By now mortgage brokers should be fully aware of the recent publication, by the Financial Services Authority (FSA) of consultation paper CP146, detailing its high-level approach to the regulation of mortgage advice. But are there any surprises in it, and what should brokers be looking out for?
Mortgages falling under regulation are those where the borrower is an individual or trustee, where the lender takes a first legal charge over the property in the UK, and where the property is at least 40% occupied by the borrower or a member of their immediate family. Notable exceptions are second-charge loans, buy-to-let and equity release reversion schemes.
The key areas covered by CP146 are fourfold. First, the requirements on firms relating to their sales process and whether they give advice or information.
Second, clear information about mortgages is to be laid out in a prescribed fashion that will allow easy comparisons.
Third, proposals on the fair treatment of consumers, with regard to sales practices. And finally, the requirements and information disclosure concerning individual firms.
Dealing with these in order, CP146 proposes three types of accepted selling practices. First, advised sales, where advice is given on the merits of particular mortgages, non-advised sales where ‘filtering’ questions are used to help the customer narrow down their choice, but no recommendation is given. And third, non-advised execution-only sales where the adviser merely processes the mortgage at the request of the client, with no filtering questions or recommendations.
Where firms give advice, brokers will have to consider whether a mortgage per se is a suitable product for the client, what types of mortgage are suitable, and what mortgages and lenders best meet their needs. In doing so brokers will need to assess the affordability of the mortgage during the initial period and in the future.
This area has been criticised because it could create more problems than it solves. James Mayne, head of strategic development at Britannic Money, said: ‘This could cause problems for advisers who deal with clients who want to self-certify their income so they can borrow more than the typical income multiples. We might find, in view of the risk that this poses to the adviser, self-cert loans could become an advice-free zone.’
With regard to clear information about the mortgages, it has been noted by a number of commentators that the development of the proposed Pre-Application Illustration (PAI) has been influenced by feedback on previous consultation documents. And it now acknowledges that different information is relevant to different mortgages, so the document can be quite flexible and vary in length.
However, the Mortgage Code Compliance Board (MCCB) has expressed the opinion that some of the other new proposals may lessen the clarity afforded borrowers under the current, non-statutory, regime. It feels the omission of the requirement for written confirmation to the client detailing advice received could make the complaint and redress process harder for both consumers and advisers.
Brad Baker, head of communications for the MCCB, said: ‘If there is no ‘reasons why’ letter and it is subsumed within the mortgage offer, we feel the customer may lose the relevance of this information. If there is a complaint in the future it makes it harder to track the process back.’
The FSA’s requirements for ensuring fair treatment of clients and brokers include plans to assimilate the existing financial promotions rule designed to protect consumers from being pressurised unnecessarily, although it has dropped plans to introduce a cooling-off period.
The regulator has also decided to carve regulated mortgage contracts out of section 155 of the Consumer Credit Act. Section 155 refers to the maximum fee of £5 that brokers can charge for agreements not taken up within six months of being introduced. However, with regard to charging excessive fees, it warns the amounts charged must be compared with charges for similar services in the market.
CP146 proposes that for advised sales and non-advised ‘filtered’ sales, brokers will need to issue clients with a document containing wording prescribed by the FSA. This will describe what service they provide, what lenders they deal with, how will they be paid, how (if at all) fees may be refunded, who regulates them and what to do if they have a complaint. This document will need to be disclosed at the outset of every initial meeting.
The MCCB has also raised concerns about this section as it feels that it is moving away from the requirement for full disclosure of fees as currently required under the Mortgage Code.
Baker said: ‘Under the Mortgage Code, brokers have to disclose their exact fee from lenders it is over £250. If it is under £250 they just have to mention they are receiving a fee. The FSA has proposed that they just have to mention they are receiving a fee, which we think is a retrograde step.’
However, as with most documents, what isn’t said is often as important as what is.
Rob Clifford, managing director of Mortgageforce, said: ‘There is no clear idea of a compensation scheme, and how it would be funded. In the IFA market, their Investors Compensation Scheme is the cornerstone of regulation. After all, clients who have a complaint will want some sort of financial redress. There needs to be discussion as to how it would work and be funded.’
Responses to CP146 need to be sent to the FSA by 11 November 2002.
Ben Marquand is deputy editor