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FSA To Investigate Sub-Prime Mortgage Brokers

The Financial Services Authority (FSA) has referred an additional four sub-prime mortgage brokers to the financial watchdog’s enforcement division on the basis of mis-selling its services and products resulting from misleading promotional materials they distribute to customers.

Mortgage RateIn an ongoing investigation to clampdown on the practice of promoting misleading sub-prime mortgage promotional material, the FSA has investigated hundreds of UK sub-prime brokers over the course of the last 12 months, promoting many sub-prime mortgage brokers in the UK to amend or completely withdraw any promotional material that was, in the view of the FSA, misleading to the extent that it could constitute “mis-selling”.

While many of the UK’s sub-prime mortgage brokers, particularly those who have been the target of the FSA’s campaign, have taken the warnings of the FSA to heart and amended their practices, some have clearly not. It is the latter group the FSA is now concentrating its efforts on; and at the heart of the issue is whether or not customers were being made to pay more in fees than they had anticipated would be the case on reading the sub-prime mortgage broker’s promotional materials. In a number of the worst cases, this appears to have been the case.

Commenting on the business standards currently being reflected in the UK sub-prime mortgage sector, Vernon Everitt, FSA retails themes director, said: “Financial advertising has a massive influence on the decision people make; so it must be clear, fair and not misleading, leaving people with a balanced picture of the key pros and cons.” Everitt went on to say, “Firms in this sector should be on notice that this is a priority area for us [FSA] in assessing whether they are genuinely treating their customers fairly.”

The UK’s sub-prime mortgage sector caters for those looking to purchase property in the UK but who have an adverse credit history and, thus, do not normally qualify for the standard UK home mortgage loan products offered by most leading home mortgage providers. As a result, borrowers under sub-prime mortgages generally incur higher rates of interest and fees than is otherwise the case with mainstream UK home mortgage lending, to reflect the additional risk burden being incurred by the home mortgage lender.

In addition, borrowers are not normally entitled to the high income multipliers available to other mortgage borrowers and are also required to make a deposit on the property purchase to ensure that there is some equity retention in the property in the event that the borrower defaults. Nonetheless, the UK’s sub-prime mortgage sector also happens to be one of the fastest growing sectors in the UK home mortgage lending industry at this time. Which is probably why the FSA has seen fit to concentrate its valuable time on developments in this industry sector.

Richard Smith
29th November 2006

 

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