q. What is the benefit to unsecured creditors? A. The benefit to unsecured creditors will be a potentially sizeable amount of redress being payable to the client, and this redress subsequently forming part of the funds available to be disbursed to creditors. Q. What percentage of the reviews are expected to lead to a claim and how much is the average claim? A. In a typical book of IVA clients we anticipate 60% of audits identifying a potential claim given the greater susceptibility of mis-selling within the profile of individual who holds an IVA. The typical claim value on cases is around £30k but there have been instances of higher pay outs particularly where the underlying reason of the mortgage was an investment purchases such as a holiday or timeshare, or where it was for debt consolidation. Q. What is the turn-around time from completion of the audit report and claim to completion? If this is going to delay a completion is this in the debtor’s interest? A. From the return of the Data Subject Access request (DSAR) documentation to settling a claim we would expect around 5 to 6 months on average. The recommended solicitors have established arrangements with The Financial Ombudsman Service (FOS) which decreases the amount of time taken to deal with the cases. Q. Our clients won’t be able to remember who advised them on their mortgage several years ago so how would you obtain the relevant information? A. We will apply to the lender for a DSAR and the documents therein will identify the information required in respect of the mortgage claim although it is important to remember that the claim is unlikely to be brought against the lender. Q. The criteria provided for the mortgage claim seems vague. Why isn’t more specific criteria applied? A. The range of mortgage mis-selling criteria is broad and likely not to be immediately available within the data held in respect of clients. This information would only be found on receipt of the DSAR. Q. How long does it take before a report is completed? A. We expect to complete the reports within 2 to 3 weeks of receiving the DSAR. The organisation providing the DSAR information has 40 days in which to respond to the DSAR request. Q. Is a report completed on every case for which a DSAR is applied for? A. The initial filtering stage, prior to any DSAR request being made, will remove the majority of unviable cases. It is only upon reviewing the information contained in the DSAR that we can identify whether a claim is likely and we issue a report in all cases as we are required to act with diligence and demonstrate our findings. It should also be remembered that IVA clients are more likely to have been missold a mortgage than most other client groups and consequently we expect a higher than average of winnable claims from these cases. Even where there has been no actual mis-sale of the mortgage there is a strong possibility that the client may have been overcharged interest particularly where mortgages have fallen into arrears or defaulted. This is likely to substantially increase the number of IVA clients who have a claim. 10 Mortgage Redress for the Over Indebted Scott Robert

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