Brokers in the dock
26 Mar 2014
FCA data shows 676 broker firms have been thrown off lenders’ panels in four years – and the results can be devastating for an adviser’s livelihood
Being removed from a major lender’s panel can effectively spell the end of a mortgage broker’s business overnight - which is why there is no room for error.
Figures from the Financial Conduct Authority show 676 broker firms were kicked off lenders’ panels over the past four years.
Is it the case though that all of these brokers were not up to scratch or involved in fraudulent activity, or are lenders being too trigger happy when it comes to removing brokers from their panel?
Lenders were warned in 2011 by the former regulator, the Financial Services Authority, that they needed to have a tighter grip on their panels and not to give brokers a free ticket onto them.
Some brokers however have accused lenders of being too eager to remove them from their panel by adopting a kangaroo court style, with no explanation as to why they have been removed and no chance of appeal.
So is it time for lenders to reform their panel removal process and use a standardised system whereby brokers can appeal the decision?
Here today, gone tomorrow
How lenders manage their panels has been an issue of debate since before the credit crunch. In the boom years, distribution was king and some lenders, especially those in the specialist market, would often favour the brokers and packagers who could bring in the highest volumes.
In turn, some networks would put lenders to the test and stop doing business with them if they provided poor service – something they could afford to do with plenty of lenders in the market competing for brokers’ business.
Once the market shrank back down to size following the credit crunch, mortgage deals became harder to acquire and lenders started to remove brokers for suspected fraud. In 2011 it was reported that Lloyds Banking Group had struck 900 mortgage brokers off its panel over a three year period after uncovering suspected fraudulent practices.
Fast forward to today’s market and the issue of panel removal is still making headlines.
Mortgage Strategy has recently been contacted by approximately two dozen brokers complaining they have been removed from lenders’ panels with no warning or right to appeal.
“This decision has destroyed my livelihood,” one broker told Mortgage Strategy. “Since being struck off panel, I have been told I can no longer be a member of my network, other lenders have refused my registrations and I have struggled to find another network to take me on.”
Mortgage Strategy is backing the Association for Mortgage Intermediaries calls for lenders to address five key issues surrounding panel removal. Firstly for lenders to set up a standardised appeals process; agree on an acceptable timescale for appeals; tell brokers why they have been removed; issue a warning before removing a broker from panel; and enter into an open dialogue with the broker.
Mortgage Strategy is also in favour of an independent appeals board being set up in order to assess brokers’ cases, which would be funded by both lenders and brokers.
AMI chief executive Robert Sinclair says there are generally three categories which brokers who have been removed from a panel for suspected fraud fall into.
“There are genuine situations where the customer has manipulated the broker to commit fraud and it is very hard for the broker to see what is happening. In that situation lenders need to be careful they don’t unfairly treat the broker,” he says.
“Another situation is where the broker should have spotted fraudulent behaviour and the lender has every right to say - you don’t know what you are doing. Then there is a third situation where there is some doubt as to whether the broker should or could have known what was happening and it is these grey cases that cause the most difficulty for lenders.”
Sinclair says in some instances once he has gone through a broker’s case with a lender it has reversed its decision and reinstated the broker.
“The broker goes back under increased scrutiny but that is fine,” he says. “There are other instances though where the lender has said, no, we don’t want them back.”
Suspected fraud is not the only reason brokers can be removed from a panel. Poorly submitted applications can also affect a broker’s position and if their account has become dormant.
Speaking to Mortgage Strategy on condition of anonymity, one broker who has been removed from several lender panels, feels he has been unfairly treated.
He received a telephone call from one major lender on January 6 telling him his account had been suspended because too many of his cases had gone to audit. His appeals process involved him explaining to the lender why each of these cases had not completed.
“The majority of the cases had completed,” he says. “One hadn’t because the couple had split up, another hadn’t because the valuer came back with a value of zero and in another case there was a legal wrangle over a property.
“When I explained this to the lender it sent back a reply saying it had compared me to brokers in similar geographical areas and they were doing better than me – I was off panel, end of story,” he says.
Once he was removed from the lender’s panel, the broker says another two lenders started to audit him and this resulted in him being removed from their panels.
He questions why if he has allegedly done something wrong have the police or the regulator not been in contact with him.
“I have been in this market for 12 years, I am now having to wind down my business, I’m 50 years of age, I can’t pay my mortgage, feed my kids – where are my human rights?” he asks.
Paradigm Mortgage Services chief executive Bob Hunt, believes there are instances when lenders can make a mistake.
“I do suspect that in a small minority of cases some brokers will be removed unfairly,” he says. “The reality is that different lenders will form different views and take different steps based on their interpretation of the facts.
