Chapter 2 Mortgages Advising and Selling Standards

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1 Chapter 2 Mortgages Advising and Selling Standards 1 Initial Disclosure Requirements Scope of Service Basis of Remuneration Alternative Finance Options - Additional Borrowing Commission Payments Uncertainty whether a mortgage is regulated 2 Advised Sales Suitability Bridging Loans Debt Consolidation Interest Only Roll Up of Charges Rejected Recommendations Research Record Keeping 3 European Standardised Information Sheet (ESIS) Issuing of a ESIS Content of a ESIS Disclosure at offer stage Disclosure at the start of contract and after sale Record Keeping 4 Home Purchase Plans (Islamic Mortgages) Professional Independent Advisers Ltd 1 April 2016

2 Chapter 2 Mortgages Advising and Selling Standards 1. Initial Disclosure Requirements A firm must provide the customer with the following information: (1) whether there are any limitations in the range of products that it will offer to the customer, and if so what those are; (2) the basis on which the firm will be remunerated; and (3) (where there is an increase in borrowing) confirm the alternative finance options that may be available and more appropriate. Where there is personal interaction with a customer this information can be provided orally at the initial contact with the customer. Points 1 and 2 above have to be provided in a durable medium and it is recommended that point 3 is also confirmed by the same method and all provided at the earliest time in the sales process. If the initial contact is by telephone, then the firm must also, before proceeding further, give the name of the firm and (if the call is initiated by or on behalf of the firm) the commercial purpose of the call. Scope of Service (1) Are there any limitations in your service offering? To identify this you need to consider two parts of your sales process. Firstly what is your relevant market? This will be; Commercial business; and/or Non-Commercial business; and/or Equity Release (this is covered in a separate chapter) To be without a limitation you must also consider all products from the relevant market you are focusing on. This means for additional borrowing you must consider both first and second charge options. Secondly, to be without a limitation you must consider all lenders you have access to. If you only consider a limited number of, or a single, lender(s), you will have a limitation. You would not hold a limitation however where you do not consider direct deals (provided this was disclosed to the customer) or you do not have access to products that are only available to certain distribution groups. For clarity if you reviewed all lenders but only considered products on a first or second charge basis you would be classed as being limited in your scope of service. Only those firms that do not have any limitations in each of the relevant markets above from within their scope of service can refer to themselves generally as Independent. A firm must ensure it confirms its scope of service in clear and simple terms for the customer to understand. Examples of how these disclosures could be made are contained in our template Disclosure documents. Professional Independent Advisers Ltd 2 April 2016

3 Investment Firms firms that also conduct investment activities will need to consider the term Independent in its title. Firms cannot make a general statement of independence where they are not independent for all activities. Basis of Remuneration (2) A firm must confirm the basis of any fees that it will charge its customer. This must include when the fee will become due and if any of its fees are reimbursable (i.e. refunded, although there is no requirement to refund). This must be expressed as a specific cash amount, however, this will not always be possible. Where this is not possible the following principles must be applied; If a firm charges a fee that is a percentage of the loan the firm must provide details of the percentage and a representative illustrative example which gives an amount as a cash sum. If a firm charges one of a range of possible cash fees or percentages, the firm must provide a description of the fee in terms which include the maximum and minimum possible fees as cash sums, and what factors will determine where in the range the fee will be. If a firm charges an amount based on an hourly rate, but the number of hours to be spent on the customer's transaction is unknown, the firm must state the hourly rate in cash terms and set out what factors will determine how many hours it takes to provide the firm's services. Again, some examples of these are contained in our template Disclosure documents. Alternative Finance Options (3) Where a customer is increasing their borrowing, a firm must inform the customer of the alternative options available and the fact they may be more appropriate. This includes; A further advance Where the firm only considers first charge mortgages, a second charge mortgage Where the firm only considers second charge mortgages, a new first charge mortgage Unsecured lending Firms are under no obligation to explore the various options where they are not within the scope of their service. This means if a firm only considers first charge mortgages, it does not have to consider the merits of a second charge or other type of lending. Commission Payments Where a firm receives commission from a lender a statement must be made to this effect. This amount should then be confirmed at the time of the recommendation or a statement can be made that the amount will be confirmed in the ESIS. Professional Independent Advisers Ltd 3 April 2016

