FSA Mortgage Market Review Distribution & Disclosure (CP10/28) Response by the Building Societies Association

Transcription

1 FSA Mortgage Market Review Distribution & Disclosure (CP10/28) Response by the Building Societies Association 1

2 Mortgage Market Review: Distribution & Disclosure CP 10/28 Response by the Building Societies Association Introduction 1. The Building Societies Association (BSA) represents mutual lenders and deposit takers in the UK including all 48 UK building societies. Mutual lenders and deposit takers have total assets of over 365 billion and, together with their subsidiaries, hold residential mortgages of almost 235 billion, 19% of the total outstanding in the UK. They hold more than 245 billion of retail deposits, accounting for 22% of all such deposits in the UK. Mutual deposit takers account for about 36% of cash ISA balances. They employ approximately 50,000 full and part-time staff and operate through approximately 2,000 branches. 2. This response should be read in conjunction with the BSA responses to the Mortgage Market Review Discussion Paper 09/3, Approved Persons Consultation 10/2 and Responsible Lending Consultation 10/ The BSA supports the FSA s stated objectives of a mortgage market that is sustainable for all participants; and a flexible market that works better for consumers. As such we believe the MMR should be aiming to: Promote responsible borrowing by raising financial capability. Empowering borrowers to take ownership of their personal finances and enabling them to make well informed decisions; Promote best practice to raise standards across the industry and ensure better outcomes for consumers including consumer choice, transparency and TCF goals; Promote competition in the mortgage market, enabling lenders of all business structures to compete on a level playing field and provide the range of products required to service all appropriate sections of the market; Promote product innovation to meet the demand of a diverse and ever evolving customer base. A wide range of products and providers is necessary to ensure consumers have choice of product and price; and Ensure lenders have flexibility to support their customers when they need to, for example, when they are experiencing financial stress, and ensure sensible outcomes are delivered. 4. The BSA is supportive of proposals to ensure the advice and information given to consumers is both accurate and sufficient to allow them to make an informed financial decision, be that following advice or information under a non advised sale. 5. We are disappointed that this consultation does not propose any significant changes to the advising and selling process and instead seeks to make minor changes only, which will have little impact on consumers, but could have cost and process implications for firms. 6. As we stated in our response to DP 09/3, the BSA is supportive of a move away from mortgage advising and selling being solely focussed on recommending or providing information on a product. The mortgage is the single biggest financial decision an individual will make and therefore we believe the advising and selling process, particularly in the intermediary sector, should be focussed on holistic advice and/or information to ensure the mortgage is appropriate overall. This should include advice on safety nets, to ensure the customer makes suitable provisions should they experience an unexpected life event which impacts on their ability to maintain their financial commitments. 2

3 7. Whilst some of the proposals in this CP represent a step in this direction, we do not believe they go far enough, nor are they necessarily focussed on the right areas. The final outcome is still based on the seller finding a suitable or appropriate product. 8. We are also concerned that some of the proposals would be difficult for lender advisers to comply with. The proposals in the CP generally work for intermediaries, but create difficulties for lender advisers. The impact on lender advisers has not, in our view, been fully considered and as a result, some of the proposals are impractical and unnecessary. 9. In our response to CP 10/16 we argued the need for the consumer to maintain responsibility for the borrowing decisions they undertake. However, this CP proposes further requirements on non advised sales, seemingly removing more of the consumer s responsibility through the requirement on the seller to assess appropriateness. We believe that the existing rules are sufficient in this respect. We agree that customers should be fully informed and have access to relevant information in order to make an informed decision, but this decision should not be taken away from them, if they have made on the face of it, the wrong choice. Executive Summary 10. We do agree that customers should be able to obtain a mortgage without advice. Many customers are able to make sound financial decisions for themselves and they should be allowed to continue to do so. 11. We do not agree with the premise that the intermediary role should be restricted to no more than checking whether the consumer fits within the expected parameters of the lender's affordability assessment. Assessment of affordability is one of the key aspects of the advising and selling process and therefore including a requirement on intermediaries in the appropriateness test is insufficient and we would prefer that they remain as requirements in MCOB. 12. We agree that the lender should have responsibility for assessing affordability, as part of the lending decision. However, this does not mean the intermediary responsibility is diminished in any way. The lender is responsible for the mortgage, not for the customer's wider financial circumstances. The view that intermediaries merely provide the documentary evidence is wrong. The intermediary should have a wider role in relation to the advice given. 13. There is often confusion amongst customers as to whether or not they have received advice and the proposal to require an appropriateness test for all sales further blurs the distinction. It is not clear how a seller can ensure there are no suitable products, without a full fact find and in depth assessment of a customer's circumstances. Furthermore, the ability to confirm that there are no suitable products and the reasons why they believe that to be the case, in our view, leads to the seller providing a personal recommendation and therefore advice. 14. We are also concerned that the appropriateness test would extend to existing mortgages where the customer requests a variation to the mortgage contract. The current wording of the proposals conflicts with the approved persons requirements, which excluded lender staff where the variation in the mortgage contract did not include new or additional borrowing. 15. We do not see how acting in the best interests of the customer is any easier to prove or more attainable that most suitable. In our view, acting in the customer s best interests is more subjective than recommending the most suitable product and therefore is not an easier standard to attain. 3

