Posted: 26th April 2014

In this month’s Mortgage Market Review (MMR) article we highlight issues beyond standard IT and people challenges. We continue by focussing on the impact that MMR has on the control environment and what firms can do to ensure they have appropriate 1st and 2nd line defence mechanisms.

This challenge falls into two logical parts: control environment and lines of defence. Thereafter, we look at actions for senior management.

Control environment

To be clear, the impact on the control environment is significant; MMR is a game changer in terms of regulatory expectations. It brings with it a number of increased requirements, both for lenders and intermediaries.

By now, implementation activity for both lenders and intermediaries should have tackled how the control environment will change in light of the new rules. Preparation should have been focussed on reviewing the most significant and major changes, including:

1) Removal of the non-advised sales process and consideration of what this means for controls such as training and competency schemes, span of controls and outcomes testing going forward

2) Decision about whether a firm will offer an execution only sales process post 26 April 2014, including identifying an appropriate level of business for this route and how this level will be monitored and controlled

3) Identifying changes needed to the sales process to capture the required level of customer information regarding income and expenditure, interest only repayment strategies and other relevant personal circumstances and needs

Lines of defence

The lines of defence are used to monitor activity and provide assurance within firms. As we know, MMR poses a fundamental change to the operating environment. What does this mean for the “lines of defence” model? The 1st and 2nd lines must be reviewed to assess the appropriateness of what they do today against what the business will be doing tomorrow.

In the short term such a review is likely to result in increased monitoring activity. This is particularly so in the light of the Financial Conduct Authority’s (FCA) signal that it will conduct a post implementation review of the MMR six months into the new regime. Equally the 1st line and 2nd line must enhance their current approaches to deal with the new rules ensuring that they are delivering fair outcomes for mortgage customers.

Impact and action for senior management

Acting on the above – the enhancements to the control environment and methods used by the lines of defence – depends on where senior management sets its risk appetite for the selling and affordability of mortgages. This will also impact what management information it receives to ensure that the business is operating within this.

A stand out inclusion in the new Mortgage Conduct of Business (MCOB) rules is MCOB 11.6.22R. This explicitly refers to the need for a lender to be able to demonstrate that it has robust systems and controls in place to monitor the effectiveness of its affordability assessments.

Having a specific monitoring requirement in the rules is a clear signal that firms will be required to evidence this on an ongoing basis. That means right down to individual cases. Senior management must show that it has appropriate key risk indicators in place and conduct root cause analysis as a result.

MMR continues to be much more than just about implementing IT and training people in the lead up to and beyond April 2014.


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