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MMS: FCA rule changes to support execution-only as consumers ‘channelled unnecessarily into advice’

  • 26/03/2019
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MMS: FCA rule changes to support execution-only as consumers ‘channelled unnecessarily into advice’
The Financial Conduct Authority (FCA) will consult on changes to mortgage advice rules in the second quarter of 2019 after suggesting some consumers are “being channelled unnecessarily into advice”.


In the final report of its Mortgages Market Study, the regulator said it would propose the changes to support innovation in online offerings, and execution-only models.

However, it added that any harm from being unnecessarily channelled into advice “does not appear to be large”.

The proposals also continue the extension of the FCA’s focus throughout the market review on ensuring customers get the cheapest mortgage possible, rather than the suitability.

“Our current advice rules and guidance focus predominantly on suitability and no longer refer explicitly to price,” it said.

“As almost all new customers are channelled by firms to an advised route, it is likely that some consumers are being channelled unnecessarily into advice.

“However, further analysis we have carried out since the interim report suggests the harm from this does not appear to be large,” it added.


Rules deter execution-only tools

The regulator raised the issue that mortgage distribution had seen little consumer-facing innovation compared to other markets it regulated.

“For example, unlike other markets, for purchases of new products, it is usually not possible to complete a mortgage transaction online (from initial search to acceptance of offer),” the FCA said.

It added that some lenders and intermediaries had suggested that advice rules prevented them from innovating in online mortgage offerings.

“To avoid inadvertently breaching our rules they do not develop tools to sell via execution-only,” the FCA said.

In particular, these firms mentioned:

  • Perimeter guidance which states that where a firm gives generic information that leads to the identification of particular or several particular mortgage contracts they may be considered as giving regulated advice;
  • the interaction trigger for advice which requires firms interacting with a consumer in a new mortgage sale to provide advice.


Half of product transfers execution-only

Following the introduction of the ‘interaction trigger’ for advice within the Mortgage Market Review (MMR) around 97% of new mortgages are now completed with advice. Pre-MMR this was around 70% of mortgages.

The FCA highlighted that the interaction trigger does not apply when consumers choose a product transfer with their current mortgage provider and do not borrow more.

As a result, many lenders “have developed easy options for consumers to switch to another product, with around 51 per cent of internal switches sold on an execution-only basis”, the regulator noted.


Consumers have ‘sufficient financial capability’

Since the interim report, the FCA said it had expanded its analysis of the effects of advice on consumers who chose not to get mortgage advice before the MMR.

It found there was no significant change in the likelihood of falling into arrears, needing forbearance or triggering an early repayment charge when the same consumers bought a mortgage without advice before MMR or after receiving advice.

“This suggests that, many (but not all) consumers who opted out of getting mortgage advice before the MMR had sufficient financial capability to make suitable product decisions on their own,” the FCA said.

“There are some important caveats to these findings, but they do not dissuade us from the proposals we described in the interim report,” it added.


Reduce barriers to innovation

Concluding, the FCA said it was committed to identifying what changes it could make to advice rules and guidance to reduce barriers to innovation in mortgage distribution.

“At the same time, we recognise the important role our rules play in providing a degree of consumer protection for many borrowers, and we do not want to restrict access to advice for those consumers who can benefit from it.

“We have carefully considered the feedback on our interim report and we will consult on specific changes to our advice rules and guidance in the next quarter of this year,” it added.


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