FSA failing in financial mis-selling

| November 19, 2007 | 0 Comments

Today it was announced that the FSA had fined two brokerages because of potential mis-selling.

The action by the FSA just doesn’t go far enough.

The Loan Company (trading as Greenhill Finance) was fined £31,500 for failing to make proper affordability checks on the sub-prime mortgages it was selling.

Next Generation Mortgages was fined £10,500 for failing to make proper assessments and failing to explain mortgage risks properly.

But look at those figures in another context - brokers can reasonably expect 0.5% to 2.5% commission for each mortgage that they sell.

And bad credit mortgages - the more common name for UK sub-prime mortgage products - can offer higher commission rates because of the higher interest payments, and therefore profits, usually provided by these vehicles.

A quick bit of math - £200,000 sub prime mortgage = £1000 - £5000 commission, minimum, per sale.

And if you settle with the FSA early, you get a 30% discount on your fine!

So the benefits of flouting FSA guidelines easily offset the risks of being caught.

Cold calling scams

And a number of lenders are already clearly flouting FSA regulations in big cold-calling campaigns, commonly using autodialers to call up random phone numbers, play a recorded message, and offer people the chance to talk to a salesman by pressing 5.

The big problems here is that such companies attempt to mislead callers by claiming it is a “public information announcement” or else that the person may qualify as part of a “government initiative” - attempting to mislead those being called that what they are receiving isn’t a sales call, but something else.

Additionally, the calls always fail to identify the company making the call, block the number so it can’t be traced, and the sales person you speak to will put the phone down if you ask difficult questions - such as try to identify the company in question before making a commitment.

According to the FSA, making cold calls for the purposes of selling mortgages is illegal under their regulations - and while the FSA does have teeth enough to punish wrong-doers, the actual results of those punishments send out a very clear message:

Companies who can evade the FSA for long enough, will make profits far in excess of any punishment the FSA can deliver.

Not enough punishment for financial offenders

For those who believe even the worse sharks being closed down somehow represents a significant punishment, think about the fact that the company directors of such establishments can simply cash in their profits and laugh all the way to the bank.

Even if consumers may have been mislead and/or mis-sold financial products, not least mortgages.

For example, the FSA also closed Homebuyer Securities, and their report is quite damning (PDF: The Final Notice to Homebuyer Securities Limited).

The company used staff with no relevant qualifications, who sold sub-prime mortgages to unsuspecting members of the public.

And to quote the BBC report: “Its director has agreed never to work as a mortgage broker again.”

Well, boo-hoo, I bet he’s crying all the way to the bank.

He may have lost his company, but I’ll make a fair bet that he earned a big income from big commissions on those big profit sub prime financial products.

Lost his company? Who cares - he’ll probably be laid out on some tropical beach over the winter, enjoying the fruits of his misdeeds, as the FSA sees them.

The bottom line in all of this is this: we’ve been reporting for months on FM about the subprime fallout - the mis-selling of mortgages in the USA, which has crippled the entire financial markets across the globe.

But mis-selling finance is a big money-earner and the regulatory bodies supposed to police it are too slow and gummy-jawed to offer effective punishment to those who predate on normal people for profit.

So here’s an idea - why not give the FSA authority to strip out the assets of company directors who abuse the financial services system, backdated, and take away all those juicy incentives to be a bad boy for big short-term profit?

Sure, the FSA can audit for past bad practice, but where are the real financial punishments for the company directors?

Because at present, mis-selling mortgages is still all carrot and very little stick.

Until that deep flaw in the system is dealt with, we’re going to constantly see the Del boys of the world milking the financial services market for fun and profit.

After all, that’s exactly what they can get away with.

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