Registered Electrical Engineer (REE – Philippines)

Correct: Implementing a mandatory system control ensures that the bank’s due diligence requirements are met before a business relationship is utilized. By integrating the mortgage application system with the centralized procurement database, the bank ensures that all third-party surveyors are screened against sanctions lists systematically, which directly addresses the regulatory concern and mitigates the risk of financial crime.

Incorrect: Updating the mortgage offer letter with a disclaimer does not mitigate the regulatory risk or fulfill the bank’s obligation to prevent financial crime. Delegating sanctions screening to the third party is insufficient because the bank remains ultimately responsible for its own due diligence and cannot rely solely on a third party’s self-certification. Restricting valuations to internal staff for high-risk areas is a partial measure that fails to address the systemic control weakness across the entire mortgage portfolio.

Takeaway: Internal auditors should recommend systemic, automated controls to ensure that all third-party service providers, including surveyors, are vetted against sanctions lists before engagement.

Correct: The Financial Conduct Authority (FCA) requires all approved persons to act with integrity. Accessing a competitor’s private systems using unauthorized credentials is a fundamental breach of this requirement and the professional standards expected of a mortgage adviser, regardless of whether the intent was to help a client. This behavior undermines the trust and ethical standards of the financial services industry.

Correct: Under MCOB 11 and standard prudent underwriting, income for self-employed individuals must be verified as sustainable. For applicants with irregular income, averaging over a 2-3 year period (using SA302s or accounts) provides a balanced view. However, if the most recent year shows a decline, that lower figure is typically used to ensure the mortgage remains affordable under the applicant’s current financial circumstances, preventing over-lending based on outdated higher earnings.

Incorrect: Using only the most recent year’s profit (option_b) fails to account for the volatility inherent in self-employment and may lead to an inaccurate assessment if that year was an anomaly. Using the highest profit figure (option_c) is an aggressive lending practice that ignores the risk of lower-income periods and likely breaches responsible lending requirements. While a weighted average (option_d) is a possible internal policy, it is less prudent than the ‘average or lower’ rule and may still overstate income in a declining business scenario.

Takeaway: For self-employed applicants with fluctuating income, the most prudent approach is to use the lower of the multi-year average or the most recent year’s profit to ensure sustainable affordability.

Correct: Under MCOB 13 and the Pre-Action Protocol for Possession Claims, lenders must demonstrate that they have considered all reasonable attempts to resolve the arrears before seeking possession. Implementing a mandatory checklist within the case management system ensures that there is a robust audit trail of the forbearance options discussed (such as term extensions or payment holidays) and provides the necessary evidence to defend the firm’s actions in court.

Incorrect: Suspending all proceedings manually is an inefficient operational bottleneck that does not address the underlying documentation failure. Relying on verbal confirmation is an insufficient control for regulatory compliance as it provides no verifiable evidence for auditors or the courts. While firms can outsource the execution of enforcement, they cannot outsource their ultimate regulatory responsibility for ensuring that the process complies with MCOB and fair treatment principles.

Takeaway: Lenders must maintain detailed records of all forbearance efforts to comply with MCOB rules and the Pre-Action Protocol before initiating mortgage enforcement proceedings.

Correct: Stress testing is the most effective control because it directly addresses the risk of payment shock. By simulating higher interest rate environments during the underwriting and advice process, the adviser ensures the client can maintain repayments even if economic conditions change. This aligns with the Financial Conduct Authority’s (FCA) Mortgage Conduct of Business (MCOB) rules, which mandate that firms must consider the impact of future interest rate increases on affordability.

Incorrect: Restricting advice to long-term fixed rates is a rigid approach that may not be suitable for all clients’ needs and does not constitute a robust risk control for affordability. Retrospective file reviews are a detective control that identifies errors after the advice has been given, rather than preventing the risk of unsuitable advice at the outset. Excluding specific economic sectors is a blunt instrument that may lead to unfair treatment of customers and does not replace the need for an individualized assessment of a borrower’s financial resilience.

Takeaway: Proactive stress testing against potential interest rate hikes is the primary control for ensuring mortgage sustainability in a volatile economic environment.

Correct: In a landscape of rising interest rates and economic uncertainty, internal auditors must verify that the bank is adhering to strict suitability standards, particularly ensuring that interest-only borrowers have a viable and documented repayment vehicle to prevent future financial distress. This aligns with regulatory expectations that lenders must assess the credibility of repayment strategies to mitigate the risk of capital shortfalls at the end of the mortgage term.

