In the Financial Conduct Authority’s (FCA’s) Mortgage Rule Review discussion paper, the regulator said the level 4 mortgage advice qualification could be updated, with all advisers required to pass it to give advice in certain scenarios.
Alternatively, advisers may be required to achieve the level 3 equity release qualification as well as the standard level 3 mortgage advice qualification. Borrowers could also be made to seek more holistic financial advice before going ahead with mortgage advice.
The FCA said professionalism in the sector meant a lot of advice went “further than the rules require”, leading brokers to recommend the product that was “most suitable” rather than simply ‘suitable’ without additional cost to the customer.
However, it found there was evidence of “poor practice in niche areas” such as lifetime mortgages and in record keeping. The FCA also said the ‘cheapest option’ rule may not be the best way to ensure the borrower understands why they are being recommended a certain product.
The regulator wants to explore if its rules require enhanced advice in certain circumstances, such as when a borrower wants to use equity in their home, for certain customers, products, or repayment types.
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It pointed to interest-only borrowers and people at higher loan-to-value (LTV) bands, who it said were overrepresented in arrears data.
Further, credit-impaired customers represent a higher share of people in long-term arrears. By contrast, the proportion of first-time buyers in arrears is proportional to the market, and it did not find a need for the potential of enhanced advice for high loan-to-income (LTI) borrowers.
It also said second charge mortgages for borrowers consolidating debt may be the right solution for some, but more complex decisions needed to be made to determine this.
Introducing personalised disclosure requirements
The FCA said changes to advice rules in its 2014 Mortgage Market Review had led to the majority of mortgage sales being advised, and execution-only sales consistently accounted for less than 5% of the market.
However, it said some parts of its current mortgage disclosure rules encouraged firms to take a one-size-fits-all approach and did not allow flexibility to tailor communications to customers.
It said firms could provide additional information, but the ease of automated standardised disclosures meant some firms did not do this, and where they did, there was a risk of information overload, which could confuse the consumer.
It said the standardised approach could be “delivering poorer customer outcomes, by requiring firms to communicate to customers in a way that obscures the information most important to them”.
The regulator said many of the rules existed because they were required under the EU Mortgage Credit Directive (MCD), but it now had the flexibility to update the rules.
Some stakeholders have told the regulator that the European Standardised Information Sheet (ESIS) is “excessively long and complex”, the FCA said the requirement to provide an annual percentage rate of charge (APRC) did not “reflect real-world mortgage behaviour”, as it assumed borrowers would not make changes to their mortgage repayment plans.
There are also products that fall outside the scope of MCD that predated the rules, including lifetime mortgages, bridging loans, credit union mortgages and overdrafts secured against property for less than a month.
It said it wanted to streamline the different disclosure requirements to remove duplication and contradictions.
Firms have told the regulator that prescriptive disclosure requirements were a barrier to adopting new technologies like artificial intelligence (AI), which could allow for more personalised and tailored disclosures.
It said there could be a more outcomes-based disclosure regime, underpinned by Consumer Duty.