4 A general statement must be made to inform clients that they have the right to request the different commission rates payable from the range of lenders the firm considers. It is likely the request, if exercised, would be made at the time of the recommendation of the product and lender. Uncertainty whether a mortgage is regulated at initial contact If at the point that initial disclosure must be made a firm is uncertain whether the contract will be a regulated mortgage contract, the firm must: Provide the initial disclosure document, or; Seek to obtain from the customer information that will enable the firm to ascertain whether the contract will be a regulated mortgage contract. Disclosure must be provided unless the firm has reasonable evidence that the contract is not a regulated mortgage contract. 2. Advised Sales The rules require advice to be provided to a customer where there is spoken or other interactive dialogue in the sales process. Suitability Firms are required to take reasonable care to ensure the suitability of their advice. Therefore a firm should take reasonable steps to obtain from a customer all information likely to be relevant for the purpose of an advised sale. A firm must take reasonable steps to ensure that it does not make a personal recommendation to a customer to enter into regulated mortgage contract or vary an existing regulated mortgage contract transaction, unless it is, or after variation will be, suitable for that customer. When assessing whether the regulated mortgage contract is appropriate to the needs and circumstances of the customer the following factors must be considered; whether the customer's requirements appear to be within the mortgage lender's known eligibility criteria for the regulated mortgage contract; whether it is appropriate for the customer to have an interest-only mortgage (see also comments below), a repayment mortgage, or a combination of the two; whether it is appropriate for the customer to take out a regulated mortgage contract for a particular term; whether it is appropriate for the customer to have stability in the amount of required payments, especially having regard to the impact on the customer of significant interest rate changes in the future; whether it is appropriate for the customer to have their payments minimised at the outset; whether it is appropriate for the customer to make early repayments; whether it is appropriate for the customer to have any other features of a regulated mortgage contract; whether the regulated mortgage contract is appropriate, based on the information provided by the customer as to his credit history; and Professional Independent Advisers Ltd 4 April 2016

5 whether it is appropriate for the customer to pay any fees or charges in relation to the regulated mortgage contract up front, rather than adding them to the sum advanced. You must also account for any future foreseen changes. No recommendation should be made if there is no regulated mortgage or MCD contract from within the scope of the service provided to the customer which is appropriate to their needs and circumstances. Whilst this is more usually directed at firms with limitations in their scope of service, it should be applied by all firms to ensure they are applying FCA Principle 6 A firm must pay due regard to the interests of its customers and treat them fairly. All recommendations, whilst taking into account customers current needs and circumstances, must consider any reasonable future foreseeable change to these. Bridging Loans A bridging loan is a (MCD) regulated mortgage contract with a term of 12 months or less. When a firm assesses whether a bridging loan is appropriate to the needs and circumstances of the customer, the factors it must consider, in addition to the factors listed at above, are: whether it is appropriate for the customer to make regular payments; and whether it is appropriate for the customer to access finance quickly. Where a firm has identified a bridging loan as appropriate for a customer, the firm must ensure that the customer is aware that they will have to demonstrate to the mortgage lender that they have a clearly understood and credible repayment strategy in place. Where a firm is considering giving advice to a customer to enter into a bridging loan, it must consider why it is not appropriate for the customer to take out a regulated mortgage contract which is not a bridging loan. Certain types of bridging loans fall outside the definition of a regulated mortgage contract. These are limited payment second charge bridging loans and where the reference to limited payment means payments made under the contract do not exceed four. These types of loans fall within the consumer credit rules. Debt Consolidation When a firm advises a customer in relation to entering into a regulated mortgage contract where the main purpose for doing so is the consolidation of existing debts by the customer, it must also take account of the following, where relevant, in assessing whether the regulated mortgage contract is suitable: the costs associated with increasing the period over which a debt is to be repaid; whether it is appropriate for the customer to secure a previously unsecured loan; and where the customer is known to have payment difficulties, whether it would be appropriate for the customer to negotiate an arrangement with his creditors rather than to take out a regulated mortgage contract. Professional Independent Advisers Ltd 5 April 2016

