Now that we have the MMR final rules and the dust has settled a bit, we should all turn our attention to the task at hand – implementation.
The most significant changes for the industry (both lenders and intermediaries) are the advice rules. Much of the early focus has been on execution-only, but this should not overshadow the changes to the advice process itself.
It appears that the FSA has made two subtle, but very significant, changes to the needs and circumstances requirements.
Currently, firms have to evidence that they have ‘taken into account’ borrower’s preferences on a number of features (including the term length, fixed or variable payments etc) when giving advice.
The MMR has changed the status of the needs and circumstances test and it now becomes a ‘rule’, against which firms will be judged. The second – and perhaps more fundamental change – is that firms can not simply take a borrower’s preferences at face-value and must make a judgement as to whether they are appropriate for the borrower.
For example, if a borrower states a preference to take a mortgage over a 30-year term to help reduce their initial payment, but the adviser believes that a 20-year term is appropriate because of their broader circumstances enabling them to repay the product over as short-a-term as possible (reducing interest payable and making them mortgage-free sooner), the adviser would be required to recommend the shorter term.
Under the current regime this would not have to be considered and the mortgage could be completed by reference to the borrower’s preferences.
Under the MMR, the mortgage can be offered over the longer term, but the adviser will have to be satisfied that it remains appropriate and would have to clearly demonstrate that their recommendation was for a shorter term and the reasons they have deviated from it.
Although this may result in the same outcome, it seems the advice process has to change and the regulation is definitely tougher – a general trend and a reminder to look carefully across all the new rules.
Andrew Baddeley-Chappell is head of mortgage strategy and policy at Nationwide