4 16. We do agree with the proposal to apply common professional standards across the market and agree that this should be applied in line with the Approved Persons regime. 17. We agree with the intentions of the proposal to require a seller to consider if a further advance is appropriate (for advised sales), rather than seeking a remortgage and incurring the associated costs. However, we do not believe that the wording of the draft rules will achieve this outcome. Lender advisers will find it difficult, if not impossible, to comply with this requirement in its current form. 18. We agree that all customers should be advised of the impact of the rolling up of fees and therefore agree that this information should be provided in both advised and non advised sales. We also agree that fees should not be automatically rolled up and the customer should confirm their choice and a record should be maintained. 19. We believe that firms should be able to continue to use the IDD to disclose this key information. It seems pointless to require this information to be sent in a separate document. Furthermore, the proposals to introduce flexibility in the IDD template could allow firms to use the document anyway to disclose this information. We see no evidence or justification for an alternative approach. 20. In terms of oral disclosure, we are not convinced of the merits of this approach. The requirement for firms to hold a record of the oral disclosure will likely render this change redundant. 21. We do not agree that it is necessary to reiterate the firm s scope of service again at the point the product is put forward. We do not believe there is any need to add this into the process, particularly as this information will have already been given to the customer in a clear manner at the point of engagement. This may also include written confirmation, of which the customer will still have a record. 22. We agree with the assertion that there is little value in providing a KFI for all available products and agree that a more sensible approach is to provide a KFI only for the customer s preferred products. 23. We agree with the proposal to allow intermediary firms to provide a record rather than a KFI for a direct only deal. We agree that the existing rules make it difficult for intermediaries to recommend a direct only deal, even where it may be the most suitable. Distribution Q1: Do you agree that we should continue to allow consumers to get a mortgage without advice? If not, what other options should we consider and how would these result in better outcomes for consumers? 24. We do agree that customers should be able to obtain a mortgage without advice. Many customers are able to make sound financial decisions for themselves and they should be allowed to continue to do so. 25. In our view, the need for advice assumes the mortgage is new or involves additional borrowing. 26. The table below 1 shows total lending from 2006 to 2009 and the proportion of which was a remortgage. 1 Source: FSA PSD data August 2010 trend report. 4

5 Total Lending 2,254,814 2,327,604 2,016,894 1,237, ,051 of which remortgage 1,160,504 1,136,923 1,031, , ,374 remortgage as % The following chart shows the purpose of the remortgage 2, as a percentage of the total remortgage lending each year: Purpose of remortgage 50.0% 45.0% 40.0% 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% Extra money for debt consolidation Extra money for home improvements Extra money for home improvements & debt consolidation No extra money raised Unknown 28. This chart shows that a significant proportion of customers do not seek additional borrowing as the purpose of the remortgage. Whilst the number of people remortgaging and consolidating debt or withdrawing capital makes up a significant proportion of remortgage activity, other consumers remortgage purely to change the rate or reduce the amount they owe. 29. The key challenge, as ever, will be to ensure that the right customers opt for the right route. This is difficult to regulate in practice, but there are a number of ways in which the industry could collectively help drive customers through the appropriate channels. 30. The Approved Persons regime will increase confidence in those from whom advice and/or information is sought. The provision of the right information at the right time and access to financial education and capability tools, such as those on moneymadeclear, will help customers choose the route which is right for them. Q2: Do you agree with removing from sellers any requirement to assess affordability? Q3: Can you see any risks from us adopting this approach? (i) Intermediaries 31. We do not agree with the premise that the intermediary role should be restricted to no more than checking whether the consumer fits within the expected parameters of the lender's affordability assessment. Assessment of affordability is one of the key aspects of the advising and selling process and therefore including a requirement on intermediaries in the appropriateness test is insufficient and we would prefer that they remain as requirements in MCOB. 2 Source: Source: FSA PSD data August 2010 trend report. 5

