Mortgages Regulated Mortgage Contracts and the FCA

Transcription

1 Mortgages Regulated Mortgage Contracts and the FCA NLD - Compliance Manual - Mortgages - March

2 Chapter 1 Regulated Mortgage Contracts and the FCA 1.1 When does MCOB apply? 1.2 What is a regulated mortgage contract? 1.3 Business Loans 1.4 Buy to Let 1.5 Consumer Credit Act Home Purchase Plans 1.7 Arranging a regulated Mortgage 1.8 Introducers 1.9 Advising on regulated mortgage contracts 1.10 Overseas activities 1.11 What am I authorised to do? NLD - Compliance Manual - Mortgages - March

3 Chapter 1 Regulated Home Finance and the FCA The Mortgage Conduct of Business sourcebook (MCOB) has been renamed as the Mortgage Conduct of Business Sourcebook, although it will continue to be referred to as MCOB for short. 1.1 When does MCOB apply? MCOB applies to every firm that carries on home finance transactions. Home finance transactions are regulated mortgage contracts, home purchase plans and equity release. Equity release transactions are lifetime mortgages and home reversion plans. There are four types of firms to which MCOB applies: Lenders/Providers Administrators Arrangers (intermediaries) Advisers (intermediaries) 1.2 What is a regulated mortgage contract? A regulated mortgage contract is defined within Article 61(3)(a) of the Regulated Activities Order and is a contract, which meets the following criteria; (1) contract is one where a lender provides credit to an individual or trustees; (2) the obligation of the borrower to repay is secured by a first legal mortgage on land (other than timeshare) in the UK (legal mortgage over moveable property, e.g. a caravan, would not constitute a regulated mortgage contract); and (3) at least 40% of that land is used, or is intended to be used, as or in connection with a dwelling by the borrower (or where The Trustees are the borrower, by an individual who is a beneficiary of the trust) or by a related person. 1.3 Business Loans In general terms, therefore, the Rules exclude business loans unless the loan is made to a sole trader or (in England and Wales) a partnership or a company acting in a trustee capacity. As the loan must be secured over land in the UK and at least 40% of the land must be used in connection with a dwelling, a loan secured on property entirely used for business purposes (e.g. a factory or office block) would not be eligible. A firm must assess the business turnover of a firm to assess whether it would come under the definition of a large business customer. A large business customer is a client that has a group annual turnover of 1 million or more. Large business customers are specifically excluded from the rules. Where MCOB rules apply, a firm can either choose to follow full MCOB rules, or FCA tailored rules for certain parts of the process. Further information on these rules is available in various chapters throughout MCOB. 1.4 Buy to Let Importantly, this applies to a large number of potential situations, for example; a buy to let loan would not be regarded as a regulated mortgage contract unless the tenant (lessee) is related to the borrower. For the avoidance of doubt, related persons referred above comprise: NLD - Compliance Manual - Mortgages - March

4 Borrower s spouse Parents Grandparents Siblings Children Grandchildren Unmarried partners, including same-sex Stepchildren would not be included. Similarly, in relation to country properties, if the main house and garden do not account for at least 40% of the usage of the land, then the arrangement is not a regulated mortgage contract. 1.5 Consumer Credit Act 2006 Whilst a number of arrangements may not be regulated insofar as the Rules of the FCA are concerned, many will still fall under the auspices of the Consumer Credit Act 2006, eg secured lending, (except for financial promotions where the lender is also a first charge mortgage lender), unsecured lending and second charge loans. You should, therefore, act appropriately in all instances and maintain a Consumer Credit Licence with the appropriate permissions. If a firm treats a mortgage as unregulated, and subsequently establishes that it should have been treated as a regulated contract, the firm must contact the client as soon as possible, and advise him of this fact and follow MCOB rules, and advise the client that the Consumer Credit Act 2006 will not apply. 1.6 Home Purchase Plans Tailored provisions may also apply to home purchase plans, and further information is contained throughout the manual 1.7 Arranging a regulated Mortgage The following permissions are required for firms who wish to carry on home finance activities: There are two types of FCA regulated activities concerned with Arranging Regulated mortgage contracts, as follows; (1) making arrangements for another person to: (a) enter into a regulated mortgage contract as borrower; or (b) vary the terms of a regulated mortgage contract entered into by him or her as borrower after 31 October 2004 in such a way as to vary his obligations under the contract; and (2) making arrangements with a view to a person who participates in the arrangements entering into a regulated mortgage contract as borrower. The following permissions are required for firms who wish to carry on home reversion and home purchase plans Regulatory activities relating to home reversion plans Arranging (bringing about) a regulated home reversion plan NLD - Compliance Manual - Mortgages - March

