Document to be published to Employees and ARs Head of Compliance Policy

Transcription

1 PINK HOME LOANS FINAL VERSION Mortgage Advice and Debt Consolidation Policy AR Document Information Document Purpose Governance Framework Document Name Mortgage Advice and Debt Consolidation Policy AR Date of Adoption January 2017 Target Audience All Employees and ARs Description Mortgage Advice and Debt Consolidation Policy Cross Reference Debt Consolidation Guidance AR Q&A Process Guide for Debt Consolidation Mortgages AR Debt Consolidation Horizon Guidance Debt Consolidation Non-Horizon Suitability Letter Text Debt Consolidation Calculators and Guidance Customer Debt Information Record Template Action Required Author Glossary Document to be published to Employees and ARs Head of Compliance Policy ACM AR FCA MCOB Network Document Status Area Compliance Manager Appointed Representative Financial Conduct Authority Mortgage Conduct of Business Sourcebook published by the FCA Advance Mortgage Funding Limited t/a Pink Home Loans This is a controlled document. Whilst this document may be printed, the electronic version posted on the Network website is the controlled copy. Any printed copies of this document are not controlled. As a controlled document, this document should not be saved onto local or network drives but should always be accessed from the Policy folder within the P drive. 1

2 Mortgage Advice and Debt Consolidation Policy Introduction and Role of this Policy 1. Debt consolidation is the process of repaying one or more pre-existing unsecured debts from the proceeds of a new mortgage or re-mortgage. Consolidating debt will reduce the number and monetary amount of the pre-existing unsecured debts held by a customer and replace them with a new mortgage. The previously unsecured debt is effectively repaid by the customer over the term of the new mortgage. 2. ARs must observe this Policy when it is proposed to consolidate any previously unsecured debt of a customer into a mortgage contract. 3. The Policy applies in full to any mortgage transaction (including re-mortgages, purchases, Help to Buy or similar Government schemes) that involves any element of debt consolidation, even if it is only one debt, and whether a regulated or buy to let mortgage. 4. ARs are reminded that the arrangement of a buy to let mortgage still carries with it a requirement to exercise a reasonable level of skill and care and to look after the interests of a customer accordingly. It is Network policy that an AR follows a process that is identical to that for regulated mortgage contracts in order to meet this standard. This is an essential risk management policy, designed to protect the Network and its ARs in the event of mis-selling claims. 5. This Policy should be read alongside the Network Process guide for Debt Consolidation Mortgages, which contains additional detail regarding how ARs can achieve compliance with this Policy and best position themselves to deliver a good customer outcome. The Process guide also sets out the Network requirements for the customer file and Suitability Letter content. Requirement for Customers to Receive Advice 6. Mortgages are a long-term commitment and potentially risky transaction for customers in that the debt is secured on their main residence, which could be at risk of repossession in the event that the mortgage repayments are not met. MCOB requires customers to receive Advice, such that they only enter into a Mortgage that is appropriate and suitable for their needs. This rule sits alongside the MCOB responsibility to act honestly, fairly and professionally in the best interests of customers. 7. The customer file presented to the Network should tell the story of the process set out below to show how the Recommendation was arrived at following discussions with the customer regarding their needs, preferences and risks the customer is prepared to take. From the file, the Network should be able to ascertain how and why an individual adviser used their skill and applied their judgement in the best interests of the customer. 2

3 8. As part of the Network, ARs are subject to the general regulatory requirement that customers experience good outcomes in the course of their dealings with the Network and AR members. The following sets out the steps an AR will take in the course of providing Advice to a customer: 9. Taking a customer through this journey, in a clear and logical way, will place the AR in the best possible position to deliver a good customer outcome. Customers should be able to identify the value that an AR firm has added by providing Advice, rather than simply viewing the intermediary as the channel through which a lender deal can be accessed. The Factors in the Suitability Assessment 10. In addition to the MCOB requirement to act honestly, fairly and professionally in the best interests of customers, a consideration of the suitability of a proposed Mortgage contract for a customer will involve the assessment of the following factors by the AR: 3

