FCA to require advisers to explain why they have not chosen a cheaper mortgage

FCA to require advisers to explain why they have not chosen a cheaper mortgage

 

The regulator proposed the move as part of its CP19/17 consultation on changes to mortgage advice rules, which follow on from its Mortgages Market Study (MMS) earlier this year.

The FCA highlighted that situations such as recommending a more expensive mortgage because of poor lender service standards would need to be explained and recorded.

As part of the CP19/17 consultation paper published today, the FCA said that many consumers are overpaying for their mortgages, even when they get advice.

“We also want advisers to explain their rationale where they have not recommended the cheapest of the suitable mortgages available,” the FCA said.

“This should mean more consumers understand how price has been taken account of in the recommendation they are given and give them an opportunity to challenge the recommendation.”

 

Not return of safe harbour

The FCA noted that the MMS had found around 30% of consumers could have found an identical or better mortgage that was cheaper than the one they bought.

It estimated that this made no difference whether the customer had received advice or not.

The regulator said it was not proposing to return to the pre-Mortgage Market Review (MMR) safe harbour price provision position.

“We think this approach reflects and builds upon good practice in the market,” it said.

“We are aware that many advisers already discuss price with their customers and if they are not recommending the cheapest of the suitable mortgages from their product range, explain why.

“We also consider that the proposed requirement is easier for firms to attain and prove than the pre-MMR price provision.”

 

Not incentivising price focus

It continued: “We do not want to incentivise advisers to focus on price at the expense of recommending a mortgage that meets the customer’s other needs and circumstances.

“Because of this, we propose that the adviser must first ascertain the customer’s needs and circumstances and identify the mortgages that meet these.

“In cases where the adviser does not recommend the cheapest of these mortgages, the adviser must explain why and keep a record of the explanation.”

 

‘Levelling up quality of advice’

The regulator offered an example where an adviser may decide to recommend that a two-year fixed rate mortgage with no upfront fees meets the customer’s needs.

But because the cheapest of these is offered by a lender known to have a slow speed of service and the customer prefers an offer quickly, the adviser may recommend the next cheapest mortgage.

“It is in these cases, that the explanation must be given and recorded,” the FCA said.

“We think this gives the customer a chance to challenge the recommendation, as well as levelling up the quality of advice to the good practice already seen in the market.”

 

Encouraging execution-only

The consultation also relaxes rules around advice and contact with customers with the intention of encouraging firms to create execution-only tools and make the process easier.

Although the MMS was focused on first charge mortgages, the FCA said it will also apply these changes to second charge lending, but not to lifetime mortgages.

The consultation is open until 7 July and the FCA said it will consider feedback and intends to publish its rules in a policy statement late in 2019.