Broker FSCS levy soars as pensions sector ‘blind’ to fraud and bad advice
Brokers will pay a collective £22.9m towards the more than £1bn FSCS levy in 2021-22, more than seven times the £3m total mortgage advisers contributed during the current financial year.
The initial estimate of £1.04bn to cover the FSCS for the coming financial year is almost 50 per cent higher than the final £700m tally for 2020-21.
The shocking rise is driven largely by pension advice failings, self-invested personal pension (SIPP) operators, general insurance claims and firm failures as a result of the Covid-19 pandemic.
It has drawn frustration and anger across the industry, particularly from those sectors not responsible for the surge.
The regulator is predicting an increase of claims against home finance intermediaries but the sector will still remain one of the smallest contributors to the FSCS’s workload and expenses.
Complaints received are predicted to rise to 1,247, up from around 1,088 for the current financial year – just two per cent of the actual claims anticipated. (See FSCS graph below)
The £22.9m fee for mortgage advisers for 2021-22 is made up of £5.8m to cover its own sector and £17.1m for the wider industry failings.
Mortgage providers will also see an increase in contributions, rising from £1.1m to £8.6m, with £6.4m of that to fund the wider industry.
Association of Mortgage Intermediaries (AMI) chief executive Robert Sinclair (pictured) said the need to raise in excess of £1bn to make compensation claims was “a new low in the story of financial regulation in the UK”.
He said: “The dire discovery that the investment and pensions sector has been blind to widespread fraud and poor advice needs direct action by the industry.
“Asking mortgage brokers to pay more for bad pensions and investment advice than they are levied by the Financial Conduct Authority (FCA) for their own regulation is nothing short of a disgrace. The announcement of a Treasury Taskforce is too little and too late.
“On behalf of ordinary advisers who will have to find this money at a time when doing their job could not be harder, AMI requests that the review of future regulatory framework is expanded to look at how we develop a new approach that gives proper scrutiny of how firms are able to operate within the UK regulatory framework.”
Pensions and insurance failings
Announcing the details, the FSCS acknowledged the Life Distribution and Investment Intermediation (LDII) and Investment Provision classes were expected to breach their class funding limits for the second year in a row.
As a result, the retail pool will be triggered for a total of £252m.
It explained the four key factors behind the massive rise in claims costs:
- We are expecting an increase in failures throughout 2021-22 due to the widespread economic impacts of Covid-19. However, the situation is continually changing and the potential impact, both in terms of the number of firms failing, and their timing, is something we will continue to monitor carefully.
- We are anticipating an ongoing rise in complex pension advice claims. The compensation cost for the LDII class is forecast to be £361m, which is a similar level to the latest 2020-21 forecast. The main cost (71 per cent) of this class is estimated to be in respect of advice claims, where we expect the recent trend of processing more complex and expensive claims to continue.
- We expect further failures of SIPP operators. Claims in relation to SIPP operators are forecast to account for £336m of the Investment Provision’s anticipated £345m compensation costs. The compensation cost for this class is a significant (89 per cent) increase on 2020-21, mainly due to expectations that firms in this sector may fail.
- We expect an increase in pay-outs for the General Insurance Provision class. The costs of are expected to increase by 46 per cent to £233m due to continuing costs arising from current failures, such as East West Insurance Company Ltd. We also expect additional failures in this class, in line with trends we see year-on-year.
In one small positive, the FSCS revised the forecasted 2020-21 supplementary levy announced in November down from £92m to £78m. This saw the mortgage adviser contribution falling from £2m to £1.5m.
FSCS chief executive Caroline Rainbird said: “Although we are prepared for a difficult and uncertain year ahead, we look forward to working with the industry and the FCA on our recommendations.
“Much more must be done as regulation alone cannot be expected to solve the complex problem of the rising levy. We need multiple interventions and fundamental shifts across the sector.
“I am a strong believer in tackling the root causes of the increased compensation costs and distress caused by failures, rather than the symptoms of the problem.