6 Interest Only In relation to assessing suitability, where a firm has identified an interest-only mortgage as appropriate for a customer, the firm must ensure that the customer is aware that they will have to demonstrate to the mortgage lender that they will have in place a clearly understood and credible repayment strategy. This does not require a firm to advise the customer on a credible repayment strategy or assess the adequacy of a customer's existing repayment strategy, however, you should ensure this strategy meets with the lender s eligibility criteria. Roll Up of Charges Remuneration, fees or charges of any kind must not be added to the mortgage loan until the client has provided their express consent. Rejected Recommendations Where a customer rejects the recommendation of the adviser and wishes to proceed on the basis of their own requirements the business can be processed on what is referred to as Execution Only. This must only proceed where the customer provides the firm with the following information; the name of the mortgage lender; the rate of interest; the interest rate type (that is, whether fixed, variable or some other type); the price or value of the property on which the regulated mortgage contract would be secured (estimated where necessary); the length of the term required by the customer; the sum the customer wishes to borrow; and whether the customer wants an interest-only mortgage or a repayment mortgage; the reasons for rejecting the recommendation In these instances, before a case should proceed, the adviser should satisfy themselves the instructions from the customer are suitable for their circumstances. You should take this to mean that whilst it may not be the most suitable solution it is not unsuitable. Where you consider a client instruction as being unsuitable you need to take a decision whether it is appropriate for you to process the instructions based on FCA Principle 6 Acting in the Clients Best Interests. Should you decide to proceed you should ensure you confirm the unsuitability of the transaction to the customer. In all cases you must include the following disclaimer (or wording similar): You have chosen not to accept our original recommendation and you should be aware that with us proceeding on your specific instructions you will not benefit from the protection of the rules of the Financial Conduct Authority on assessing suitability. Research It is essential that client files demonstrate the research undertaken in selecting the appropriate product and lender. It is not sufficient merely to record details of Professional Independent Advisers Ltd 6 April 2016

7 the reference source used. The file should demonstrate that the reference sources referred to have been used logically to identify a product and lender which is suited to the clients needs. There should be sufficient evidence on file to support initial assessment carried out. This is likely to be the sourcing system used i.e. Trigold, Mortgage Brain, etc. The decision supporting the recommended lender should ensure it meets the requirements within MCOB, most notably; MCOB 4.7A6 R (1) whether the customer's requirements appear to be within the mortgage lender's known eligibility criteria for the regulated mortgage contract; MCOB 4.7A G the expected affordability criteria of the mortgage lender Record Keeping A firm must make and retain a record; Of the customer information, including that relating to the customer's needs and circumstances, that it has obtained; that explains why the firm has concluded that any advice given to a customer satisfies the suitability requirement; of the customer's positive choice (Rolling up of fees or charges into loan) where applicable; any advice from the firm which the customer rejected, including the reasons why it was rejected, before deciding to enter into an executiononly sale. These records must be retained for a minimum of three years from the date on which the advice was given. For detailed guidance to the level of information that should be recorded in the suitability report, please refer to the template reports and the range of advice standards documents on our website. You will also find a file administration checklist document that lists the documents you should hold on your client files. Issuing of an ESIS 3. European Standardised Information Sheet (ESIS) The firm is responsible for ensuring a personalised European Standardised information sheet (ESIS), is issued to a customer when a particular mortgage is recommended to them; when written information is provided that is specific to the amount a customer wants to borrow on a particular mortgage; when a customer requests written information that is specific to the amount they wish to borrow on a particular mortgage, and; before they apply for a particular mortgage. The ESIS should be provided in a durable medium and must make clear; the features of the contract; any linked deposits, linked borrowing and any tied products, and; Professional Independent Advisers Ltd 7 April 2016

8 the price that the customer will have to pay. It is imperative the customer understands the importance of the personalised ESIS and the customer must be compelled to read the document and confirm understanding. If the customer does not understand any aspect of the ESIS i, you should offer sufficient time and assistance to enable customer understanding. You should encourage your customers to retain a copy of the ESIS for future reference. A copy of the ESIS must be retained on file for at least one year from the date of application. In the event the mortgage contract requires that a customer takes out tied products as a condition of the loan, this should be detailed within the ESIS. Content of ESIS While the lender is responsible for the accuracy of the content of a ESIS in cases where you have obtained the document directly with them, it is your firm that must take reasonable steps to ensure the ESIS issued is accurate, where this is obtained indirectly (i.e. through a mortgage sourcing system). For example: The main features of the loan o amount and currency of the loan, with further details where the loan is not in the national currency of the borrower o the duration of the loan, type and typical applicable interest rate o the total amount to be repaid Interest rate and other costs o The APRC applicable to the loan o Costs to be paid on a one-off basis o Costs to be paid regularly Frequency and number of repayments The amount of each instalment, reflecting affordability o the need to make separate arrangements for any element that is on an interest-only basis, o changes in interests rates, where applicable fluctuations in currency exchange rates of 20% relative to the credit currency, as well as o details of and tied savings products and deferred- interest loans Additional obligations Early repayment and any charges applicable Flexible features such as portability to another property or lender You should familiarise yourself with the document, and ensure the figures are accurate before it is provided to the customer. LENDERS HAVE UNTIL MARCH 2019 TO CONVERT FULLY TO THE ESIS. UNTIL SUCH TIME THE KEY FEATURES ILLUSTRATION CAN BE ISSUED WITH ADDITIONAL INFORMATION. THIS WILL BE KNOWN AS A KFI PLUS. Disclosure at the offer stage This applies to the lender of a regulated mortgage contract. The purpose of making appropriate disclosures at the offer stage is to ensure that the customer receives a clear offer document to enable them to check the Professional Independent Advisers Ltd 8 April 2016

