Can You Afford a £1 Million Fine?

A conversation with a firm recently reminded me of the importance and, arguably, the utter impossibility of checking the HM Treasury Sanctions list. By way of a reminder, this is a list that our Government has complied of individuals and organisations that we are prohibited from dealing with. You may recall a couple of years ago the then FSA sent out a survey on Systems of Control which included a question about whether firms routinely check against the Sanctions List.

Of course such checks are mandatory for all firms and, whilst the probability of  being approached by someone or an organisation on that list is quite low, the consequences are quite serious both for your firm and personally to the individual transacting.

From April 2017, the Treasury’s Office of Financial Sanctions Implementation (OFSI) will be able to impose penalties for serious breaches of up to £1 million or 50% of the breach - whichever is higher.

So what can be done?

Well a quick look at the first three entries on the Individuals Sanctions List  below indicates the scale of the problem when considering a visual search on screen. There are 136 entries for individuals and 5 entries for Entities for the Afghan Regime alone and that accounts for approximately 10% of the size of the list. Currently, the UK has over 27 United Nations, European Union and domestic financial sanctions in place, covering just over 1,900 individuals, groups and countries.

• Extract from Afghanistan Regime Individuals List

1. Name 6: ABBASIN 1: ABDUL AZIZ 2: n/a 3: n/a 4: n/a 5: n/a.DOB: --/--/1969. POB: Sheykhan Village, Pirkowti Area, Orgun District, Paktika Province, Afghanistan a.k.a: MAHSUD, Abdul Aziz Other Information: UN Ref TI.A.155.11. Key commander in the Haqqani Network under Sirajuddin Jallaloudine Haqqani. Taliban Shadow Governor of Orgun District, Paktika Province, as of early 2010. Listed on: 21/10/2011 Last Updated: 17/05/2013 Group ID: 12156.
2. Name 6: ABDUL AHAD 1: AZIZIRAHMAN 2: n/a 3: n/a 4: n/a 5: n/a.DOB: --/--/1972. POB: Shega District, Kandahar Province, Afghanistan Nationality: Afghan National Identification no: 44323 (Afghan) (tazkira) Position: Third Secretary, Taliban Embassy, Abu Dhabi, United Arab Emirates Other Information: UN Ref TI.A.121.01. Listed on: 23/02/2001 Last Updated: 29/03/2012 Group ID: 7055.
3. Name 6: ABDUL AHMAD TURK 1: ABDUL GHANI 2: BARADAR 3: n/a 4: n/a 5: n/a.Title: Mullah  DOB: --/--/1968. POB: Yatimak village, Dehrawood District, Uruzgan Province, Afghanistan a.k.a: (1) AKHUND, Baradar (2) BARADAR, Abdul, Ghani Nationality: Afghan Position: Deputy Minister of Defence under the Taliban regime Other Information: UN Ref TI.B.24.01. Arrested in Feb 2010 and in custody in Pakistan. Extradition request to Afghanistan pending in Lahore High Court, Pakistan as of June 2011. Belongs to Popalzai tribe. Senior Taliban military commander and member of Taliban Quetta Council as of May 2007. Listed on: 02/04/2001 Last Updated: 29/03/2012 Group ID: 7060.

Obviously, it is possible to do a SHIFT F3 search on a screen version of the Sanctions List but if you are looking for the name, Mohammed, then you have  136 entries to read through.

This all takes time and frankly, whilst it is mandatory, it doesn't add to the profit margins. Even if you use a system ( and there are a few out there) you still come down to the final point of responsibility. It is you as a controller who have to have in place a system to check the Sanctions List and you and if applicable, your employees or ARs or self employed staff must undertake these checks without fail.

Next steps

You must have  in place a procedure for checking the HM Sanctions List at the this address .

• You must ensure that for each application for mortgages or insurances ( or any other business), a check is made of that list. My recommendation is check Surname first and if any occurrence, then also check full name. Depending on your level of confidence it might also be  worth checking just first name. Don't forget that these lists include names and aliases.
• If any occurrences are found, then check the details of each entry as far as you are able, e.g. date of birth or any other details that you can find that might be  pertinent ( address history for example or passport details - not an exhaustive list).
• Keep a record the result of your review and if you identify an issue or have a concern report it to Office of Financial Sanctions Implementation (OFSI).

The  OFSI has issued guidance on the Sanctions List in December 2016  and, inter alia, includes the following text.

The consolidated list generally contains additional identifying information such as date of birth, passport details, nationality, last known address, and employment or government role.  You should consider all of the information that you hold on the person or entity you are dealing with against the information on the consolidated list to determine if you have a real match, usually known as a target match.

Where you have reviewed all of the information on the consolidated list against all of the information that you have about the person or entity and you are still unsure as to whether you have a target match, you can contact OFSI for assistance. 

Additional Point

The  reality of all this is that most searches will result in nothing being found but you never know and, as important, you do need to demonstrate that you have systems of control in place to deal with this.

If you currently use my MI System, you can find a new facility to check the Sanctions List in the Library Section under Fraud. This will report all the unique occurrences of the text submitted with details of each entry identified, including duplicates where there are aliases. You can print this off and keep it on file to demonstrate compliance.