5 Making arrangements with a view to another person entering into a regulated home reversion plan as a reversion occupier or a reversion provider. Advising an actual or potential reversion occupier or a reversion provider on the merits of entering into or varying a regulated home reversion plan. a reversion occupier is the person selling their house (or part of it) to a reversion provider. Regulatory activities related to home purchase plans Arranging (bringing about) a regulated home purchase plan. Making arrangements with a view to another person entering into a regulated home purchase plan as a home purchaser. Advising an actual or potential home purchaser on the merits of entering into or varying a regulated home purchase plan. Where the firm s activities go beyond those of simply acting as an Introducer, it must hold the appropriate permissions as required by the Financial Conduct Authority and the Regulated Activities Order. 1.8 Introducers Notably Introducer activities are defined as making arrangements with a view to regulated mortgage contracts. The FCA requires that an Introducer disclose certain information to the borrower prior to making the introduction, namely; Whether he is a member of the same group as the lender; Details of any payment he will receive by way of fee or commission in respect of the introduction, and; An indication of any other reward or advantage arising out of the introduction (eg; office space, travel expenses, subscription fees). The Introducer should keep a written record of the information disclosed even when the disclosures were made on an oral basis. There may be instances where the final commission or fee is unknown until the final loan amount is certain. In such cases, it is sufficient for the introducer to confirm the method of calculation of the fee, eg as a percentage of the final loan. You may currently, or plan to have, your own Introducers who will by virtue of definition, introduce consumers to you for the purpose of you providing advice in relation to regulated mortgage or general insurance contracts. The Introducer, unless authorised to do so, cannot provide advice. 1.9 Advising on regulated mortgage contracts The provision of advice in relation to regulated Home Finance contracts is a regulated activity in itself. This extends to advice that is both; (1) given to a person in his capacity as borrower or potential borrower; and (2) advice on the merits of the borrower: (a) entering into a particular regulated mortgage contract (whether or not the entering into is done by way of business); or NLD - Compliance Manual - Mortgages - March

6 (b) varying the terms of a regulated mortgage contract entered into by the borrower on or after 31 October 2004 in such a way as to vary the borrower s obligations under the contract. In (b) above, the circumstances in which advice is has been provided in relation to varying the terms of a regulated mortgage contract would include; the borrower obtaining a further advance; a rate switch or a product switch with the same lender; or the borrower transferring from a repayment mortgage to an interest only mortgage or vice versa Overseas activities In the event that the firm envisages activity overseas, perhaps by way of Internet, specific guidance should be sought from Compliance to ensure compliance with the Distance Marketing Directive, E-commerce Directive, etc. A distance contract must be concluded under an organised distance sale or service provision scheme, where exclusive use is made of one or more means of distance communication up to and including the time at which the contract is concluded. The FCA permits electronic media to by used, however, the use of electronic media is restricted in certain circumstances with regards to the Distance Marketing Directive, e.g. - If the customer requests it, the firm must provide a paper copy of the contractual terms and conditions of the mortgage contract, or of the services provided by the firm (Initial Disclosure Document) If the customer requests it, the firm must change the means of distance communication, unless it would not be compatible with the service provided, or the mortgage contract What am I authorised to do? New Leaf Distribution holds authorisation that permits its advisers (and Appointed Representatives) to advise on and arrange home finance (including home reversion and home purchase plans) as well as general insurance products, such as term assurance. NLD - Compliance Manual - Mortgages - March

7 Mortgages Conduct of Business Standards General Rules NLD - Compliance Manual - Mortgages - March

8 Chapter 2 Conduct of Business Standards General Rules 2.1 Communications 2.2 Clear, fair and not misleading 2.3 Inducements 2.4 Lead generation and cold calling 2.5 Home Purchase Plans - Protecting Customers Interest 2.6 Treating Customers Fairly 2.7 Home Reversion Plans - Protecting Customers Interest 2.8 Treating Customers Fairly 2.9 Independent Valuation 2.10 Unregulated Home Reversion Plan Providers NLD - Compliance Manual - Mortgages - March

