In recent months many intermediaries have said that until the Financial Services Authority (FSA) publishes the final rules, they cannot prepare for regulation.
Well the final rules of the mortgage conduct of business sourcebook were published on the 16 October and the FSA has met its objective of giving the industry just over 12 months to prepare and implement its requirements. This all sounds easy enough, but anyone who has looked at the published final rules will know that it is far from simple.
For example, the final rules are 337 pages long, they come with no index and the explanation as to what has changed, and why, was published separately.
The main changes
So what changes have been made from the draft rules in CP186?
It is not possible to list all the changes, but there are some key areas where significant changes have been made.
1. Record keeping Generally the conduct of business rules require firms to keep records for 12 months. CP186 consulted specifically on the required retention period for the record of the suitability decision. It has been decided that this record should be kept for three years. Remember, there are no requirements for a suitability letter but firms do have to record how they reached their decision on suitability.
2. Responsible lending
Many respondents to CP186 argued that the responsible lending rules were too restrictive and prevented self-certification lending to employed persons, which was justified in appropriate circumstances. The FSA has accepted the arguments made and the rules have been amended to reflect this. The changes make clear that the lender may rely on self-certification in appropriate cases where it has no reasonable grounds to doubt the information provided. Examples of this have been given in the guidance. Remember that, as an intermediary, when you are giving advice you must ensure that the borrower can afford the mortgage and this requirement is not removed simply because the lender is prepared to lend.
3. Accuracy of the KFI document
Many respondents questioned whether the key facts illustration (KFI) needed to be penny accurate when issued by an intermediary using a sourcing system. This is mainly due to the different calculation methods lenders and sourcing systems operate. The FSA has considered the arguments and decided that lender-produced illustrations should be completely accurate. However, for KFIs produced by sourcing systems, it has decided that a tolerance should be allowed of 1% or £1 (whichever is the greater). The tolerance would apply to the monthly payment and the total amount payable. This is good news for intermediaries, provided that any error in the calculations is within the tolerance.
4 Commission disclosure
Where the fee received by the intermediary from the lender is more than £250, this must be disclosed within the KFI. CP186 introduced a further requirement to disclose any other fees paid by the lender to third parties such as packagers. Many disagreed with this approach and argued that where the two companies were completely separate there was no need to protect the consumer. The FSA has taken on board these comments and its new rules reflect that packager fees and any other third party fees only need to be disclosed if the broker and that party are connected in some way.
5. Holding client money
The FSA research suggested that only a few intermediaries hold client money, and where they do, the sums are small and firms only hold them for a few days. Because of this CP186 consulted on whether or not to introduce client money segregation rules for mortgage intermediaries, similar to those for investment business. A mixed response was received but the FSA has concluded that as there is no evidence that intermediaries” holding of client money poses a significant risk to consumers, it cannot justify the costs of imposing client money segregation rules. However, there remain different capital resources requirements for firms that hold client money and these remain at a minimum of £10,000. These compare with a minimum of £5,000 for firms that do not.
6. Meeting the rules early
Some advisers have asked the FSA whether it is possible to introduce FSA compliant documentation before 31 October 2004 and apply it to non-regulated mortgages as well. The FSA is happy with this provided that the firm still complies with all other relevant requirements applicable at that time and does not give the false impression that the customer is receiving services and products that the FSA regulates. In simple terms, do not mention the FSA.
Firms have also asked if they can start complying with the FSA rules on general insurance at the same time as mortgages rather than wait until January. Again the FSA has no objection, in principle, provided the firm does not mislead the consumer over its regulatory status, does not use the FSA”s key facts logo on any insurance documentation, and gets cooperation from the insurer. Firms will also not be allowed to use the combined IDD document. The FSA will clarify further once the final insurance rules are published.
Getting to grips with the rules is not an easy task, but there are just under 12 months until implementation and in that time it is possible to focus on particular areas, one at a time, to build up the knowledge and understanding needed. It is the objective of this training page to help you do so.