4 11. Any risks that the customer may be exposed to as a result of the suitability assessment should be appropriately mitigated by other factors known about the customer, and the reasons why it is appropriate for the customer to take those risks documented on the file. The information gained at the fact-find stage should be assessed without making assumptions or ignoring customer needs where these have been identified. 12. By way of example, the risk associated with an early repayment charge (ERC) where it was established by the fact-find that the customers have school age children and a new house in a catchment area of a good school. This means that any potential impact of an ERC on the customer is low as they are unlikely to either (1) be moving house or (2) want to release funds for home improvements. The risk is therefore appropriately mitigated. Specific Requirements for Debt Consolidation Cases 13. MCOB contains a specific rule requirement which needs to be met by ARs who are dealing with customers who are seeking to consolidate existing debts into a Mortgage. This rule is in addition to the other considerations with regard to the suitability assessment set out above. 14. Where debt consolidation is a feature of a mortgage then ARs are required to take account of: any costs associated with the period over which the debt is to be repaid; and whether it is appropriate for the customer to secure a previously unsecured loan; and 4

5 where the customer is known to have payment difficulties, whether it would be appropriate for the customer to negotiate an agreement with creditors rather than take out a mortgage 15. In addition, as a natural consequence of already having raised the subject of additional sources of finance with a customer at the point of explanation of the service Disclosure Document, the Network expects that an AR contemplating recommending a debt consolidation mortgage transaction will also have discussed whether the customer has the option of consolidating the pre-existing debt into another personal unsecured loan or make use of options such as a credit card balance transfer. The Network expects to have seen these options to have been ruled out or, if they are available to the customer, utilised as part of the overall solution to addressing the needs and circumstances of the customer. 16. Customers who are in a poor financial situation should be handled with extreme care by ARs. Where a customer s history shows a track record of debt consolidation which has nonetheless resulted in an inability of the customer to manage their financial affairs, it will be difficult to demonstrate that it was appropriate to repeat the exercise, exacerbating the circumstances of the customer by adding additional fees and charges to the mortgage amount. 17. Customers who are under pressure financially are considered potentially vulnerable by the Network and for this reason the Network will apply the requirements of this Policy strictly. The pressure may be the result of job loss, divorce or separation or ill health. ARs are likely to offer the prospect of a solution to make the problem go away with a customer more keen to deal with the symptoms of the over-indebtedness (e.g. stopping persistent contact from creditors) rather that dealing with the actual debt itself. Such facts simply serve to underline the importance of customers receiving good advice. 18. Assessing the appropriateness of debt consolidation is an exercise of judgement, intended to force consideration of the question just because I have an option available for the customer to consolidate debts, is it right that they do so, incur more costs, and risk a deterioration in their financial situation which could result in re-possession. For some customers, it will be entirely appropriate for the AR to step back from the transaction and refer the customer for professional help and advice on debt counselling. 19. Examples of good and poor practice on debt consolidation cases are provided below. These do not mean that a customer outcome will be suitable or unsuitable if the particular scenario set out is evident at file review; each case is assessed by the Network in the round. For this reason, and as detailed above, it is very important for the file to tell the story to avoid possible poor customer outcome indicators being flagged where the reality is that information missing from the file would have been sufficient to record the case as providing a suitable customer outcome. 20. Some examples of good and poor practice when considering Debt Consolidation are: 5

6 ARs collect the interest rates payable and amounts outstanding on all preexisting unsecured loans, enabling the AR to consider whether it is appropriate for the customer to consolidate the debt on an individual debt by debt basis (i.e. which debts to leave in and which debts to leave out) - this analysis is then summarised for the customer in the Suitability Letter The customer file contains the calculations that the AR has made in relation those debts that are to be consolidated and which have been used to demonstrate the effect of extending the term of the debt in cash terms to the customer Customers who are in dire financial circumstances, and in relation to whom debt consolidation into a Mortgage has failed as a strategy in the past, are referred to take professional advice on managing their finances rather than shoe-horned into a potentially unsuitable Mortgage Re-mortgaging the customer is possible without debt consolidation and the consequential reduction in the Mortgage repayment can be applied to reduce the unsecured debts, without increasing their cost over the long term and exposing the customer to the risk of securing the debts against their home Weak rationale cited as the reason for the consolidation e.g. "the customer wanted one easy manageable repayment" when the circumstances of the customer demonstrated that they were keeping up to date with multiple payment amounts and dates, had the situation under control and there was insufficient complexity in the customer's circumstances to justify the consolidation Over-reliance on risk warnings and dislosures to justify the Recommendation e.g. "you have been advised that these debts are now secured on your home" without the customer being taken through the finanical implications as required by the MCOB rule Consolidation of debt that had a 0% interest rate, or loans with a relatively short term remaining and the customer was managing to make repayments (and could continue to do so) thereby making this element of the debt much more expensive for the customer Where the transaction purports to generate more disposable income or spare cash for overpayments, including switching a customer from a repayment Mortgage to interest only, the file does not contain a plausible explanation of why such headroom was required or whether there are other ways to achieve this, especially when interest rates on loans were increased and costs added to the mortgage, or where payments were being maintained on existing debts and the customer would have repaid those debts (had they not been consolidated) There was insufficient consideration of short term gain to the customer v increased long term costs e.g. a nominal increase of say 100 in "spare cash" did not justify costs to set up the mortgage, an interest rate increase, switch from repayment to interest only and debt consolidation 6