9 Chapter 2 Conduct of Business Standards General Rules 2.1 Communications Sending Information Where there are two or more customers under a home finance transaction, and the customers have two different addresses, a firm is required to send information to both addresses. If the customers share the same address, a single copy can be sent addressed to both of the customers. 2.2 Clear, fair and not misleading All communications with customers must be clear, fair and not misleading, and must take into account the customers knowledge of the home finance transaction to which the information relates. This rule covers all communications including oral or written statements, telephone calls and all other correspondence. Firms should pay particular attention to the prominence of relevant information in preparing any communication. A firm must pay due regard to its customers and treat them fairly. 2.3 Inducements Firms are reminded that they must take reasonable steps to ensure that it, or any person acting on its behalf, does not offer, give, solicit or accept an inducement, or direct or refer any actual or potential business in relation to a regulated mortgage contract or home reversion plan to another person if it is likely to conflict to a material extent with any duty the firm owed to its customers. 2.4 Lead generation and cold calling For mortgage business, unsolicited real-time financial promotions (cold calling) is not permitted unless there is an established pre-existing customer relationship through which the consumer expects to receive such promotions. In order to make such calls, firms must be able to demonstrate that they have an ongoing relationship with the customer, and that the customer expects to be contacted by the firm. In order to determine if a firm has an existing relationship with the client, the firm should be able to demonstrate regular customer contact. Therefore, an adviser who arranged a mortgage for a customer once five years ago is unlikely to have a relationship with the customer beyond the conclusion of that mortgage, and would not, therefore be deemed to have an existing relationship with the customer. Where the firm does have an existing customer relationship, it must be able to demonstrate that the customer anticipates receiving unsolicited real time promotions from the firm. To do this, the firm should specifically point out to the customer that it has a policy to call customers from time to time. This can be included within the firm s standard terms of business letter, however it must be specifically pointed out to the customer that the firm may contact the customer. If the firm cannot demonstrate an existing relationship with the customer, then it must rely on the customer expressly requesting a call. Advisers may obtain requests that expressly permit them to contact the customer shortly before a fixed or discounted rate is due to end. The express permission from the client should allow the firm to contact the client over a number of years. NLD - Compliance Manual - Mortgages - March

10 Third Party questionnaires Firms may obtain from third parties lists of consumers who are interested in receiving information or advice on their mortgage requirements. As long as the consumer has expressed an interest in receiving advice or information on his mortgage requirements from a named firm (the intermediary firm) and that firm only contacts the consumer for that purpose, the call may be deemed solicited. It is important that the customer has made an express request to be contacted. This means that the firm must be satisfied that the customer has clearly and consciously requested the review and not just signed up to a long and detailed set of terms within which a mortgage review is hidden. 2.5 Home Purchase Plans Protecting Customers Interest The firm must ensure the interests of its customers under a home purchase plan (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 2.6 Treating customers fairly The firm must pay due regard to the interest of its customers and treat them fairly when dealing with them in advising on, or arranging, a HPP. 2.7 Home Reversion Plans Protecting Customers Interest The firm must ensure the interests of its customers under a home reversion plan (HRP) are protected to a reasonable standard. This will ensure the customer will be protected in the event of The failure of a home reversion provider The transfer of HRP s interest in the property to a third party Other dealings by a HRP provider with a third party A HRP 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: NLD - Compliance Manual - Mortgages - March

11 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 2.8 Treating customers fairly The firm must pay due regard to the interest of its customers and treat them fairly when dealing with them in advising on, or arranging, a HRP. 2.9 Independent Valuation The firm must ensure a competent valuer, who is independent of the HRP provider, carries out any valuation Unregulated Home Reversion Plan Providers If a person wishes to enter into a home reversion plan as a provider, without being regulated by the FCA, they may do so provided they do not do so as a business. The firm should ensure, when recommending a home reversion plan, that the provider is a regulated firm. NLD - Compliance Manual - Mortgages - March

12 Mortgages Providing Client Advice NLD - Compliance Manual - Mortgages - March

13 Chapter 3 Providing client advice 3.1 Scope of service 3.2 Initial Disclosure Requirements 3.3 Disclosure where initial contact is made by phone 3.4 Additional disclosure for distance mediation contracts and distance home purchase contracts with retail customers 3.5 Cancellation of distance mortgage mediation contracts and distance home purchase mediation contracts 3.6 Record keeping 3.7 Advised Sales 3.8 Rejected Recommendations 3.9 Record keeping 3.10 Non-advised sales 3.11 Record Keeping 3.12 Home Purchase Plans initial disclosure requirements 3.13 Advised Sales 3.14 Non-advised sales NLD - Compliance Manual - Mortgages - March