“It may be the case that a broker has made an error – rather than a premeditated attempt to defraud. However, to the broker who is struck off the penalty is the same,” he says.
For those brokers that have been removed from a panel there is often a ripple effect and once one lender raises doubts, others may follow suit.
“If a broker is removed from a lender’s panel due to quality measures that information does not tend to get spread between lenders,” says Sinclair.
“If however there is an issue over suspected fraud that will appear on National Hunter – the national fraud database. There are two levels of reporting that can be marked up on there - proven and suspected fraud.
“The database tracks customers and brokers, so lenders may pull files to see if there is an issue with one particular broker, which is entirely legitimate.
“What I would not want to see lenders doing is automatically removing brokers just because something appears on there. It should be that there is evidence from each lender.”
In the Dark
One of the main complaints from brokers who are removed from a panel is that they were not told why.
It is often not the lender’s intention to be purposely awkward by not revealing its reasons, but if it suspects a broker of fraud it cannot divulge any of its suspicions to the broker as that would be seen as tipping off and an offence under the Proceeds of Crime Act.
Pink Network director Mark Graves, says lenders do not take brokers off panel for no reason.
“There is always a reason,” he says. “Sometimes a lender can’t share that reason if there is an ongoing investigation as it will be classed as tipping off. The adviser may only be a cog in a large wheel and not necessarily the one that is being investigated.
“I can absolutely understand the frustration of an adviser who thinks they haven’t done anything wrong but in some cases they will have. A lender will not have taken a broker off by error, it is always a last resort.
“But I do accept that if possible it would be helpful if advisers knew why they had been removed because that is just the basic need of anyone who has done something wrong –they always want to know what it is.”
The Mortgage Market Review requires that lenders ‘know their broker’, which means lenders are becoming increasingly protective of their panels and whom they will do business with.
In June 2011, the former regulator the FSA released the findings of its thematic review of mortgage fraud against lenders.
Within the review it said it was bad practice for lenders to not review their panels on an ongoing basis or to have a panel that was too big to manage.
The AMI representative on the National Fraud Authority’s mortgage fraud forum John Malone, says in his former role as executive chairman of PMS he spoke to a number of brokers, both directly authorised and appointed representatives, who felt marginalised in the way they had been removed from a lender’s panel.
“In some instances it can be a broker’s dependence on introducers for business that is the problem, where the introducer seems to be dealing more with the client than the actual regulated intermediary,” he says.
“In the eyes of the lender the broker does not know its potential borrower and in a number of these instances it is why brokers have been removed.”
Another area that Malone says is cause for concern is where brokers are putting the mortgage through as buy-to-let when it should be residential mortgage, or putting a mortgage through for themselves, a family friend or someone in the chain.
“If you look at the number of intermediaries being removed - nearly 700 over four years, that number does not alarm me in any way shape or form.”
Processes in place
So are lenders being fair to the brokers they have removed from their panel?
Countrywide financial services director Nigel Stockton, says having been both a lender and a broker himself, he knows first-hand that lenders take full panel removal extremely seriously.
“They have to,” he says. “Lenders know that they must have no doubt that this last resort option is beyond argument or contention. If a lender doesn’t behave like this and has any doubt, then they should not remove but suspend the broker pending enquiries.”
However, Mortgage Strategy has seen a copy of one letter sent to a broker which stated:
“[Lender A] has recently carried out a full review of cases submitted by you, and as the applications failed to meet the required standard, [Lender A] feels that the business relationship between us has broken down and cannot continue.
“No further residential or buy-to-let applications should be submitted to [Lender A].
“[Lender A] is not prepared to enter into any further correspondence regarding this matter and has now closed our records.”
This seems an unfair way to treat brokers, even if fraud is suspected.
Three out of the top five intermediary lenders, Lloyds Banking Group, Santander for Intermediaries and Nationwide, all say they have a formal appeals process in place for brokers removed from their panel.
NatWest Intermediary Solutions has no formal process but says it judges decisions on an individual basis.
Lloyds’ director of intermediaries Mike Jones says taking a broker off panel is not a decision it takes lightly.
“We conduct an in-depth review of applications, with a particular focus on business over the past 12 months,” he says.
“If irregularities are spotted, we use a warning process and work with the broker to address the areas of concern, providing tailored guidance and face-to-face meetings. In some rare and isolated cases, outright removals do occur where there is significant evidence that inaccurate or fraudulent application and supporting documents have been intentionally provided.”
Lloyds also has a team of investigators who compile an evidence pack which is presented and verified. A small team of managers then review this to agree a proposed route forward.