“We are ready to contribute by providing insights, an independent view on the issues and recommendations that could transform the financial services market.
“It is only by taking these steps in an integrated and coordinated way that we can improve outcomes for consumers and, in turn, reduce the burden of the levy on the industry.”
AMI and IMLA warn of property chains collapsing without phased stamp duty deadline
The Association of Mortgage Intermediaries (AMI) and Intermediary Lenders Association (IMLA) issued a joint statement warning the UK home buying market is at a critical stage and that “it is now likely that many cases will not complete before 31 March”.
IMLA and AMI said they had raised their concerns with the Treasury, noting that a large number of borrowers may not be able to meet the March deadline through no fault of their own with unprecedented demand putting immense pressure on lenders, intermediaries and conveyancers.
Delays in obtaining searches are being combined with complex chains and firms’ capacity to operate in a Covid-safe way.
“The market has processed record levels of new applications from buyers while managing the varied and continuing impacts of Covid-19 on their businesses,” they said.
“Once mortgage offers are issued and borrowers move on to try to achieve exchange and eventually completion, the pressure moves on to conveyancers, who are also facing record volumes of business.”
Widespread collapse in property chains
They issued a stark warning about the potential risks to borrowers and the likely knock-on effects on the market.
Those buying properties for less than £500,000 will pay no stamp duty if they complete in time.
However, if they miss the date they will be liable to pay the tax on the value of the property above £125,000, or over £300,000 for first-time buyers.
“The result could be that borrowers are forced to borrow more funds to cover the costs of stamp duty, at a time when they may be stretched on their mortgage loan and additional borrowing may not be available,” the bodies continued.
“We are concerned that the tax exemption cut-off with no taper could see a widespread collapse in property chains if buyers who planned to take advantage of the stamp duty holiday have not completed before 1 April 2021 and are forced to withdraw.”
‘No plan to extend relief’
IMLA and AMI join fellow trade bodies the Building Societies Association (BSA) and the Association of Short Term Lenders (ASTL) in calling for the taper to soften the cut off.
However, earlier this week HM Treasury confirmed it was not planning an extension to the stamp duty holiday deadline.
“As the relief was to provide an immediate stimulus to the property market, the government does not plan to extend this relief,” Treasury said.
“Stamp Duty Land Tax (SDLT) is an important source of government revenue, raising several billion pounds each year to help pay for the essential services the government provides.”
Borrowers must prepare to pay
IMLA executive director Kate Davies warned borrowers to be realistic about what will happen if they miss the 31 March cut-off date and to plan ahead.
“Those who do miss it will need to be aware of how much stamp duty they may be liable to pay – and have a plan for finding that cash,” she said.
“If they can’t – there is a risk that their sale may fall through – taking with it a number of other transactions if there is a chain.”
She added that lenders, intermediaries and conveyancers will be as upfront as possible with borrowers and manage their expectations.
“We are asking all our members to work to increase post offer operational support, and our broker and conveyancer partners to assess their new business pipelines,” Davies continued.
“This will ensure as many complete before any deadline.
“We want to avoid borrowers losing out – through no fault of their own – and have called for some flexibility to the deadline which would ease the immediate pressure on lenders and conveyancers, and treat borrowers whose cases are already in the pipeline more fairly.”
Brokers should assess pipelines
AMI chief executive Robert Sinclair added: “As the main contact point for the consumer at the sharp end of this, brokers will work hard to keep the consumer informed and warn them of the potential risks they face.
“We are calling on lenders to ensure their conveyancer partners have capacity to deal with the pipeline in front of them.
“I would like all lenders, brokers and conveyancers to assess their pipelines and operational capacity between now and the end of March and give a realistic assessment to their customers of the likely outcomes.
“By working together now we can minimise disappointment. However, I firmly believe with what is already in the legal process, government needs to stand ready to extend the deadline to avoid there being thousands of frustrated and disappointed taxpayers.”