14 Chapter 3 Providing Client Advice 3.1 Scope of Service Scope of Service provided A firm must take reasonable steps to ensure that the scope of the service given to a customer, and the home finance transactions offered, is based on a selection from one of the following: 1 Whole of market; 2 Limited number of home finance providers, and; 3 A single home finance provider. A firm may change the scope of its service it gives to a customer by widening the scope, from that of a single mortgage lender, to a limited number of mortgage lenders, provided it makes the customer aware of the proposed change, by a communication in a durable medium, and the customer s attention is drawn to any change in the fees that the customer must pay to the firm. A firm which states that it provides a service based on a limited number of mortgage lenders should have adequate systems and controls in place to monitor whether business is actually placed with those mortgage lenders. Clearly, it would be misleading to offer service (1), when the actual nature of the service will typically fall within category (2) and all advisers should ensure that they materially provide the level of service offered to the customer within the mortgage key facts letter. As an mortgage adviser, you must act in the best interests of your customer. You owe your customer a high duty of care and commission, convenience, and advantages to the adviser or must not influence you by lack of knowledge or experience. You may not enter into commercial arrangements that adversely affect your ability to provide advice on an impartial basis. Whole of Market A firm which holds itself out as giving information or advice to customers on regulated mortgage contracts from the whole market must not give any such information or advice unless: It has considered a sufficiently large number of regulated mortgage contracts which are generally available from the market; and The consideration above is based on criteria that reflects adequate knowledge of the regulated mortgage contracts generally available from the market as a whole. If a firm holds itself out as giving information or advice to customers on regulated mortgage contracts generally available from the whole market, the firm may choose to offer its customers only a selection of those regulated mortgage contracts. The firm s selection of those regulated mortgage contracts for this purpose will need to be sufficiently large to enable the firm to satisfy the whole of market suitability requirement. Appointed Representative A firm may restrict the home finance transactions it authorises a particular appointed representative to sell. If it does so, the AR must reflect this restricted scope in any initial disclosure document or combined initial disclosure document. NLD - Compliance Manual - Mortgages - March

15 3.2 Initial Disclosure Requirements Disclosure where initial contact is not made by phone. A firm must ensure, on first making contact with a customer, it anticipates giving personalised information or advice to on a regulated mortgage contract, it: Establishes with the customer whether it will provide advice or information; Establishes how much the customer will pay, or the basis on which the firm will be remunerated, and; Provide the customer with either the IDD, or, if the firm has reasonable grounds to be satisfied that the service which it is likely to provide the customer will relate to a combination of different types of home finance transactions, or will relate to home finance transactions and one or more non investment insurance contracts or packaged products, a combined initial disclosure document in a durable medium. The requirement to provide an IDD or CIDD do not apply where the document has already been provided and is still likely to be accurate and appropriate for the customer, or where initial contact is made by telephone. A firm must not use a combined initial disclosure document in relation to a combination of: Regulated mortgage contracts or home purchase plans; and Equity release transactions. If a firm has provided a customer with an appropriate initial disclosure document but subsequently discovers that the customer wants different services from those originally anticipated and described in the document, the firm will need to establish details of the new service to be provided to the customer and provide the customer with a new initial disclosure document. Uncertainty whether a mortgage is regulated 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. The IDD must be provided unless the firm has reasonable evidence that the contract is not a regulated mortgage contract. Information to be provided to customer on request If a firms scope of service is based on a limited number of lenders, it must maintain, and keep up to date, in a durable medium and in a form which is appropriate for distribution to the customer, a list of the mortgage lenders whose regulated mortgage contracts it offers. This list must also confirm whether or not the firm provides services in relation to all of the regulated mortgage contracts generally available from each mortgage lender. This must be available to customers on request. A firm must also ensure that its appointed representatives provide a copy of the record of lenders to a customer on request. 3.3 Disclosure where initial contact is made by phone NLD - Compliance Manual - Mortgages - March

16 If initial contact is made by telephone, then unless the customer has already been provided with an IDD and it is still likely to be accurate, the following information must be given before proceeding further: Name of the firm (and if the call is initiated by or on behalf of the firm) the commercial purpose of the call; The scope of the service provided by the firm; If the scope of the service is based on a limited number of lenders, that the customer can request a copy of the list of mortgage lenders whose regulated mortgage contract it offers and confirmation of whether the firm provides services in relation to all of the regulated contracts generally available from each mortgage lender; Whether or not the firm will provide the customers with advice on those regulated mortgage contracts within its scope, and; That the information given above will be confirmed in writing. Provided that the telephone call has not led the firm to conclude that the customer is ineligible for any of its regulated mortgage contracts, and that the customer has provided his contact details, the firm must send the customer a copy of an initial disclosure document or combined initial disclosure document, in a durable medium within five business days of the telephone call. If the customer accepts the offer of a list of the mortgage lenders whose regulated mortgage contracts the firm offers, that list must also be sent with the IDD or CIDD. 3.4 Additional Disclosure for distance mortgage mediation contracts and distance home purchase mediation contracts with retail customers There are certain additional disclosure requirements laid down by the Distance Marketing Directive that will have to be provided by a mortgage intermediary and a home purchase intermediary to retail customers prior to the conclusion of a distance mortgage contract or a distance home purchase contract. See MCOB If the initial contact is made by telephone with a retail customer with a view to concluding a distance mortgage mediation contract or a distance home purchase mediation contract a firm must: In addition to the initial disclosure information and any other required information, provide the retail customer with the information in MCOB 4 annex 3 in a durable medium in good time before the conclusion of the distance mortgage mediation contract or distance home purchase mediation contract with that customer unless one of the following exemptions applies; Exemptions Telephone sales: advice is being provided on the telephone and the customer wishes to enter into a contract with the firm. Provided the customer gives his explicit consent to receiving only limited information, the firm may proceed on the basis of at least the following information; o Name of the person in contact with the customer and his link with the firm; o The total price to be paid by the customer to the firm for the services, including all related fees, charges and expenses, and all taxes paid through the firm or, where an exact price cannot be indicated, the basis for the calculation of the price; o Notice of the possibility that other taxes or costs may exist that are not paid through the firm or imposed by it; o Information about cancellation rights, and; o That other information is available on request, and the nature of that information. NLD - Compliance Manual - Mortgages - March

