A1.08: MORTGAGE REGULATION: SALES AND ADVICE

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1 A1.08: MORTGAGE REGULATION: SALES AND ADVICE SYLLABUS Status options for firms offering mortgage advice Requirements for independence Nature and use of IDD Advised and non-advised sales Suitability Provision and content of illustrations Record-keeping Status options for firms offering mortgage advice Firms offering mortgage advice can offer: - products from across the whole market - products from a limited number of lenders - products from a single lender These different situations may be referred to respectively as independent or whole of market (see below), multi-tied and tied Alternatively, firms may choose only to give information rather than advice, but must make this clear to clients Requirements for independence In order to offer independent advice, a firm must operate on a whole of market basis This involves consideration of a sufficiently large number of regulated mortgage contracts to represent the whole market, though it would not be feasible to require that every product be considered An independent firm can use a panel of lenders provided that the panel is representative of the whole market Firms must ensure that their knowledge and analysis of the market are always kept up to date, through regular reviews and similar processes An independent adviser must offer clients the option to pay for services by means of a fee payable by the client It is permitted to offer alternative methods, for example payment solely by means of commissions or payments from lenders A firm which does not want to offer a fee-based option can offer whole of market advice, but cannot describe itself as independent Where a firm offers advice in a number of areas, for example on mortgages and investment products, they can be independent for one area, but not the other(s), provided they always make this clear to clients Nature and use of IDD On first contact, the client must generally be given the firm s IDD (Initial Disclosure Document) Note that although there is no longer a compulsory disclosure for investment business, the IDD remains a requirement in relation to regulated mortgage business

2 However, if on first contact, the firm does not expect the result to be a recommendation for a regulated mortgage contract, no IDD is required (unless and until this expectation changes) If the first contact is by telephone, the IDD must be sent to the client within 5 working days The form of the IDD is laid down by the FSA Amongst other things it must: - explain the firm s status (ie whether recommendations are made on a whole of market basis, from products of a limited number of lenders or a single lender) - state whether the firm is offering advice or a recommendation - explain how the service provided is paid for (eg a fee from the client, payments from the lender etc) - give details of the amount of any fee payable by the client, and when payment must be made - state whether fees are refunded, wholly or partially, in certain circumstances, for example, if the mortgage is not completed The IDD also gives details of the FSA as regulator, and of the FSCS (Financial Services Compensation Scheme) Information about the firm s complaints procedures must also be included Advised and non-advised sales Advised sales are those involving advice taking into account the particular circumstances of the client Those giving advice must have passed an appropriate examination (for example CeMAP) and have been classified as competent by their firm Other sales, including those where the firm has only provided information rather than advice, are non-advised sales A firm which gives advice in relation to mortgage contracts may, subject to appropriate FSA permissions, also give advice on investment products, insurance products etc, but is not obliged to do so For non-advised sales, questions designed to obtain information about the client s needs and circumstances must be scripted With a non-advised sale, the individual dealing with the client is not required to be qualified by examination in the way required of a mortgage adviser, but must be judged competent for his role by the firm The firm must ensure that the individual is trained in the use of the scripted questions, and knows the difference between giving information and making a recommendation A record must be kept of the scripted questions, and this record must be retained for a minimum of one year after the last use of the script If it becomes apparent that the client is considering an unsuitable contract, the firm must suggest that he seeks advice Suitability For an advised sale, the firm must take reasonable steps to ensure that the mortgage contract which is recommended is suitable for the client This must take account of affordability, and the needs and circumstances of the client The contract must be the most suitable of those which can be offered by the firm The assessment of suitability takes into account current interest rates and circumstances, and it must be made clear to the client that these could change in the future

3 However, information given by the client about his income and resources, including expected changes, must be considered So too must predictable changes to the interest rate applicable to the loan, for example, the ending of a discounted rate period If there is no suitable mortgage contract for the client s needs, none must be recommended In particular, this means that a firm which is not offering whole of market advice may not be able to offer a suitable contract because of the limited range of products available, but cannot then offer one which is not suitable just because it is the closest to suitable from its range Factors to consider generally include: - eligibility for particular mortgage contracts - whether interest only or repayment (or a combination) is most suitable - the term required - whether the client needs stability of repayments - whether it is important to have reduced payments initially - whether the borrower expects to make early partial or full repayments - any special features required, such as payment holidays Where a mortgage is arranged primarily for debt consolidation purposes, the following further factors must also be considered: - the increased cost arising from any lengthening of the term of the debt - whether it is appropriate to move from unsecured to secured lending, which could place the borrower s property at risk in the event of default - in the case of a borrower with a history of payment difficulties, whether renegotiation of debts would be a more suitable option If the client has no preference between interest only and repayment, an illustration for a repayment mortgage must always be given, though an illustration for interest only can also be given Provision and content of illustrations A Key Facts illustration must always be provided in connection with a recommendation for a regulated mortgage contract or where specific information (including the amount to be borrowed) is given It must be provided at the time of recommendation if in a face to face situation It must be provided within 5 working days of a recommendation being made if this is done by telephone It must be provided before the submission of the application to the lender Details of the contract and the price (ie interest rate and other charges) must be included The effect on repayments of a 1% increase in the interest rate must be shown The illustration must show the total amount which will be repaid over the term (including both capital and interest) This must also be used to show the total amount repayable for each 1 borrowed Responsibility for the illustration lies with the intermediary (or the lender if the case is handled direct) Lenders generally provide details to intermediaries to facilitate the provision of these illustrations, but the content remains the responsibility of the intermediary The illustration must not understate the cost of mortgage by more than the greater of 1 or 1%

4 This applies to: - the total repayments - the amount payable for each 1 borrowed - the monthly repayments - the increase in repayments which would result from a 1% increase in the interest rate The APR quoted must not understate the true figure by more than 0.1% The illustration must also contain details as laid down in the FSA Rules The required items include: - the service provided (ie whether a recommendation is being made) - the information given by the client (amount of loan, term, property price etc) - a description of the mortgage product concerned - details of any early repayment charges - any restrictions on overpayments, and how such payments affect interest charged - any fees payable - any compulsory insurance required - reference to the FSA guide to mortgages and their website address and telephone number Where a mortgage intermediary issues the illustration, details of any fees to be received from the lender must be given This usually requires disclosure of the total amount involved, but where the amount is no more than 250, the disclosure can simply be that the fee does not exceed 250 However, if the borrower requests details of the exact fee, this must be given even if no more than 250 The warning Your home may be repossessed if you do not keep up repayments on your mortgage must also be included The illustration must not contain anything other than the details as laid down in the FSA Rules It must not contain details of more than one regulated mortgage contract, and no comparisons can be made within the illustration It must be in the form laid down by the FSA Rules, which govern both the content of the illustration and the order in which the content is presented Record-keeping Records of advice in relation to regulated mortgage contracts must be retained for at least three years from the time the advice was given The records must include the information provided by the client There must be sufficient information to explain how the firm arrived at its recommendation as to the suitable product to recommend Records of illustrations must be kept for at least a year from the date of the client s mortgage application If the client does not apply for the mortgage to which the illustration relates, it is not necessary for the firm to retain records of the illustrations, though firms may choose to do so, in case of complaint or query The method of record-keeping adopted (eg paper files, computer records etc) is a matter for the firm to decide However, the records must be readily accessible

5 This means that, if required by the FSA, they must be available for inspection within a maximum of two business days The FSA are empowered to require access to records in all cases, without requiring specific client permission