‘Don’t bury your heads’ FCA equity release concerns are not just about ‘dabblers’ – Sinclair
In what has been a muddled year, where mentally it feels like it should be March yet we are nearing Christmas, it’s important that the significance of this regulatory review does not get lost as 2020 draws to an end.
This is particularly the case as the FCA has set out in its recent Dear CEO letter to mortgage intermediary firms that it intends to do further work on lifetime mortgages during 2021.
To refresh, the FCA’s main concerns centre around the equity release sales and advice process, in particular the insufficient personalisation of advice, insufficient challenging of customer assumptions and lack of evidence to support the suitability of advice.
FCA looked at most active firms
These communications combined form a clear message that firms need to take action; they cannot be complacent and think the issues raised do not concern them.
As an industry we should not make assumptions that the FCA review and recent Dear CEO letter only relate to firms dipping their toe into the later life market intermittently – to make that assumption puts us in a dangerous place.
Indeed the 2020 supervisory work was on the dozen most active firms in this market.
It is very unusual for the FCA to publish its findings from exploratory work meaning that its concerns are widespread and not just limited to firms that carry out a few equity release cases each year.
The FCA has also been explicit in that all firms should ensure that their advice processes, including how they record the suitability of advice, are sufficient.
If we believe that this only relates to dabblers in the market, then we are in denial.
Industry bodies have gone quiet
It will take a concerted effort from all that represent the equity release market to ensure there is change and to convey the message on the reality of the situation.
However, there has been a distinct lack of communication from some industry bodies on the actions required and updates on any progress.
Back in June some were vocal in the mortgage trade press about what actions they had planned but have since remained quiet.
There must be more open and transparent dialogue to re-ignite the discussion and ensure the correct level of focus.
The mortgage advice industry will be measured by the way it reacts and moves forward.
Comments made in the FCA review and recent Dear CEO letter should not be viewed as criticisms but rather an opportunity.
An opportunity to ensure regulated advisers take responsibility, not delegate to solicitor checks, and really mean it when we say we put consumers at the heart of everything we do.
We cannot ignore the fact there will be increased regulatory scrutiny over the next 12 months and the industry needs to avoid a situation where the FCA feels intervention and action is necessary.
Now is our chance to improve the perception of this market. With a collective approach this is possible – just as long as we don’t bury our heads in the sand.
AMI fears second charge and equity release advisers not heeding FCA warnings
The Financial Conduct Authority (FCA) issued a Dear CEO letter last month to all mortgage intermediaries highlighting concerns with advice in the two sectors.
Speaking to Specialist Lending Solutions, AMI chief executive Robert Sinclair (pictured) said while the sectors had been separated in the FCA letter, there were common threads between second charge and equity release.
“There are concerns people start down that journey and then end up with that product no matter what they say,” he said.
“Also, all the costs end up being paid by those who complete and there are concerns about quality of advice around debt consolidation.”
He added: “I’m concerned that both markets aren’t listening to what the FCA has been saying to them. It is continuing to ask them to think about changes to business models.”
Poor quality fact finds
Sinclair noted that it was expected the FCA would return to examine the second charge sector in 2020 with the coronavirus pandemic delaying that.
But he said the regulator had raised concerns about the quality of advice around debt consolidation in the sectors and the issue of borrower vulnerability.
“They don’t see a great deal of good advice in the suitability letters that go out to people, there’s poor quality in terms of fact find and suitability,” he said.
“This isn’t a standard mortgage and often it’s being taken because they have debt distress, so there has to be a higher level of care.”
Sinclair added that AMI would be talking to its member firms about all the risks and issues but highlighted that the FCA’s vast data pool now meant it was much harder for firms to hide from the regulator’s scrutiny.
FCA scrutiny makes sense
Rob Jupp, CEO of The Brightstar Group, said it was understandable people reacted to news of an FCA review with a jolt of suspicion that something must be wrong with a sector, but noted it was the job of a regulator to review the markets that it regulates.