17 If the customer does not give his explicit consent to receiving limited information, and the parties wish to proceed by telephone, the firm must, prior to conclusion of the contract, provide orally to the customer all of the information required by the IDD and MCOB 4 annex 3R. Where the customer is provided with either limited information due to an exemption, or provided with the information orally, the firm must send the retail customer without delay and, at the latest immediately after a contract is concluded, the IDD and information in MCOB 4 annex 3R in a durable medium. Where the contract is concluded at the retail customers request using a means of distance communication (other than the telephone) which does not enable provision of the information referred to in MCOB 4 annex 3R in a durable medium before conclusion of the contract, the firm must provide the customer with the information in a durable medium immediately after conclusion on the distance mortgage mediation contract. 3.5 Cancellation of distance mortgage mediation contracts and distance home purchase mediation contracts A retail customer has no right to cancel a home finance transaction concluded with a firm but may have a right to cancel a distance contract concluded with a mortgage intermediary or a home purchase intermediary for the provision of his services. Whether a mortgage intermediary or home purchase intermediary concludes a distance mortgage mediation contract or a distance home purchase meditation contract with a retail customer will depend on the circumstances. E.g. an intermediary may not, in advising on or arranging a regulated mortgage contract or home purchase plan, act contractually on behalf of, or for, the customer. In such circumstances, no distance mediation contract will arise for the firm s services, and therefore no right to cancel. If there is a contract between the customer and the firm, however, and therefore there is a right to cancel, the firm is required to provide the information in MCOB 4 annex 3R(5). Where the notice of the right to cancel forms part of another document, or is one of a number of documents sent to the retail customer at the same time, a firm should ensure that the presence of the notice of the right to cancel is drawn to the retail customer s attention. Cancellation period The right to cancel must be exercised within 14 days beginning on the later of: The day of the conclusion of the contract, and; The day on which the retail customer receives the contractual terms and conditions and other information required. Exercising the right to cancel A retail customer who has a right to cancel a distance mortgage mediation contract or a distance home purchase mediation contract may, without giving any reason, cancel the contract by serving notice on the firm, before the expiry of the cancellation period either: By serving on, or otherwise sending by post, notice to the firm s last known address, addressed to the firm, its appointed representative or any agent of the firm with authority to accept notice on the firm s behalf, or; In accordance with any other practical instructions for exercising that right provided to the retail customer in accordance with MCOB 4 annex 3R(5). Where a customer exercises their right to cancel, a firm must: a) Pay the customer without delay and no later than 30 days after the date on which the firm received notice of cancellation any sums which he has paid to or for the benefit NLD - Compliance Manual - Mortgages - March