6 32. We believe there are challenges inherent in the current regulatory approach to mortgage advice and information. In our view, the advising and selling process should be focussed on holistic financial advice and/or information to determine whether a mortgage is appropriate. 33. We agree that the lender should have responsibility for assessing affordability, as part of the lending decision. However, this does not mean the intermediary responsibility is diminished in any way. The lender is responsible for the mortgage, not for the customer's wider financial circumstances. The view that intermediaries merely provide the documentary evidence, is wrong. The intermediary should have a wider role in relation to the advice given. 34. Clearly lenders have different approaches to affordability and therefore the intermediary is limited in terms of matching affordability to lending criteria. However, the intermediary is in a position to assess the maximum monthly payment the customer could afford based on their circumstances. 35. This then enables the intermediary to recommend a suitable mortgage for that customer. 36. The existing and proposed approach is focussed on the intermediary finding a product and only then assessing affordability. In our view this is not the right order and instead the intermediary should be assessing the amount the customer could afford and then finding an appropriate product. (ii) Lender Advisers 37. The CP refers to the role of the intermediary in relation to the removal of affordability requirements. However, it is not clear how the proposals would apply to lender advisers. We would assume that lender advisers would be required to make an assessment of affordability based upon the affordability criteria, as this is likely to be known to them. 38. However, neither the wording of the CP, nor the draft rules, make any differentiation between intermediaries and lender advisers in this respect, with the draft rules referring only to 'the firm'. We believe that the FSA need to distinguish between lender advisers and intermediaries with regards to affordability assessments and ensure the rules take account of the different nature of the respective sales channels. Q4: Do you agree with our proposed approach to ensuring appropriateness is assessed in every sale? If not, in what circumstances do you believe the checks should be waived and how could we prevent this being used as a mechanism to circumvent our requirements? 39. There is often confusion amongst customers as to whether or not they have received advice and this proposal further blurs the distinction. It is not clear how a seller can ensure there are no suitable products, without a full fact find and in depth assessment of a customer's circumstances. Furthermore, the ability to confirm that there are no suitable products and the reasons why they believe that to be the case, in our view, leads to the seller providing a personal recommendation and therefore advice. 40. There is also the difficulty for firms who offer a very small range of products, or one product only, which is the case for some small building societies. The proposals in their current form could result in a smaller society notifying the customer that their only product is unsuitable. We do not believe this is the intended outcome of the proposal, but it is one of the consequences. 41. The existing requirements under MCOB (2) already require a firm to consider if the product is appropriate. Where the product is considered inappropriate, the FSA states that 'in their opinion, the appropriate course of action would be for the firm to tell the 6

