The Prudential Regulation Authority (PRA) rules will see the whole of a landlord’s portfolio being underwritten and bring fresh demands on mortgage brokers to report potential undeclared income or tax avoidance by their clients.
Brokers were warned they could be found liable if they did not report suspicions to HM Revenue and Customs when they saw non-compliant activity.
Speaking at the Financial Services Expo, AMI chief executive Robert Sinclair warned that the issue was not that brokers knew if there was undeclared income, but “what you think you might know”. “It’s a really fine line,” he said.
“Suspicious Activity Reporting (SAR) is if you have reasonable suspicion, it does not have to be knowledge. If you have anyone look at this afterwards and someone can say: ‘but you must have known or you should have known’ then you are caught.
“If you are aware of this then I don’t think you have much choice but to process the case and tell the lender what’s happening, but you have to do that reporting at the same time,” he added.
Brokers could be complicit
Vida Homeloans director of sales – mortgages Louisa Sedgwick agreed and highlighted that failing to do so could see brokers being found liable themselves.
“If you were to submit a mortgage application to a lender and they see something that you missed by accident, then potentially you could be complicit,” she said.
“So if a lender has to make a Suspicious Activity Report then they will come to discuss that with you, so I suggest that you really do need to understand your clients incredibly well and make sure if there is any income that needs to be declared.”
By putting an effective process in place, brokers can help ensure they do not get caught up in any potential compliance or legal activity. Connect for Intermediaries managing director Liz Syms explained that she had already put a system in place to prevent this occurring to advisers.
“As part of our process, we get the client to sign a document saying that they have been made aware and they have told us what they think for the last three years their profit or loss was, because then we have something from them to make a decision ourselves on the position or not,” she said.
“Quite clearly if they accept that they made losses over the last three years therefore there would be no tax to pay then it’s not an issue, whereas if they are earning £30,000 per year and they say it was only a profit of £15,000 or £20,000 then there is an issue, and that’s when we would use the SAR.”
First point in the chain
Punishment fine limits were doubled this year and penalties can include prison for serious offences.
Mortgages for Business chief operating officer David Whittaker noted that this issue could be particularly relevant where lenders had never previously taken an interest in the landlord’s overall income.
“Landlords need to get in touch with it and you need to play your part in the chain,” he said.
“If it looks wrong, and you might be dealing with lenders who have never been curious about the landlord’s background income, you’ve got to start making decisions, because you’re the first point in the chain that has an obligation to do something about it.
“So there’s going to be some really fascinating conversations between you and underwriters in the months ahead with regards to this law on the visibility of income,” he added.