18 of the firm in connection with the contract (including sums paid by the retail customer to agents of the firm) except for the amount referred to in b; b) The firm is permitted, subject to c, to require the retail customer to pay for the services it has actually provided in connection with the contract. The amount payable, however, must be in accordance with the sums which the retail customer has agreed to pay and must not; o Exceed an amount which is in proportion to the extent of the service already provided to the retail customer by the firm; o Be such that it could be construed as a penalty; c) Where performance of the contract has commenced before expiry of the cancellation period, this was requested by the retail customer; and the firm can demonstrate that the retail customer was provided with details of the amount which he may be required to pay if exercising his right to cancel. The firm is entitled to receive without delay, and no later than 30 days after the date on which the retail customer posted or otherwise sent notice of cancellation to the firm any property that became the retail customers under the contract and any sums payable to the firm under b. 3.6 Record Keeping Where notice of cancellation is served on a firm, the firm must make and retain a record (which includes a copy of any receipt of notice issued to the retail customer and the retail customers original notice instructions) for three years from the date when the firm first became aware that notice of cancellation had been served. 3.7 Advised Sales Suitability Firms are required to take reasonable care to ensure the suitability of its 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. A regulated mortgage contract will be suitable if, having regard to the facts disclosed by the customer and other relevant facts about the customer of which the firm ought reasonably to be aware, the firm has reasonable grounds to conclude that: a) the customer can afford to enter into the contract; b) the contract is appropriate to the needs and circumstances of the customer, and; c) the regulated mortgage contract is the most suitable of those that the firm has available to it within the scope of the services provided to the customer. No recommendation should be made if there is no regulated mortgage contract from within the scope of the service provided to the customer which is appropriate to his needs and circumstances; and If a firm is dealing with an existing customer in arrears and has concluded that there is no suitable regulated mortgage contract suitable for the customer, the firm must have regard to SEE MCOB NLD - Compliance Manual - Mortgages - March

19 In relation to whether the customer can afford to enter into the regulated mortgage contract, a firm must explain to the customer that the assessment of whether he can afford to enter into a regulated mortgage contract is based on; current interest rates which may rise in the future, and; the customers current circumstances, which might change in the future. In relation to the above, where a firm makes a personal recommendation to a customer to enter into a regulated mortgage contract where the main purpose is to consolidate existing debt it must also take account of the following, where relevant, in assessing whether the regulated mortgage contract is suitable for the customer; the costs associated with increasing the period over which the debt is to be repaid; whether it is appropriate to secure a previously unsecured loan, and; whether the customer is known to have repayment difficulties, whether it would be more appropriate to the customer to negotiate an arrangement with his creditors than to enter into a regulated mortgage contract. In assessing whether a customer can afford to enter into a regulated mortgage contract, a firm should give due regard to the following: information that the customer provides about his income and expenditure, and any other resources that he has available; any likely changes to the customer s income, expenditure or resources, and; the costs that the customer will be required to meet once any discount period in relation to the regulated mortgage contract comes to an end (on the assumption that interest rates remain unchanged). A firm may rely on the information provided by the customer, unless, taking a common sense view, they have reason to doubt it. What is a firm NOT required to consider A firm is not required to consider whether it would be preferable for the customer to: purchase a property using his own resources, rather than by borrowing under a regulated mortgage contract; rent a property, rather than purchase one, or; delay entering into a regulated mortgage contract until a later date on the grounds that property prices would have fallen in the intervening period, or that the interest rate in relation to a lifetime mortgage contract would be lower, or both. In assessing whether the regulated mortgage contract is appropriate to the needs and circumstances of the customer, a firm should give due regard to the following: whether the customers requirements meet the eligibility criteria for the regulated mortgage contract (e.g. the amount the customer wishes to borrow, or the loan to value ratio); whether the customer should have an interest only mortgage, a repayment mortgage or a combination of the two; whether the customer has a preference for a particular term; whether the customer has a preference or need for 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 the customer has a preference or need for payments to be reduced at the outset (e.g. a loan with an initial discount rate period); whether the customer needs or intends to make early repayments, and; whether the customer has a preference or need for any other feature of a regulated mortgage contract (e.g. payment holidays). NLD - Compliance Manual - Mortgages - March

20 Where the scope of the advice provided is based on a selection of regulated mortgage contracts from a single or limited number of lenders, the assessment of suitability should not be limited to the types of regulated mortgage contracts that the firm offers. A firm cannot recommend the least worst regulated mortgage contract where the firm does not have access to products appropriate to the customer s needs and circumstances. This means for example, that a firm dealing solely in the sub-prime market should not recommend one of these regulated mortgage contracts if approached for advice by a customer with an unblemished credit record. A firm should, out of all the regulated mortgage contracts identified as being appropriate for that customer, recommend the one that is the least expensive for that customer taking into account those pricing elements identified by the customer as being most important to him. Different customers are likely to identify different pricing elements as being of most importance. For example, it may be the overall cost, a fixed or capped rate of interest, the inclusion of a no negative equity guarantee, or the absence of early repayment charges that a customer considers most important. A firm may make a recommendation on grounds other than price. For example, it would be open to a firm to have regard to the speed or quality of service of different mortgage lenders, the policies of mortgage lenders on further lending or capital repayments, the underwriting stance of mortgage lenders or the customer s wish for regulated mortgage contract that is compliant with Islamic Law. If circumstances arise in which a firm has reasonable grounds to conclude that there are several regulated mortgage contracts that would be suitable, the firm may recommend only one of those regulated mortgage contracts. If for any reason a customer rejects a recommendation made by a firm, the firm can make a further suitable recommendation where there remains a regulated mortgage contract that is appropriate to the needs and circumstances of the customer. 3.8 Rejected Recommendations If a customer has: rejected all the personal recommendations made by the firm and requested information instead on a regulated mortgage contract the firm does not consider suitable; and been issued with a new initial disclosure document. The firm may be able to provide information on that regulated mortgage contracts in light of the information on which the personal recommendations were originally made. If the firm needs to ask further questions regarding the needs and circumstances of the customer to be able to provide information on that regulated mortgage contract, the firm must obtain that information by asking scripted questions in accordance with the rules on nonadvised sales. Firms should record all cases where the client has rejected its personal recommendations, and it changes the nature of its service from advised, to non-advised sale. 3.9 Record Keeping A firm must make and retain a record: of the customer information, including that relating to the customers needs and circumstances, that it has obtained for the purposes of establishing suitability, and; NLD - Compliance Manual - Mortgages - March