Incorrect: Monitoring the speed of website updates is an operational task that does not address the underlying risk of product suitability. Analyzing market share growth focuses on business performance rather than the regulatory requirement to protect consumers from unsuitable debt structures. Tracking CPD hours is a general compliance metric but fails to evaluate the specific risk controls applied to the surge in interest-only mortgage approvals during economic instability.

Takeaway: Internal audits of mortgage portfolios during economic shifts must prioritize the evaluation of repayment strategy robustness and suitability assessments over general operational or performance metrics.

Correct: In the mortgage application and underwriting process, advisers and firms have a regulatory obligation under MCOB and AML guidelines to ensure that all financial information is consistent and verified. When unexplained credits are identified, the best next step is to perform enhanced due diligence to verify the source of funds and ensure the income is legitimate and sustainable for affordability purposes. This maintains the integrity of the underwriting process and fulfills ‘Know Your Customer’ requirements.

Incorrect: Ignoring the credits because of an automated approval is a failure of internal controls and regulatory oversight. Withdrawing the application and making accusations without further investigation is premature and could potentially lead to ‘tipping off’ or a breach of the duty of care to the client. While updating the general policy might be a long-term strategic move, it does not address the immediate risk and lack of documentation identified in the specific file under review.

Takeaway: Advisers must reconcile and document any discrepancies in financial evidence to satisfy both affordability assessments and anti-money laundering obligations.

Correct: Underwriting standards and regulatory expectations (such as MCOB) require that income used for affordability assessments must be sustainable. A significant spike in self-employed income may be a one-off event or an anomaly; therefore, a manual review by a qualified underwriter is necessary to investigate the cause of the increase and determine if it represents a stable trend before it is used to justify a loan amount.

Incorrect: Defaulting to the lowest figure is overly restrictive and may not reflect the applicant’s actual current affordability, potentially leading to the unfair treatment of customers. Increasing credit score requirements addresses credit risk and repayment history but does not solve the fundamental issue of verifying the accuracy and sustainability of the income used in the affordability model. Requiring a personal guarantee is a credit enhancement measure that does not satisfy the primary regulatory requirement to assess the borrower’s own ability to repay the mortgage from their verified income.

Takeaway: Effective mortgage underwriting requires identifying and investigating income volatility in self-employed applicants to ensure that the figures used in affordability assessments are sustainable and realistic.

Correct: In the context of complex mortgage applications, such as those involving self-employed individuals or high-net-worth clients with diverse income sources, a hybrid approach is superior. While automation can handle standard data entry and basic credit checks, manual underwriting is essential for evaluating the quality and reliability of non-standard income. This ensures compliance with MCOB rules regarding responsible lending by performing a deep dive into the applicant’s actual financial position rather than relying on rigid algorithmic parameters.

Incorrect: Automated systems often struggle with non-standard documentation or complex tax structures, potentially leading to unfair rejections or overlooked risks. Relying solely on credit reference scores is insufficient because these scores do not reflect current affordability or specific income nuances required by regulatory standards. Using gross income multiples is an outdated practice that has been largely replaced by detailed affordability assessments and stress testing to ensure the borrower can maintain payments if interest rates rise.

Takeaway: For complex mortgage applications, manual underwriting provides a necessary qualitative layer of risk assessment that automated systems cannot yet replicate with the same level of accuracy and regulatory compliance.

Correct: The correct approach involves ensuring that the adviser’s professional judgment and the client’s qualitative objectives (such as the desire to be debt-free by retirement) take precedence over or are integrated with automated system outputs. Under regulatory standards like MCOB, suitability is determined by a holistic view of the client’s needs, and a failure to align the mortgage term with the client’s retirement objectives constitutes a failure in the advice process.

Incorrect: Increasing system update frequency addresses market volatility but not the misalignment with individual client objectives. Requiring waivers is generally ineffective as a compliance tool because firms cannot contract out of their responsibility to provide suitable advice. Standardizing more quantitative data points might improve credit risk assessment but fails to address the qualitative ‘needs and objectives’ aspect of the advice, which was the root cause of the finding.

Takeaway: Automated systems are tools to assist advice, but advisers must manually reconcile system outputs with qualitative client objectives to ensure product suitability.