7 Assessing each Debt on an Individual Basis 21. The customer record in relation to a Mortgage where pre-existing unsecured debts have been consolidated into the mortgage must be able to evidence consideration of: all the general factors to be taken into account when assessing suitability (set out in paragraph 10 above); and all the considerations that are specific to the debt consolidation (set out in paragraph 14 above) 22. The Network requires that customers are talked through an assessment of each debt they are potentially seeking to consolidate, to enable the customer to understand the impact of a decision to consolidate the individual debt on both (1) the length of time it will take to repay the debt and (2) the total amount that will be repaid so that a meaningful comparison can be made and the customer can make an informed decision. Specific Examples 23. Advice to consolidate 0% rated credit cards with a relatively long period to run on the 0% period and/or loans with 12 or less months remaining on their term will be considered indicators of a poor customer outcome, unless the needs and circumstances of the customer are such that consolidation is appropriate when all relevant factors are taken into account. 24. Advice to consolidate an overdraft balance or amounts due under a short term high cost loan (i.e. pay day loans) will very rarely be suitable for customers. These are short term debts designed to provide emergency or crisis funding. Regular use of these facilities by a customer is likely to indicate a wider reliance on credit and living beyond means and should be a material factor to be taken into account by the AR in deciding whether to advise a customer to consolidate debt or refer the customer for formal debt counselling. 25. Switching a customer from a repayment mortgage to interest only (whether in whole or in part) and which also involves debt consolidation is also highly likely to give rise to a poor customer outcome, giving rise to the customer having no prospect whatsoever or repaying the debt. Customers for whom this strategy appears to be the only option should be referred for formal debt counselling or debt management advice. File and Suitability Letter Requirements 26. The Network Process for Debt Consolidation Mortgages sets out the Network requirements for the customer file and Suitability Letter content to assist ARs in meeting the requirements of this Policy. 27. Debt Consolidation Mortgages must be recorded as such within Horizon. Any attempt to manipulate or disguise the true nature of a transaction will be treated as a serious matter by the Network which may involve the invoking of the AR disciplinary, suspension or termination process. 7

8 ARs to operate within the boundaries of the Network regulatory permissions 28. The Network holds the regulatory permissions for itself and its ARs, of Advising in relation to Regulated Mortgage Contracts and Debt Counselling (limited to Counselling, no debt management). ARs must ensure that they conduct their own activities with customers within the boundaries of these permissions. 29. All of the following steps that will be taken by an AR in the course of discussions with and advice to a customer are permitted within the permissions that the Network holds: a detailed discussion regarding a customer s budget, including how discretionary spending may be reduced in order to free up cash to repay debts general advice on borrowing within what is affordable by the customer a discussion with a customer regarding how they feel about attempting to agree an informal agreement with their creditors, such as asking a loan provider for a reduction in the interest rate charged helping a customer establish what their priorities are when it comes to repaying their debt a recommendation that a customer seeks advice from a qualified insolvency practitioner 30. ARs are reminded that they should not undertake any of the following steps with or on behalf of customers as they are outside the permissions that the Network holds: Negotiating with providers of credit on behalf of a customer Act as a conduit for payment between a customer and providers of credit Conclusion and Review Timetable 31. This policy details the Network requirements with regard to Mortgage Advice and Debt Consolidation. 32. The on-going suitability and fitness for purpose of this policy shall be considered periodically by the Network compliance function. 8