21 that explains why the firm has concluded that any personal recommendation given to a customer satisfies their suitability requirements. This explanation must include, where this is the case, the reasons why a personal recommendation has been made on a basis other than the least expensive contract. The record must be retained for a minimum of three years from the date on which the personal recommendation was made Non-Advised Sales Please note that from April 2014 it will no longer be possible to undertake non-advised sales for Mortgages. If a firm arranges a regulated mortgage contract or a variation to an existing regulated mortgage contract without giving a personal recommendation, it must ensure that all the questions it asks the customer about the customer s needs and circumstances are scripted in advance. In providing information on only a selection of the regulated mortgage contracts it deals with, a firm will need to ensure the selection is fair and unbiased. Where the non advised sales process leads to the identification of only one regulated mortgage contract, a firm should have regard to that guidance on scripted questions in PERG If, in the course of the non advised sale, the firm thinks that the customer is considering a regulated mortgage contract that is inappropriate for that particular customer, in such circumstances, although not providing advice to the customer, the firm has an obligation to pay due regard to the interests of its customers and treat them fairly. In this case, the appropriate course of action would be to tell the customer to seek advice. In the case of a non-advised sale, firms must ensure staff using the scripted questions are; trained in the use of the script; trained in the difference between what constitutes a personal recommendation and what does not, and; instructed not to give a personal recommendation unless they meet the T & C requirements for advising on regulated mortgage contracts. A firm must take reasonable steps to supervise staff who do not meet the T&C requirements for advising on regulated mortgage contracts so that: they do not give personal recommendations, and; when using scripted questions in non advised sales, they adhere to the script in all material respects Record keeping A firm must make, and keep up to date, a record of the scripted questions for non-advised sales. The record must be made on the date on which the scripted questions are first used. This record must be retained for one year from the date on which it was superseded by a more up to date record Home Purchase Plans Initial disclosure requirements A firm must, on first making contact with a customer which it anticipates giving advice to on entering into a new home purchase plan, ensure the customer is, or has been, provided with an appropriate IDD or CIDD. NLD - Compliance Manual - Mortgages - March

22 If initial contact is by phone, a firm must; (if the call is with a view to concluding a distance home purchase mediation contract) give the following information before proceeding further: o name of the firm and (if initiated by the firm) the commercial purpose for the call; o the scope of the service provided by the firm; o whether or not the firm will provide the customer with advice on those home purchase plans within its scope, and; ensure that the customer is, or has been, provided with such a document in a durable medium as soon as practicable. Where a firm is likely to provide services in relation to both regulated mortgage contracts and home purchase plans, it should provide a combined initial disclosure document rather than two separate initial disclosure documents Advised sales: suitability A firm, before making a personal recommendation on a home purchase plan, must take reasonable steps to ensure that it is: affordable; appropriate to the customers needs and circumstances, and; the most suitable of those home purchase plans that the firm has available to it within the scope of the service provided to the customer Non-advised sales Please note that from April 2014 it will no longer be possible to undertake non-advised sales for Mortgages. If a firm arranges a home purchase plan or a variation to an existing home purchase plan without giving a personal recommendation, it must ensure that the questions it asks about the customer s needs and circumstances are scripted in advance. Risk and features statement and tariff of charges A firm must, before making a personal recommendation to a customer, or when a customer requests or selects, a home purchase plan, ensure that the customer is, or has been provided with an appropriate risks and features statement about that plan. A risks and features statement need not be personalised to the customer s circumstances but must: 1 include the key facts logo in a prominent position at the top of the statement; 2 state that the FCA requires a firm to provide the statement; 3 state that mortgages are available and that the customer should think carefully about the product appropriate to his needs; 4 describe the significant features of the plan, including; a. how the home purchase plan works b. the nature of the customer commitment c. when and how a customer s commitment is reviewed d. any significant restrictions of the plan, and e. 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; NLD - Compliance Manual - Mortgages - March