“A broker may appeal a removal decision,” he adds. “Our appeals process is clearly communicated to brokers at removal notification stage. On receipt, the appeal is reviewed by an independent investigator who was not involved in the original review.”
He says once a removal is sanctioned, it will be formally reported to the regulator and additional notifications may be shared with external law enforcement. Jones says from time to time it will also remove dormant brokers from its panel but they are free to apply for re-entry to the panel providing they meet panel membership criteria.
A spokeswoman for Santander for Intermediaries, says regular reviews of its panel can sometimes result in it removing or adding brokers.
“Firms which do not meet our expectations are removed from the panel but always have a right of appeal, which some firms choose to exercise,” she says. “An appeal is always carefully considered by the review committee, whose decision is final; there is no further right to appeal.”
The Intermediary Appeals Committee is chaired by an independent executive manager, and has representation from the lender’s risk, service and sales divisions.
“This ensures that we have a governance process for intermediary appeals and a full audit trail to support any appeal and subsequent re-instatement or decline,” she adds.
Meanwhile, Nationwide says when a broker is removed from its panel, it confirms this in writing with reasons and advises they have 14 days to appeal.
“We ask for written submissions detailing reasons for appeal,” a spokeswoman says. “On receipt of appeal we have 14 further days to consider and respond.”
She says brokers are removed for three reasons – fraud, poor business quality and abusive behaviour.
Meanwhile, NatWest Intermediary Solutions says it regularly provides feedback to brokers regarding their applications to ensure they are of a high quality.
“As a result of adopting this approach, the vast majority of applications we receive from brokers are of a good standard,” a spokesman says.
“However, there are occasions when it is necessary to remove a broker from panel. This is a serious decision that is only taken after a period of close and rigorous monitoring.
“This action has only been necessary for a very small percentage of brokers on panel.”
Once a decision has been made to remove a broker they are informed by letter.
NatWest says there is no formal process to appeal this decision because the numbers of brokers removed from panel are extremely low and it prefers to deal with them individually on a case-by-case basis.
“We would always encourage a broker to contact us, should they have any concerns or can offer any new information that may help their situation,” the spokesman says.
Lenders may feel they have robust systems and procedures in place, but with reports still coming through of brokers not being given feedback or a chance to appeal, something is not working.
A standardised independent system would go some way in helping brokers who don’t feel that lenders’ appeals processes are adequate. Hunt however is not convinced that a standardised approach would be workable.
“It would help tremendously if all lenders made clear what their appeals process was and, where they are able to, say why a firm has been excluded,” he says.
“Where it’s a case of a straightforward error, or poor submission processes, lenders are increasingly looking to identify training needs amongst introducers, and to work to address that with the firm or individual concerned rather than simply excluding brokers from panels. I genuinely believe that all lenders take these matters very seriously and understand the consequence of the actions they take.”
As lenders believe they already have robust systems in place it seems unlikely they will be willing to form a standardised system.
Malone says he would be willing to put himself forward as an independent adjudicator to look at such cases – something which would need to be funded by lenders and brokers.
“I believe there needs to be somebody who is completely independent, somebody who understands the intermediary side and understands the lender side,” he says. “In my view AMI is partially right for doing this but partially wrong because it is acting in the main for the intermediary.
“I would be quite happy in my capacity as a consultant and someone who has an excellent relationship with the lenders and brokers to do this.
“I can see somebody like me being the type of person that could look at those types of cases and make decisions as to whether the lender or the broker is right.”
Sinclair also says he is more than happy to look at any member’s cases where they feel they have been unfairly treated.
“If any member thinks they have a problem they need to bring their cases to me. I can have a look at it and we will take it forward,” he says.
Nobody in the industry would disagree that if a broker has done something wrong they should be removed, but there needs to be co-operation from both lenders and brokers for the issue to be solved.
The Intermediary Mortgage Lenders Association executive director Peter Williams says his trade body and its members are firmly committed to encouraging transparent and constructive relationships between lenders and brokers.
“We are continuing to work closely with our fellow trade bodies to ensure that understanding and clarity exist on questions about panel management and appeals processes,” he says.
“Communication should be at the heart of things but given the nature of the issue we are dealing with here, lenders and brokers should both expect things to be difficult and testing sometimes.”
At the very least, if lenders are wanting to operate in a fair and transparent way they should ensure that they have an adequate appeals process set up. Even if the lender removes just one broker from its panel every year, that broker still has the right to a fair hearing as one mistake by the lender can be fatal to their business.
Likewise, lenders who already have an appeals process in place need to make sure that it is put into practice and relayed to their staff who need to be aware that a broker’s livelihood rests in their hands.
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