Advisers may have to point out and explain the difference between mortgage contracts if a borrower switches from an interest-only loan to repayment, said a compliance specialist.
The FSA said: “Lenders should have a good look at the guidelines, read them through and make sure that their contract terms on switching are broadly compliant with what we’re saying. That is just guidance, not a rule, We’re just trying to point lenders in the right direction.”
Its guidelines, finalised yesterday, are not connected to the Mortgage Market Review and aim to help lenders avoid future litigation.
The regulator said it believes some switching terms in standard consumer contracts risk being considered unfair, or of not being expressed in plain and intelligible English, under the Unfair Terms and Consumer Contracts Regulations 1999.
Under the regulations, a term is only considered “unfair” if it is balanced in the firm’s favour over the consumers favour. It has also warned firms that only a court can determine whether or not a term is unfair.
“Our mortgage team decided that guidelines would help to make things clearer in terms of what a mortgage contract should look like.”
Compliance specialist, Bill Warren said that following the guidelines could be a cause of “irritation” for lenders because they will have to change literature and it will be costly.
“One implication of this will include advisers providing more information upfront in initial discussions with clients. Once the lender accepts an underwriting process, any compliance checks that they carry out, in terms of the quality of advice, will need to make sure that the terms are being covered and then follow the process into the actual contract.”