23 5 describe the risks associated with the plan, including; a. the risks to the customer if he fails to keep up repayments and the circumstances in which this might occur; and b. 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; 6 state the importance of obtaining independent legal advice. A firm may omit details of the charges a customer may incur under a home purchase plan from the risks and features statement if they are included in a separate tariff of charges provided to the customer at the same time. NLD - Compliance Manual - Mortgages - March

24 Mortgages Pre-Application Disclosure NLD - Compliance Manual - Mortgages - March

25 Chapter 4 Pre-application Disclosure 4.1 Issuing of Key Facts Illustrations 4.2 Disclosure at start of contract and after sale 4.3 Home Purchase Plans -Disclosure at the start of contract and after sale 4.4 On-Screen Information 4.5 Repayment and interest-only 4.6 Content of key feature illustration 4.7 Home purchase plans financial information statement NLD - Compliance Manual - Mortgages - March

26 Chapter 4 Pre-application Disclosure 4.1 Issuing of Key Facts Illustrations The firm is responsible for ensuring a personalised key facts illustration 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 illustration 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; the price that the customer will have to pay. Illustrations should be fair, clear and not misleading and you should not provide an illustration to a customer where the said customer would not meet the lenders borrowing criteria. You should ensure that any illustration you issue, or is issued on your behalf (other than by a mortgage lender) is accurate within the tolerances set out by the FCA under MCOB It is imperative the customer understands the importance of the personalised illustrations and the customer must be compelled to read the document and confirm understanding. If the customer does not understand any aspect of the illustration, you should offer sufficient time and assistance to enable customer understanding. You should encourage your customers to retain a copy of the Key Facts Illustration for future reference. A copy of the Key Facts Illustration 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 Key Facts Illustration under section 4. You are not permitted to take any fees, commission a valuation, seek references or undertake any other action, which commits the customer to the regulated mortgage product until he or she has had the opportunity to consider the illustration. In the event that an alteration to the application for a regulated mortgage product is required, a revised Key Facts illustration must be provided prior to the change being executed. Where the terms of the proposed contract are materially altered, at the time of application, you must issue the customer with a revised illustration. If the alterations occur after the application has been made, the lender must ensure a revised illustration is issued. 4.2 Disclosure at Start of Contract and after Sale If a customer wishes a further advance or wishes to change all or part of a regulated mortgage contract from one type of interest payment to another (eg fixed to variable) and this requires approval by the lender, then you must provide a Key Facts illustration in respect of the further advance, prior to submission of the application. NLD - Compliance Manual - Mortgages - March

27 Where a party has to be added or removed from a regulated mortgage contract, a new illustration must be provided unless the removal of the party is the result of death of that party and no other party is to be added. 4.3 Disclosure at the start of contract and after sale Home Purchase Plans When a post sale variation of a home purchase plan is proposed or takes place, you should issue the client with a financial information statement in accordance with the guidance given for regulated mortgage contracts above. 4.4 On-Screen Information Where information is provided on-screen (eg using the internet or interactive television) the following warning must be displayed prominently on each page of the screen- This information does not contain all of the details you need to choose a mortgage. Make sure that you read the separate Key Facts Illustration before you make a decision. You may only provide the customer with the facility to print the information, where this will be printed in the format of a Key Facts Illustration. Information can also be provided over the telephone, and in both of these cases you should encourage the customer to obtain a copy of an illustration in a durable medium. 4.5 Repayment and interest-only If a customer does not express a preference between a repayment and an interest-only mortgage, you must provide an illustration for a repayment mortgage (where available) and make the customer aware that the illustration has been provided on that basis. 4.6 Content of Key Features Illustration While the lender is responsible for the accuracy of the content of a Key Facts Illustration in cases where you have obtained the KFI direct, you are responsible in all other cases. You should familiarise yourself with the document, and ensure the figures are accurate. Where you obtain Key Facts Illustrations from a mortgage sourcing system, you can rely on these, provided you can evidence that it was reasonable to do so. You should therefore use your knowledge of the mortgage market to check the details on the KFI are reasonable and accurate. If you are aware that the information contained in a KFI is inaccurate, you should take immediate steps to ensure your customer does not rely on inaccurate information. You should obtain confirmation from the sourcing system that they are meeting FCA rules, but ultimately this is the firm s responsibility. 4.7 Home Purchase Plans Financial Information Statement 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; NLD - Compliance Manual - Mortgages - March