7 customer to seek advice'. Importantly it does not state that the seller cannot proceed with the sale if the customer requests that they do so. 42. As we have consistently stated, the customer must be able to take responsibility for their own actions, subject to them being provided with the right information to make their decision. The proposal to prohibit the seller from being able to proceed with the sale, even though the customer requests that they do so, is not the right solution. 43. In our view the existing MCOB requirements should remain, with the seller permitted to confirm in writing to the customer that they do not believe the product chosen is suitable, making it clear the choice was that of the customer. 44. This in itself is likely to be sufficient to encourage the customer to think again about their product choice, without this decision being made for them. (i) Existing customers 45. We are concerned that the proposals would extend to existing mortgages where the customer requests a variation to the mortgage contract. The current wording of the proposals would result in the lender being required to assess appropriateness if the mortgage is amended in any way, not just where the amount of borrowing is increased. 46. This conflicts with the approved persons requirements, which excluded lender staff from the regime where the variation in the mortgage contract did not include new or additional borrowing. We do not believe that it is the intention of the proposals to capture variations without new lending, but this is the consequence of the current wording of the draft rules. 47. We strongly recommend that this proposal is brought into line with the approved persons requirements. (ii) Execution only 48. We do believe there is a case for execution only deals, particularly for internet sales, where there is no direct contact with a mortgage seller. 49. Scripted questions could be used to establish whether there are any suitable products. However, this is subject to the borrower providing accurate information and with their being no human intervention, this information would be taken at face value. 50. Underwriters were explicitly excluded from the approved persons regime, therefore any requirement for the underwriter to make this assessment conflicts with the Approved Persons regime. 51. We would recommend that further analysis is undertaken to determine the situations in which execution only would be appropriate, supported by suitable rules. Q5: Do you agree with our proposal for a client s best interest rule and removing the obligation for a recommended mortgage to be the most suitable product? 52. We fail to see the benefits that the proposed change will bring and see this as tinkering rather than a full overhaul of the approach to mortgage advice. 53. We do not see how acting in the best interests of the customer is any easier to prove or more attainable that most suitable. In our view, acting in the customer s best interests is more subjective than recommending the most suitable product and therefore is not an easier standard to attain. 7

8 54. Furthermore we are not sure that restricted advisers can operate in the customer s best interests, as their best interests may be to go to an independent adviser. Under most suitable it is quite clear that a restricted adviser can recommended a suitable product from those they can access. 55. In addition, it is unclear at what point the adviser needs to start acting in the customer s best interests. For example, it could be interpreted as the seller questioning the customer s decision to have a mortgage at all, or buy the particular property they have chosen. Obtaining a mortgage for a 2 bedroom property may not be in the best interests of the customer if they should be purchasing a three bedroom property. 56. We are also concerned that the definition of best interest s, is taken from the existing COBS 2.1.1, which states that the duty extends across the transaction, rather than just applying to the sales standards. Under this definition it could be interpreted that the adviser would be required to act in the customer s best interests in relation to the conveyancing aspects of the process, of which they have no control and are not suitably qualified. It could also be interpreted that the adviser has a duty for the life of the transaction, which we do not believe is appropriate. 57. As the nature of mortgage transactions is very different from other financial transactions, this definition is not appropriate and therefore we would not support carrying over the existing definition should this proposal be taken forward. Q6: Do you agree with our approach to applying common professional standards across the mortgage market? 58. We do agree with the proposal to apply common professional standards across the market and agree that this should be applied in line with the Approved Persons regime. 59. We would question whether it is appropriate for those designing structured questions to be captured. We believe it would be more suitable for those approving the questions to be captured. Whilst for many firms, particularly smaller lender and intermediary firms, this will be the same person. However, for larger firms, individuals may design the questions, which are then reviewed and approved by senior staff. In this scenario we believe that it would be sufficient for only those approving the questions to be captured and the rules should allow for this. Q7: Do you agree with our proposals to include these three elements as part of the new appropriateness test? (i) General 60. Broadly, for advised sales the three elements are sensible. However, we do have some reservations with the practical aspects of the proposals and we do not agree that the proposals will achieve the desired outcome as currently drafted. As we have argued previously, we do not agree that an appropriateness test is suitable for non advised sales. 61. We would recommend that for non advised sales, this information should be made available to the customer, with encouragement to seek advice if needed, but the assessment of appropriateness would not be necessary. (ii) Borrowing into retirement 62. As we stated in our response to CP 10/16 there are many difficulties in trying to determine a retirement income, particularly when it is some time away. Attitudes to retirement are also changing and arrangements are much more flexible than previously, and will continue to be more flexible as people work for longer. 8

