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New rules of thumb

  • 15/07/2003
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Mortgage market regulation rules are beginning to come together with the release of CP186 which sets out how firms must behave in order to comply

Keeping up with the latest regulatory proposals published by the Financial Services Authority (FSA) is no easy task, especially when they are over 600 pages in length. CP186: Draft Conduct of Business Rules was published in late May and is the follow up to CP146. With mortgage regulation only 15 months away, this is the paper that has everyone talking, and quite rightly so.

CP186 is so large that it is split it into two volumes. Volume 1 contains feedback on the proposals and draft rules that were published in CP146. The appendices include a summary of the changes to other parts of the Handbook, as well as the list of questions that the FSA is still consulting on. Volume 2 contains the complete draft rules for consultation and the draft transitional provisions, although some of the these are classified as ‘near final’. This means the only changes that can be made from now on are technical to improve clarity and correct text.

So what has come out of CP186? One of the most significant changes to be made is the revised proposals on selling processes. The FSA will now class the risk of mortgages as either ‘standard’ or ‘higher’, the latter will include lifetime (equity release) mortgages and these will have more onerous requirements.

In CP146 it was proposed that there would be three types of sales; advised, non-advised using filtering questions and non-advised execution-only. Following strong representations made in the consultation process, the FSA has decided to simplify these to either ‘advised’ or ‘non-advised’ sales.

As would be expected there are detailed rules on the components of ‘suitable advice’ but there are also some very stringent requirements on the giving of ‘non-advice’, and anyone considering this route should read what is required very carefully.

Thankfully the FSA has now recognised in the suitable ‘advice’ requirements that when distinguishing what best meets the clients needs and circumstances, in addition to pricing elements, it will be acceptable to consider an alternative criteria such as speed or quality of service from the lender.

What constitutes ‘independence’ in the mortgage market has now been clarified and firms will only be able to be able to describe themselves as independent where they:

• Intend to provide a ‘whole of market’ service; and

• Offer the consumer the opportunity of paying fees for this service.

The whole question of what ‘whole of market’ means and how fees versus commission will work needs closer inspection but many will be relieved that there will be consistency with the investment market.

As in CP146, the FSA does not propose that a ‘suitability’ or ‘reason-why’ letter is given to the client, but it does propose that firms keep a record that explains how a recommendation made to a borrower has met the ‘suitability’ rules. Record keeping requirements in the mortgage conduct of business rules are for twelve months but for this particular requirement it is likely to be for three years.

One particular concern many mortgage advisers had was in relation to ‘training and competence’. The FSA has confirmed that it does not intend to require a top-up examination and will ‘grandfather’ advisers who have passed CeMap or MAQ under the MCCB requirements. Those only carrying out non-advised sales will not require a formal examination and will only need to meet the FSA’s commitments.

Firms will however be responsible for ensuring that advisers are familiar with the requirements of the new regime. This will necessitate some form of testing. Advisers should also be warned that T&C extends a lot further than simply passing the relevant examination. For example firms will need to have a process ensuring that they assess the ongoing competence of all relevant staff.

One of the main regulatory tools used by the FSA is issuance of ‘disclosures’ to the customer. Mortgage advisers must give the client:

• A standardised initial disclosure document at the initial point of contact, giving the client information to help them decide whether to use a particular firm’s services.

• A key facts illustration or KFI (previously known as the pre-application illustration) setting out personalised product information in a consistent format, provided early in the sales process to help the client compare products.

Both these documents are extremely important and the rules on the content of information, the timing of when they need to be provided again as well as what happens when changes occur all need close attention.

Under the ‘fair treatment’ of consumer proposals, the FSA is sticking to its guns on not requiring cooling-off provisions as well as banning ‘cold calling’. The ban on ‘cold calling’ will mean that firms will not be able to make a ‘real time promotion’ (telephone or personal visit) unless that promotion is:

• Initiated by the recipient (customer); or

• Takes place in response to an express request from the recipient.

An express request could come from the completion of a consumer questionnaire where the respondent has indicated a wish to be contacted regarding their mortgage requirements.

There are also some amendments to the proposals on commission disclosure. For a start, disclosure will be required of all material inducements and commission paid. Disclosure of an actual amount will follow MCCB’ rules and is only required where it is over £250. However, if any third party receives a payment from the lender, in connection with the introduction such as the packager, this must be disclosed as well.

Other outcomes of CP186 that firms should be aware are: the decision to require all firms regulated in respect of mortgage activities to join the compulsory jurisdiction of the Financial Ombudsman Service; specific rules on those firms holding client money; and transitional provisions.

In future weeks this column will look in more detail at the various requirements discussed above.


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