“Second charge mortgages have come under the remit of the FCA for a relatively short period of time and so it would make sense that it pays particular attention to the market to ensure that it is operating to the standards expected in other areas that fall under the regulator’s charge,” he said.
“The FCA may well find incidents where the advice process has not been up to scratch or fees are deemed to be excessive, but it will also find a lot of examples of excellent consumer outcomes and very good practise by firms that operate across the spectrum of secured lending, treating each element with the same level of professionalism.
“My biggest concern about the second charge market is not that the FCA is looking at it, but that so many brokers still are not, and that by excluding this important product from their advice process they are denying some of their clients the best outcome for their circumstances.
“If an FCA review of the second charge market provides a reminder to brokers that it sits on a level playing field along first charge lending then that can only be a good thing.”
Business models are changing
Brilliant Solutions managing director Matthew Arena agreed that the industry was improving with the benefits of the FCA’s post-credit crunch changes and added that a stable industry was positive for all.
“The fact they are going to revisit this means there are some issues to get to grips with,” he said.
“We focus on our own business and operate very differently to many others; that means low fees and an obligation to consider appropriate alternatives.
“Fees was a longstanding problem in the industry but so much has improved with more businesses than ever operating a similar low fee business model to ours.”
He added the industry has been improving and more mortgage advisers were seeing the benefits thanks to the low fee solutions available now.
“What I will say is that secured loan advice and secured loan packaging is more in depth than it is given credit for,” he continued.
“The level of work involved in offering and demonstrating compliant advice is incredibly high so the sector can justify higher fees than standard first charge mortgages, even where the procuration fees are higher.”
Equity release dabblers
Meanwhile, yesterday in his Mortgage Solutions column, Air Group CEO Stuart Wilson said he believed the FCA’s focus in the equity release sector was on so-called dabblers.
“Historically the regulator has been concerned with advisers who only carry out a very small number of equity release cases every year, and this appears to be a warning to those who may have the permissions and authorisations to provide this advice but who are not necessarily specialists in the sector,” he said.
“In other words, of course you may be able to work in this space, but are you necessarily best positioned to be doing so?
“I suspect the regulator is potentially concerned advisers might be lured into a sector which they perceive as more lucrative, only to give advice which is not appropriate because they may not understand it fully.”
Conveyancers could struggle to complete transactions to meet stamp duty holiday – Sinclair
The Association of Mortgage Intermediaries’ (AMI) chief executive said the trade body raised concerns with the government about an impending stamp duty “cliff edge” if transactions fail to meet the end of March deadline.
He said: “The volumes of transactions we’re seeing flowing through might mean there will be issues with the ability of solicitors and conveyancers to complete all of those transactions by the end of March.
“We’ve made them aware of the issue and told them there will be ongoing discussions regarding the capacity of the market to complete these transactions in an appropriate way so consumers can appropriately benefit from the allowance that’s been given by the chancellor.”
Sinclair also said brokers should tell clients to be responsive to solicitor enquiries and advise sellers to have everything in place to avoid slowing the process down.
“Clearly there are some chains that are more complex than others and therefore making sure all the people in the chain are similarly minded to get things done in a speedy manner is key to all of this,” he added.
Sinclair said he hoped any transactions which did miss the deadline would not result in legal challenges for the broker community but said having discussions and thinking about it now could reduce the chances of that happening.
He added: “We’re still five months away from this point, so as long as we have good open dialogue and appropriate planning and good dialogue with government as well, we won’t have any issues.
“The reason I’m flagging this early is to allow proper debate and planning.”
IMLA and AMI join forces to tackle lender service issues
The surveys will be conducted over the next few weeks and the different factors which affect each lender will be examined.
With the information received, IMLA will work with intermediaries and industry bodies including the Association for Mortgage Intermediaries (AMI) to find possible solutions.
Since the mortgage market reopened in May, lenders have struggled to maintain service levels as they coped with high volumes of business.
Many have resorted to withdrawing products or repricing mortgages in order to manage service levels. An increased need to look at changing customer circumstances more closely has also slowed down underwriting timescales.