9 63. The need for a considered approach is highlighted further, following the announcement by the Government that the national retirement age has been removed. The Government's intention is for this change to allow people to work for longer, therefore the proposed rules must allow the seller to take account of a customer's individual circumstances. 64. A key difficulty is that plans for retirement are very varied, making it difficult to foresee what the borrower s circumstances and income might be. This is more challenging when the anticipated retirement date is some time away. 65. We are concerned with the proposal to require the seller to assess appropriateness, particularly as the FSA has not stated how far it expects sellers to go in terms of questioning the customer and also in terms of the evidence the customer should provide. 66. The requirement to assess appropriateness could create a situation where the seller is questioning a financial planning decision, which may have been made with the advice of specialist financial adviser. We do not believe that this is the intention of the proposals, but this is a consequence of the proposed approach. 67. We would therefore recommend that our approach outlined in the response to CP 10/16 is also adopted for the advising and selling process. Our recommended approach is detailed below: Time from retirement 20 years or more 10 years to 19 years 11 months Less than 10 years Rules A warning statement should be given to the borrower advising of the need to ensure adequate retirement planning. Suggesting they take independent financial advice to ensure the mortgage is affordable in retirement. The statement should encourage the customer to 'think carefully' about their decision. The customer should provide a signed declaration confirming they are aware of their responsibilities with regards to paying the mortgage in retirement. Evidence of pension provision should be provided, but an assessment of income is not required by the lender. Proof of income in retirement should be provided to the lender Proof can be in the form of confirmation from a financial adviser that the pension will be sufficient, or a pension statement. (iii) Further Advances 68. We agree with the intentions of the proposal, to ensure that the customer looks at all alternatives for raising additional money, rather than seeking a remortgage and incurring the associated costs. However, we do not believe that the wording of the draft rules will achieve this outcome. Lender advisers will find it difficult, if not impossible to comply with this requirement in its current form. 69. The ability for a seller to assess whether a further advance would be appropriate would require the seller to have access to the further advance criteria of the lender in question. This may be difficult for restricted intermediaries who do not have access to product and criteria information for lenders with whom they have no relationship and impossible for lender advisers, who would need to obtain access to competitor lending criteria. 9

10 70. The current wording implies that the seller is responsible for collating the required information in order to make their assessment. It is this implication which creates difficulties with compliance. 71. A practical solution is to ensure the seller notifies the customer that they should speak to their existing lender, if they have not already done so, to determine if they would be eligible for a further advance and obtain a KFI. 72. If the customer chooses to do this, the seller could then use this information to determine if a further advance would be appropriate. If the customer does not choose to do this, or does not provide the seller with the required information, the seller would not be obligated to assess appropriateness. (i) Rolling up of fees 73. We agree that all customers should be advised of the impact of the rolling up of fees and therefore agree that this information should be provided in both advised and non advised sales. Q8: Do you agree with our proposal to improve the disclosure of the impact of the roll-up of fees through the provision of a second KFI? 74. We do not agree that the provision of a second KFI is the most effective way to disclose the impacts to the customer. 75. We recognise that the most cost effective way for firms to disclose the impacts may be via a second KFI. However, in terms of fulfilling the proposal s objective of ensuring the customer compares the differences and makes an informed choice, we do not believe that providing a second KFI is the most appropriate solution. 76. The KFI is a long and detailed document and therefore we would question whether duplicating all this information is relevant. The draft rules (4.7.2 (3)) give the ability for a firm to provide a 'quick quote'. Although this has not been defined or discussed in the CP itself, we believe that this approach could be more appropriate, rather than the provision of a full KFI. Once the customer has made a choice, the full KFI would be provided. 77. Furthermore, we already know that the KFI is not used as originally intended for shopping around and comparing products, therefore we would also question what evidence is available to suggest that customers would start to use the KFI to assess the impact on fees. 78. It is important to recognise that rolling up fees has been a feature of the mortgage market for many years and for many customers this is the default option. Whilst we would agree that some customers do this from an ill informed position, the likelihood is that they will continue to do so, unless they have access to funds to pay the fees upfront. Care needs to be taken that the disclosure does not lead to customers believing they should pay the fees via alternative forms of credit, putting pressure on their disposable income. 79. An example of the impact is detailed below, which is based on a fee of 995. Add to mortgage Pay by credit card Interest Rate 5% 18% Term 25 years 1 year Monthly cost This table shows that the monthly cost to the customer of adding the fee to the mortgage would be 5.88, compared to if it was paid over12 months on a credit card. 10

