Last month’s edition carried an article describing the Financial Services Authority’s (FSA) proposals for mortgage regulation, which were published in Consultation Paper 98 on 14 June. These proposals will affect all mortgage lenders, administrators and intermediaries and all these firms should study the proposals and consider how they might be affected by them.
So what are the implications of the proposals for mortgage intermediaries? All mortgage lenders and administrators will need to be authorised by the FSA to conduct mortgage business. The firms which will need to be authorised will range from traditional lenders such as banks and building societies to firms that lend for home improvements and debt consolidation. The Government decided that mortgage advice would not be part of the FSA’s regime, so mortgage intermediaries will not need to be authorised. But the proposals will nevertheless have implications for intermediaries’ business.
The legislation sets out a number of conditions that mortgages must meet for them to fall within the definition of a ‘regulated mortgage contract’ and therefore fall within the FSA’s mortgage regime. These conditions are that the loan must be to an individual or a trustee, the loan must be secured by a first charge over property in the UK and at least 40% of the property must be for the residential use of the borrower or their immediate family.
The definition does not contain any maturity element, this means that short-term lending secured by first charges will be within the scope of the FSA’s regime, for example, bridging loans and secured overdrafts. The definition also specifically excludes buy-to-let lending.
Although intermediaries will not need to be authorised for mortgage business, the proposals will affect them. The main element of the FSA’s draft rules aim to improve the quality and comparability of information that prospective mortgage borrowers receive.
Before making an application for a mortgage, prospective borrowers must be given a ‘pre-application illustration’ which will set out the terms and conditions of the mortgage in a standardised format. The illustration will be personalised to the amount the consumer wants to borrow and to the particular mortgage they are interested in. It will include the amount of the monthly repayments, both at the start of the mortgage and at the end of any discount or fixed rate period. This will allow consumers to compare different lenders’ products and check that they can afford the repayments.
As many consumers use an intermediary to help them choose a mortgage ‘ at least 40% of new mortgages are originated through intermediaries ‘ the FSA believes that if its regime is to work effectively, intermediaries as well as lenders need to provide illustrations to consumers.
So, the rules propose that lenders should take reasonable steps to ensure that intermediaries provide a pre- application illustration for any product they recommend, or if the consumer asks for one on any other product. The draft rules set out some options for how lenders can meet this requirement. For example, a group of lenders could outsource monitoring of intermediaries to a third party.
The FSA rules will also cover mortgage advertising, called ‘financial promotions’ in the Financial Services and Markets Act. The FSA’s powers over financial promotions are set out in the legislation and will extend to advertisements for all credit secured in whole or in part on property, where this is offered by a firm authorised to carry out mortgage lending. The legislation says all advertisements must be approved by a firm authorised by the FSA.
So, any firms which are not authorised, like mortgage intermediaries, will need to get their mortgage adverts approved before they are issued. Authorised firms include mortgage lenders and IFAs which are authorised by the FSA for investment business.
Any mortgage advertisements will be carved out of the Consumer Credit Act (CCA) advertising regime and the FSA rules on financial promotions will apply instead. The FSA’s draft rules mirror the CCA regime to a considerable extent, but there are some changes, particularly to how interest rates are presented. The FSA is also proposing to remove some of the small print required by current regulations.
The consultation period closes on 14 September 2001 and the FSA needs responses by then. The rules will be finalised over the autumn and the FSA expects to issue them by the end of the year. The mortgage regime will come into force at the end of August 2002.
The FSA is holding a series of seminars around the country over the summer to explain the proposals in more detail to lenders, intermediaries, consumer groups and other interested bodies.
Mortgage advice will not be regulated by the FSA, but the quality of information supplied to borrowers will.
Advisers will have to get their mortgage adverts approved by a firm authorised by the FSA.
The consultation period ends on 14 September 2001 and the regime will come into force in August 2002.