Most advisers should now be fully aware of the existence of CP98, the Financial Services Authority’s (FSA) draft proposals for mortgage regulation. For the rest another consultation paper from the FSA, and especially one which is over 400 pages in length, will probably not be on top of the priority list. This is especially true for mortgage intermediaries, because it is the actual mortgage lenders that will be regulated and not the broker.
Lenders are slowly getting to grips with the draft mortgage sourcebook, the all important rules contained within CP98 ‘ and unsurprisingly they are finding aspects they do not like. What is also becoming apparent is that while the mortgage intermediary has managed to avoid actual regulation, there are many areas that have serious implications for them, such as the rules governing the financial promotion of mortgages.
Currently any credit-related advertising carried out by a broker, must comply with the Consumer Credit (Advertisements) Regulations, introduced back in 1989. These regulations divide advertisements into three categories, simple, intermediate and full, depending on the level of information included. Each category has its own set of rules as to what either cannot or has to be included. While most advertising falls into the simple and intermediate category, websites displaying latest product rates would be classed as full credit advertisements and are, therefore, required to show a lot more information and small print.
From 30 August 2002, the date that the FSA regime will come into force, brokers will need to be aware of the new FSA rules on Financial Promotion ‘ or they may get a shock to the system.
The new rules
While these new rules will reverberate across the industry, one of the main areas of impact will stem from restrictions placed upon brokers in the promotion and advertising of their services. Under Section 21 of the Financial Service and Markets Act, and from 31 August 2002 it will be a criminal offence for any person, in the course of their business, to communicate a qualifying credit promotion unless it is authorised or an authorised person approves the content of the communication.
So, what does ‘authorised’ mean? It includes all those permitted by the FSA to carry out activities such as promotion and advertising approval. Therefore, any non-FSA authorised mortgage intermediary will not be able to display their advertisement without first having it approved by an FSA ‘authorised’ firm or person.
Thankfully this will not apply to all advertisements or promotions, there are some exemptions. Provided the promotion or advert does not identify the mortgage lender, it is exempt from these rules. However, the promotion will remain subject to the existing CCA rules.
In addition, the rules provide that a qualifying credit promotion is exempt where it contains only one or more of the following:
• The name of the firm.
• The company logo.
• A contact point such as a postal address or telephone number.
• A brief factual statement of the promoter’s occupation.
There are also exemptions applying to ‘face-to face’ and telephone communications that take place between brokers and their clients.
So who can approve the advertisement or promotion? First, the authorising body must be FSA endorsed. On the plus side, however, it can be any author- ised firm, so it does not necessarily have to be the mortgage lender that is mentioned in the advertisement. Second, the actual individual approving it must have the ‘appropriate expertise’.
That expertise will depend on the complexity of the advertisement, in essence, what this means is the compliance officer checking, approving and signing off the advertisement or promotional material will need to be as thorough with this as with any advertisement of their own.
It may be the case that some mortgage lenders come to the rescue, but that is only likely if it promotes their product alone. In time, we are likely to see non-lender authorised firms who specialise in providing this type of service, but they are likely to charge a fee for taking on this responsibility.
Whether or not a broker is authorised it will be important to gain a thorough understanding of the rules to ensure that any work meets standards first time round.
To begin with, it is probably worth understanding what the FSA is trying to do. Research conducted by the FSA into consumers’ buying decisions, concluded that while many advertisements carry a lot of complex but important information, it is only really the key selling points that are absorbed.
This led the FSA to conclude that much of the prescription laid down by the Consumer Credit Act (CCA) in terms of caveats and legalities can actually be dropped, as long as there is balance in respect of any key selling features. Although this sounds good, and indeed not many would argue to keep the CCA rules, what will this mean in practice?
Well, not only does this mean a layer of complexity associated with the categorisation of advertising as specified in the CCA regulations has been removed, but it also means that small print examples of advertised deals are no longer required.
The scope of the regulations is quite broad, covering the wide range of activities classified as a ‘qualifying credit promotion’ (see table on page 34).
The new rules require each advertisement or promotion to comply with the following:
• It must be clear, fair and not misleading.
• If it describes the features of the product, it must give no less prominence to the possible disadvantages as to the bene fits. When advertising a fixed rate deal, equal prominence must be given to any early repayment charge.
• It uses plain and intelligible language and is easily legible.
• The accuracy of all statements of fact are or can be substan- tiated.
• It’s promotional purpose is not in any way disguised or misrepresented.
• Any statement of fact, promise or prediction is clear, fair and not misleading.
• Any statement of opinion is honestly held and given with the consent of the person concerned.
• Comparisons are verified, relevant assumptions disclosed and contrast is presented in a fair and balanced way.
• It must not contain any false indications in particular to firms resources and scale of activities.
• The design, content or format does not diminish the signifi- cance of any statement, warning or other matter that it is required to contain.
• It does not include any reference to approval by the FSA or any other governing body.
The risk warning is still required for all advertisements but the wording has changed. The FSA wanted it to be hard hitting to the consumer, and have proposed changing it to ‘You may lose your home if you do not keep up repayments on your mortgage’.
Where interest rates are quoted, the advertisement must include the relevant APR for that loan. The APR must be no less prominent than the interest rate.
Equal prominence must be given to the interest rate that will apply beyond any fixed or discounted period. This would be displayed as: ‘x% for the first six months, changing to x% variable for the the remainder of the mortgage’.
There are also restrictions on the use of certain words such as ‘interest-free’, ‘free’, ‘gift’ or ‘pre-cleared’ unless they can be completely substantiated.
Many mortgage advisers now have their own websites, some are bespoke whereas others have purchased ‘off-the-shelf’ solutions.
Those that advertise specific mortgage deals or provide search and selection engines will need to have their website approved by an FSA-authorised firm. No individual mortgage lender is likely to undertake this role, so any broker providing multiple product information needs to check with their web supplier to obtain approval.
The other consideration is that if your website is capable of allowing the customer to make an application online, it will be regarded as a ‘direct offer qualifying credit promotion’. As such it must be capable of providing a pre-application illustration.
The new financial promotion rules are a major step forward from the existing CCA advertising regime and should aid transparency for consumers as well as simplifying the process for advertisers themselves. However, if non-authorised mortgage intermediaries wish to include product information in their advertising or on their website, they will need to find someone who is authorised and can approve them on their behalf ‘ otherwise from September next year they will be committing a criminal offence.
The FSA’s new financial promotion rules will come into force on 31 August 2002.
Certain advertising and promotional material will need to be approved by an individual authorised by the FSA.
Brokers with websites advertising specific deals must not neglect to seek FSA authorisation.