Much of this increased demand has been fuelled by pent up activity during the property market’s lockdown as well as buyers and sellers trying to complete transactions before the stamp duty holiday ends.
Kate Davies (pictured), executive director of IMLA, said: “The focus of lenders remains, as it should, on acting prudently and lending responsibly within their regulatory commitments and – ultimately – to protect borrowers.
“However, the current situation is clearly continuing to impact service levels and we need to identify the main reasons for this and try to find ways of alleviating the logjams.”
She added that the association needed to be clear about what was “realistically achievable” with its solutions and try to manage the expectations of borrowers and intermediaries.
“The Covid-19 crisis has emphasised the need for borrowers to be given good advice about their mortgage options, and I believe that most borrowers will understand and appreciate that good advice and responsible lending may take a little longer in these exceptional times.
“We now know that we all face further restrictions on our lives – probably for another six months. But we also know, from the way the industry has coped so far, that we are up to the challenge,” she added.
Robert Sinclair, chief executive of AMI, said: “We have an incredibly busy mortgage market at the moment. While the strong levels of activity we are seeing is certainly a positive sign of the sector’s resilience, it is continuing to present difficulties for lenders as they battle demand.
“Whether we are advisers or lenders, we are all in this market together and it is vital that we work in partnership to find ways of overcoming these difficulties.”
He added: “This is a welcome step from IMLA towards highlighting and resolving factors that are impacting service levels for customers and we are eager to work jointly with its members as they evaluate their findings and identify solutions to the current challenges we are all facing.”
FCA complaints compensation should come from exec bonuses – Sinclair
Sinclair also slammed the complaints scheme consultation launched by the regulator in July as a “disgrace” for proposing to cap its liability at just £10,000 per case.
Speaking at the Association of Short Term Lenders (ASTL) annual conference, Sinclair strongly criticised the regulator and said it needed to mirror the industry and accept liability for its mistakes.
“The FCA’s decision to try to run through an eight-week consultation rather than 12 weeks in order to protect itself from criticisms of its own complaints structure was a disgrace,” Sinclair said.
“That’s the only words I can use.
“We were very strong in our response that we were about to submit that they should have done a 12-week response but they’ve now extended that under pressure from the Treasury Select Committee.
“They recognise that they made a wrong decision in the first place – a regulator should not reach that point very often in their careers.”
The lack of acceptance or meaningful change to anything the regulator did in the consultation also frustrated Sinclair.
He continued: “The complaints commissioner said there were fundamental flaws and failures in handling and responding to complainants and the consultation did absolutely nothing to address anything around that. Nothing.
“The consultation was cosmetic, capping how much they would have to pay while causing distress and inconvenience and capping if they made a mistake at £10,000 per case.
“Businesses would love to get away with that rather than £355,000 which is the cap at the ombudsman service, and uncapped in court. Only this regulator could do that.”
‘The only fair way’
Fellow panellist Ray Cohen, managing director of Jackson Cohen, suggested that would inevitably mean regulated firms would end up paying more to cover compensation.
However, Sinclair argued the FCA should accept the liability themselves.
“The FCA has a bonus pot for all its staff and executives; anything they have to pay out in complaints comes out of that bonus pot – it’s the only fair way,” he continued.
“They said they implemented the senior management regime internally, but there is no liability for anything they do wrong. There has to be liability because there is for every other firm.”
The FCA executive committee has deferred any bonus payment until the report of the investigation into the circumstances surrounding the collapse of London Capital & Finance (LCF) has been issued.
David Copland to leave LSL and AMI
Copland will also depart from his role at deputy chairman on the Association of Mortgage Intermediaries (AMI) board, where he has been for nearly eight years.
He joined LSL when the group acquired Pink Home Loans in 2010, where Copland was CEO. Before this, he was the founding director of Pink Home Loans which was established in 1988, before going on to launch the Pink Mortgage Club and the Pink mortgage network which is now part of Primis.