11 If the customer was to repay the credit balance over 6 months, this would increase to Therefore, whilst we agree that the long term cost is higher if the fee is added to the mortgage, the impact on the customer's monthly disposable income is significantly lower. We believe it is this factor which will continue to drive the consumer to adding the fees to the loan. Q9: Do you agree with our proposal to require firms to present consumers with a choice of rolling-up the fees and charges, and to record the decision made? 82. We do agree that fees should not be automatically rolled up and the customer should confirm their choice and a record should be maintained. Q10: Do you agree or have any other suggestions about how to improve consumer awareness of the impact of rolling-up fees and charges? 83. As highlighted previously, any tool to allow the customer to assess the impact of rolling up fees into the mortgage also needs to assess the impact of paying the fees via other forms of credit. 84. For example, a calculator showing the impact of rolling into the mortgage should also output the result if the same fees were added to a credit card. This will ensure the customer is able to make a fully informed decision about their finances. Q11: Do you have any views on other ways in which we could promote consumer engagement? 85. In our response to CP10/16 we argued the importance of the customer taking responsibility for the choices that they make. We suggested that the way to encourage responsible borrowing is to promote the availability of suitable advice and information. 86. The current approach to selling and disclosure is based on a structured format, with information given at set points in set ways, for every sale, regardless of its nature. It is therefore difficult for firms to provide a flexible and tailored service for customers, which would encourage the customer to be more engaged in the process. An approach to advising and selling which looks at the customers circumstances overall, including provisions to support the mortgage long term, would work better for the customer. Q12: Do you think that these distribution proposals will impact any groups with protected characteristics (e.g. race, religion, age, disability)? 87. We do not believe that the proposals will impact on any groups with protected characteristics. However, care needs to be taken that the proposed requirements, with regards to lending into retirement, do not conflict with the Equalities Act 2010, the Employment and Equalities (Age) Regulations 2006 and the Government decision to remove the national retirement age. 11

12 Disclosure Q13: Do you agree that it is appropriate to focus our service disclosure on these key messages? Do you agree that this is the correct approach for communicating these messages to consumers? (i) Service disclosure 88. We agree that scope of service should be communicated to the customer. This is a key piece of information and will ensure the customer understands whether or not they are receiving advice. However, we refer back to our previous comments on ensuring there is a clear distinction between advised and non advised sales. 89. We agree that the fee structure is important information to disclose upfront and as part of the initial information provided to the consumer. We also agree that providing the customer with information on the seller s remuneration is important. However, the revised requirement adds no value or benefit to the consumer. As such we believe the existing requirements are sufficient. 90. The current rule requires firms to disclose how much the customer will be required to pay for their services. The CP proposes that firms disclose the basis on which the firm will be remunerated. This works for intermediary firms, who are more likely to work on a commission basis for part of their earnings. However, lender advisers are more likely to work on a fixed salary, with bonus payments related to the performance of the company as a whole and not directly linked to the products they sell. Applying this requirement to lender adviser serves no purpose and provides no benefit to the customer. 91. We recommend that the requirement is re-worded to apply only to those firms who have commission based earnings. Firms whose advisers work on a fixed salary basis should not need to disclose remuneration details and instead will provide information as per the current requirements. (ii) Documentation & Oral Disclosure 92. We see no value in amending the approach on key information. 93. We believe that firms should be able to continue to use the IDD to disclose this key information. It seems pointless to require this information to be sent in a separate document. Furthermore, the proposals to introduce flexibility in the IDD template could allow firms to use the document anyway to disclose this information. We see no evidence or justification for an alternative approach. 94. In terms of oral disclosure, we are not convinced of the merits of this approach. The requirement for firms to hold a record of the oral disclosure will likely render this change redundant. Q14: (i) Do you agree with our application of the independent and restricted labels to the mortgage market? 95. We agree that the labels applied to advisers need to be simplified. In our response to DP 09/3, we were in favour of such an approach. 96. We are concerned that restricted, could be interpreted by consumers as relating to the quality of advice they are receiving, rather than to the range of products available. 97. This is the drawback of using a single word. An alternative may be to consider the use of key phrases to describe the service being offered, which would ensure the customer receives clear and concise information. 12