BTLs, tax liability and mortgage intermediaries

One of the potential problems that is no doubt growing in the background of the mortgage market is the increasing liability to tax for Buy to let Mortgages. With a relatively low level of perceived taxation a few years ago, many would-be landlords will have entered a market without a lot of research possibly owning one or two properties that they have let out. Beyond this position there are those investors who have  developed a small portfolio of properties, moderately highly geared with mortgages and growing their book by re-mortgaging on property price rises.

The growing focus of HMRC and the government on this sector means that now a BTL property creates four opportunities for HMRC to collect tax. Quite apart from stamp duty, capital gains and inheritance there is of course income tax. The budget changes that were proposed in 2015 and will take effect from 2017 and beyond mean that those landlords paying higher rates of tax will only be  able to offset mortgage interest payments at the lower rate of tax. Depending on the level of gearing this could mean that some landlords may need to drop off some of their properties in order to reduce their  loan to value on mortgage and thus their gearing.

There is a potential here, with an influx of properties  onto the market to dampen house price sales and to reduce ( or possibly even halt) house price growth. Whilst it would be  all too easy to see the spectre of reducing house prices and a possible return to the days of handing keys back to the lender, such a view is perhaps a little far fetched.  What is not in doubt however, is that landlords at all levels, particularly those subject to personal taxation rather than corporate are going to have to take actions that they had not planned for in order to deal with the new rules.

So what does this mean for mortgage advisers?

If losses occur or if tax liabilities suddenly spring out of the proverbial woodwork, they could be  held to blame. After all a mortgage intermediary recommends or sells a BTL even if it is not generally regulated. (Consumer BTLs and regulated BTLs will be dealt with separately in this article.) That recommendation or advice or sale is expected to take into account affordability and plausibility of the deal for even where the products are not regulated it could be argued with relative ease that these things should have been considered. After all, most PI insurers require non advised sales to be undertaken  in a similar manner to regulated sales and it could be  argued in a court that given that there are also regulated BTLs in the market place in the form of CBTLs it would be  reasonable for a client to assume the same duty of care when making a sale.

So what can brokers do to protect themselves?

In relation to cases already completed, not a lot other than to put aside a reserve against potential complaints from BTL clients in the future.

For future cases however, now is the time to act.

There is a potential exposure to intermediary firms where a recommendation in made to take a buy to let mortgage (there is equally an exposure where a recommendation is not made and where a client agrees to take a BTL). The exposure relates to the potential tax liability that  a client is likely to incur either immediately or at some time in the near future. Mortgage intermediaries are not tax advisers and are not in a position to advise on matters of tax liability . However, they do have an obligation to point out potential exposures such as tax liability when considering the merits of  a mortgage transaction. To this effect, firms need to ensure that there is a dialogue about potential tax liability covering the following points:-

·       That changes are taking place in the way that HMRC looks at rental income from BTLs.;

·       That the firm is not a tax adviser and is not therefore qualified to give advice on this matter;

·       That the client should seek advice from an accountant or other tax adviser before proceeding with any BTL transaction;

·       That your firm will ask the client to sign a document confirming that advice has been taken in relation to current and future tax liability and that they are proceeding on the basis of that third party advice and acknowledging that the mortgage firm has not offered advice on matters of taxation.

These aspects should be  written into the firms BTL Mortgage procedures and staff should be  appropriately trained.

Firms should also consider implementing a suitable declaration regarding BTL transactions that is signed by all applicants.

What about consumer Buy To Lets?

Even within the mortgage sector, it seems difficult enough to determine exactly what does or does not constitute a consumer buy to let and so it seems highly likely that HMRC will take a simple view of the matter when it comes to tax liability. If there is rental income, then there is tax due, irrespective of the circumstances behind the case. This being the case, it is even more important to ensure that anyone in a position to take on a consumer BTL, or indeed a regulated BTL for a family member, is aware of their exposure to tax liability before they agree to take on such a mortgage. Once again, an explanation of the limitations of the recommending firm in relation to tax matters and a clear explanation of the likely risks and liabilities are crucial as well as some form of documentation where the client has acknowledged the issues and has confirmed that they have taken appropriate tax advice. Consumer and regulated BTLs fall within the remit of the Financial Ombudsman Service and are, by definition, easier to raise complaints about as they don’t necessarily incur costs to pursue.

MCD Data Request

Wow, December seemed to have flashed by in a blur of Consumer Credit applications. However, here we are 2016 looking forward to the implementation of the Mortgage Credit Directive and dare I say it, the demise of the second charge market. Of course I could be  wrong!

With the MCD in mind, all firms are or should be receiving notifications from the FCA asking them to complete an MCD Data return on the Connect system. If your wondering what Connect is then it is the new information reporting system from the FCA to replace the old ONA system that was switched off last year.

Point number one. If you are not already on Connect you need to sort it. Call the FCA Firms Contact centre and select the Connect option from the menu. I have found the team there to be  extremely helpful.

Point number two. For the avoidance of doubt Connect does not replace GABRIEL and the RMAR.

The notification from the FCA gives firms until 28th January (certainly in those documents I have seen so far) to respond the the Data Request so it is important to get onto this right away. It will only take a few minutes.Please be  aware that your deadline date may differ from the one I have given.

There are three basic areas:-

• who is responsible for MCD;
• whether your firm is tied or not (i.e. if you are not offering whole of market or a panel broadly representative of whole of market);
• whether you will be  offering second charges from 21st March 2016.

That's basically it. No reason to procrastinate. If you want any assistance with it, please let me know by responding to this post.

Happy New Year!