9 features and price of the home finance transaction before they enter into it. The offer document should include an updated and suitably adapted illustration (for a regulated mortgage contract) or financial information statement (for a home purchase plan) so that the customer can compare it with the one they received before they applied for the home finance. Disclosure at the start of contract and after sale Information must be supplied to customers at the start of a regulated mortgage contract to enable them to check that the mortgage contract has been set up in accordance with their requirements and to notify them of the first and subsequent payments. This also applies to Further advances Rate switches Change of repayment or interest type, and The addition or removal of a party to a mortgage contract This information has to be provided to the customer in a durable medium. This information will be produced by the mortgage lender as set out in MCOB 7. Records A firm must make an adequate record of each offer document which is issued to a customer. The record must be retained for one year from the date that the offer document is issued to the customer. If information is included in a separate document that is sent with the offer document, that information must also be retained for one year. 4. Home Purchase Plans You must ensure that a customer is supplied with a personalised Financial Information Statement, in a durable medium Before they submit an application for a particular plan; When you make a personal recommendation to the customer, unless the recommendation is made by telephone, in which case you must ensure the financial statement has been provided as soon as practicable after the telephone call; When you provide written information specific to the amount of finance to be provided on a particular plan; When the customer requests written information specific to the amount of finance to be provided on a particular plan. If the terms of the proposed plan are subsequently materially altered, a new appropriate statement must be provided. A financial information statement must be personalised and follow the guidelines set out by the FCA. If the statement is not set out in a separate document, it must be in a prominent place within any other documentation and clearly identifiable as key information that the customer should read and be separate from the other content of the document in which it is included. You must ensure the customer has a reasonable opportunity to consider the financial information statement and risks and features statement before committing to an application. Professional Independent Advisers Ltd 9 April 2016

10 The requirements for HPPs should follow the processes for a regulated mortgage contract, with the exception that mortgages should be replaced with home purchase plans and lenders replaced with home purchase providers. In addition to the above the following information about the features and risks must be recorded and in the manner stated; include the keyfacts logo in a prominent position at the top of the statement; state that the FCA requires a firm to provide the statement; state that mortgages are available and that the customer should think carefully about the product appropriate to his needs; describe the significant features of the plan, including: i. how the home purchase plan works; ii. the nature of the customer's commitment; iii. when and how a customer's commitment is reviewed; iv. any significant restrictions of the plan; and v. the charges that a customer may incur under the plan, including the reason for, and amount of, each charge, when they are payable, whether they will be reimbursed and, if so, when; describe the risks associated with the plan, including: i. the risks to the customer if they fail to keep up repayments and the circumstances in which this might occur; and ii. risks to the customer of the home purchase provider failing or disposing of any of its obligations or rights (including its interest in the property) to a third party (taking into account steps that will be taken by the home purchase provider to mitigate such risks); and state the importance of obtaining independent legal advice. A firm must ensure the interests of its customers under a HPP are protected to a reasonable standard. This will include ensuring that the customer will be protected in the event of: The failure of a home purchase provider The transfer of HPP s interest in the property to a third party Other dealings by a HPP provider with a third party A HPP provider s failure to perform obligations owed to third parties, or imposed by statute. In the FCA s view, a customer s interests will include: Protection of the customer s rights under the plan, particularly the right to occupy the property throughout its term Protection of any interest the customer retains Any money paid under a HPP towards the purchase price will be correctly applied. Where this is not possible, an appropriate amount will be returned to the customer All other matters are the same as throughout this chapter Professional Independent Advisers Ltd 10 April 2016