13 (ii) Do you agree that we should require independent firms to disclose whether they consider direct-only deals? 98. We agree that this is a necessary change. When engaging the services of an independent broker, it would be reasonable for the customer to assume that this will include products advertised by their building society or bank. It is right that independent firms are transparent if this is not the case. (iii) Do you agree that we do not need to retain a fee option as part of our requirements for the label of independent? 99. We agree with the proposal to remove the mandatory fee option in order to be considered independent. However, we would argue that firms should always be encouraged to charge a fair fee for the services they provide, rather than relying upon commission from lenders. This will ensure that the market continues to operate without any significant commission bias and would promote consumer confidence in the services they are receiving from the firm. Q15: Do you agree that firms should reiterate their scope at the point that they put the product(s) forward? 100. We do not agree that it is necessary to reiterate the firm s scope of service again at the point the product is put forward. We do not believe there is any need to add this into the process, particularly as this information will have already been given to the customer in a clear manner at the point of engagement. This may also include written confirmation, of which the customer will still have a record We do not believe that this proposal works within the FSA objective of reducing information overload on the customer. We would also query what evidence the FSA has that demonstrates that this proposal is necessary. Q16: (i) Do you agree that we make these changes to the trigger points for the preapplication KFI? 102. We agree with the assertion that there is little value in providing a KFI for all available products and agree that a more sensible approach is to provide a KFI only for the customer s preferred products We also agree with the proposals to allow firms to provide information about the product and that the current rules are restrictive in this respect We are not entirely convinced that removing the rules is the best option and reminding firms via guidance, to act in the customer s best interest and not be biased by commission. Although the FSA has not found evidence of commission bias, this could in part be down to the existing rules with regards to disclosure In our view, introducing guidance rather than rules could result in commission bias occurring and we would urge caution in this respect as this is likely to result in consumer detriment. (ii) Do you agree that we should have a requirement to make firms tell consumers that they can request a KFI for any product they offer? 106. We are broadly supportive of this proposal, but would question the need for such a requirement to be imposed on firms. As stated in paragraph 3.40 in the CP, only a small proportion of customers use the KFI to shop around. Imposing a requirement on firms to notify the customer they can have a KFI on any product is unlikely to increase this proportion, particularly amongst customers who are opting for advice. 13

14 (iii) Do you agree that we should require firms to provide the consumer with a record, rather than a KFI, where they recommend a direct-only deal? 107. We agree with the proposal to allow intermediary firms to provide a record rather than a KFI for a direct only deal. We agree that the existing rules make it difficult for intermediaries to recommend a direct only deal, even where it may be the most suitable We also agree that a firm should be able to charge a fair fee for their advice or services provided (as we have stated previously) including on direct only deals. This approach is likely to ensure firms are not driven by commission bias and are offering the customer a product most suitable for their needs. Q17: Do you think that these disclosure proposals will impact any groups with protected characteristics (e.g. race, religion, age, disability)? 109. We do not believe that the proposals will impact on any groups with protected characteristics. Q18: Do you have any comments on the most appropriate way to read these proposals across to equity release? 110. We have no comments. Q19: Do you have any comments on the most appropriate way to read these proposals across to Home Purchase Plans? 111. We have no comments. Q20: Do you have any comments on the cost-benefit analysis? 112. We have not sought to comment on the cost benefit analysis in this CP in detail, as we do not believe it is appropriate to assess the impact on these proposals in isolation. As we stated in our response to CP 10/16, a full CBA which assesses the cumulative impact of the MMR in its entirety is needed. We welcome the FSA's confirmation that a detailed CBA on the cumulative impacts of the MMR will be published It is also difficult to comment on the CBA due to the concerns we have with some of the proposals. As we have argued, some of the proposals are impractical and unworkable, particularly for lender advisers and many of the proposals will have unintended outcomes, which require a redrafting or reconsideration of the policy approach. (i) Market Failures 114. We agree that some consumers may have been sold or taken out an inappropriate mortgage, but we do not agree that there is sufficient evidence to state that the market has failed. We believe that for the majority of customers, the existing requirements serves them well We do agree that some changes could be made to enhance the process, but the majority of changes proposed in this CP will not achieve this. As we have stated throughout, we believe there needs to be a fundamental review of the advising and selling process to deliver tangible benefits to the customer In the meantime we believe it would be more appropriate for the FSA to take targeted action against firms where there is evidence of consistent mis-selling and consumer detriment. 14