Copland (pictured) said: “I have thoroughly enjoyed my time with LSL fulfilling a number of roles including supporting the hugely successful TMA mortgage club, managing mortgage lender relationships on behalf of the group and more latterly working on digital propositions, including the investment in Mortgage Gym.
“2020 has been a turbulent year for the mortgage industry, but Primis and TMA have performed extremely well throughout this period and I will leave proud in the knowledge that these businesses are in great shape and well positioned for future growth.”
Jon Round, group financial services director at LSL, added: “I would like to take this opportunity to express my sincere thanks to David for his support and contribution over the last ten years.
“David has played a significant role in the successful growth and direction of our financial services businesses, applying his depth of industry knowledge and insight. I will miss working with David as a colleague – and as a fellow West Bromwich Albion fan – but I wish him every success for the future.”
Mortgage Vision: Brokers should be saving now for hard times next year – Sinclair
Speaking at the Mortgage Vision event, Sinclair said the industry was enjoying a period where “transactions were at a very good level” and lenders had never been busier.
However, he predicted the market may enter a tough period in the middle of 2021.
“While we’re making money, make sure we’re putting some away because I do think when we get to Q2 or Q3 next year, times will get a little bit harder.
“Therefore, saving some money now and putting it away to sustain us through the rainy times that I think might come in 2021 might be a very good idea.”
It is also important for advisers to talk to their customers and understand their needs to protect future business, Sinclair said.
“Remortgage and products transfers are as important as full-blooded purchase property transactions because staying close to existing customers and earning money from them is the key to having a future sustainable business,” he added.
Mortgage prisoner help
Sinclair said brokers who responded to the Financial Conduct Authority’s (FCA) call to action to help mortgage prisoners should prepare to be contacted by lenders before the end of the year to find out how they can get them onto better rates.
He said: “I expect the third-party administrators will issue their letters to the prisoners that they deem can be helped during October and November this year.
“I expect during September, a group of lenders to come to market with either new products or new policy or new processes.”
Mortgage Vision: No Pure Legal mis-sold mortgage claim has been upheld by court – Sinclair
Speaking at the Mortgage Solutions Mortgage Vision event, when asked if any Pure Legal claims had been upheld or paid out, Sinclair (pictured) said he was aware of just one claim which was settled out of court after the legal firm walked away.
The damages for this claim are yet to be awarded.
He also noted another case where “the insurer stopped it from going to court, but the payout damages were negligible, and they came to an agreement with the firm that was taking the case.
“There have been no decisions as yet upheld by a court having gone through the full case,” Sinclair said.
Sinclair asked brokers to notify AMI of any cases that have gone to court so that it can co-ordinate an overall approach on the issue. This was seen as important particularly as some firms still struggle to acquire professional indemnity insurance owing to concerns about possible mis-selling.
“We’ll deal with any case where there is genuine customer mis-selling or any harm, but we will not accept vexatious claims from people who are just trying to make money for themselves,” Sinclair said.
In 2018, the Financial Conduct Authority (FCA) warned that interest-only borrowers could risk losing their homes if they had no repayment plans in place at the end of their term.
This resulted in a drop in take-up of interest-only mortgages and a number of complaints that the mortgages had been mis-sold.
Speaking with the regulator
Sinclair is to begin talks with the FCA and Treasury, with a view to encouraging insurers to overlook “legacy issues” on mis-sold mortgages and to provide cover.
“I have my first meeting with the FCA on Friday to go through with them exactly what the position is, what the issues are, and to make sure we’ve got a way of taking this forward to help the insurance market understand that the risks in this are hopefully minimal,” he said.
However, Sinclair cautioned that brokers moving into new product areas or markets, such as later life mortgages or bridging, increased insurers’ reluctance to service the mortgage market.
He added that the FCA’s recent study on the later life market – which suggested not all firms were giving advice in the best interests of clients – did not help.
“Insurers will be much more nervous about taking that on,” he said.