15 (ii) Compliance Costs 117. The proposal to require an appropriateness test on existing customers would mean that lender staff would be brought under the approved persons requirements (as per our response to question 4). This would significantly increase the number of staff captured by the professionalism requirements and therefore the estimate of 3,000 to 5,000 significantly understates the likely impact and therefore results in much higher costs. (iii) Benefits 118. We do not agree that the proposals will increase the suitability of mortgages offered and accepted by customers. As we have stated, a number of the proposals have unintended outcomes and are impractical or unworkable. As such we do not believe there is sufficient evidence to justify the need for change. Q21: Do you have any comments on the compatibility statement? 119. As we have stated throughout our response, we do not believe all the proposals are necessary, nor will they deliver the outcomes the FSA intends or expects. We believe the compatibility with the principles of good regulation need to reviewed before deciding on the final rules. Q22: Do you have any comments on the draft rules? 120. We believe that a number of the proposals need to be re-assessed to ensure they deliver the intended outcomes. We have specific concerns with some of the rules, which are detailed below, but overall we believe that the draft rules need to be re-assessed in their entirety (c) As per our response to question 13, applying this requirement to the lender adviser serves no purpose and provides no benefit to the customer. We therefore believe the current wording in MCOB would remain sufficient (3). We believe this rule could permit firms to provide customers with the impact of rolling up fees in a simple format, without the need for a second KFI. However, this rule has not been discussed in the CP, nor fully defined, therefore the FSA's intentions as to when this should be used are unknown We do not believe that these requirements work for non advised sales. As we have stated, we believe the existing MCOB rules for non advised sales are broadly sufficient (9) As we have stated, this requirement is unworkable for lender advisers and for some intermediary firms. We recommend the FSA considers our suggested approach, as per our response to question We understand these to be new requirements, but there is no reference to debt consolidation within the CP. We would recommend that this proposal is consulted on fully in order for the FSA's intentions to be understood and to ensure the proposal delivers the intended outcome. 15

16 Data Requirements 121. We agree that the current regulatory reporting needs to be reviewed to ensure relevant data is captured from firms going forward In our view, the key objective should be to ensure the data collected is useful and relevant and delivers the information needed for the FSA to monitor the rules in place. (i) Mandatory reporting of some optional PSD fields 123. We support the FSA intention of reviewing some of the current optional fields with a view of making them mandatory. We believe it would be sensible to capture data on the incentive rate end date, ERC end date and the initial gross interest rate on a mandatory basis. (ii) Adding new fields 124. We recognise the desire to capture more information relating to income and expenditure. However, the FSA needs to consider carefully how this information will be captured. Lenders will seek to assess affordability in different ways, as we argued in our response to CP 10/16. For example, lenders who factor affordability into an income multiple using statistical modelling, would not be able to provide the breakdown suggested in the CP Furthermore, the data may not yield any meaningful output for comparison purposes due to this expected variation in data sets. (iii) Definition of credit impairment 126. The credit impaired market is diverse in nature, ranging from a missed payment through to bankruptcy. Therefore whilst we are supportive of the intention to define credit impaired we believe it will be extremely difficult to do so. (iv) Fees and Charges 127. In our response to DP 09/2, we recommended that a better approach would be for the FSA to collect details of fees and charges via existing sources, such as the product specification from the lender's website and the tariff of charges. This would also put the fees into context, especially in relation to products. Where the FSA identifies potential concerns, further information should then be requested from the lender. This would be far less costly and would ensure that lenders which are compliant are not hit with unnecessary costs This is particularly relevant for firms who charge minimal fees, as is the case with small building societies. Not only are the number and types of fees charged very different from larger firms, they also tend to amend the fees less often, making regular collection of this information unnecessary For example, one small society only has three fees in their tariff of charges. A valuation fee, a repossession fee and an ad-hoc admin fee, which is only charged in exceptional circumstances. There would be little benefit from a regulatory view, for this firm to provide a regular copy of their tariff. A more proportionate response would be to provide this information only when it changes significantly. Contact 130. This response has been prepared by the BSA in consultation with its members. Comments and queries in the first instance should be addressed to Victoria Barnard, Mortgage Policy Adviser (victoria.barnard@bsa.org.uk). 16