Advice FAQs. This document contains FAQs on: This page contains FAQs related to the new MMR Advice rules.

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1 Advice FAQs This page contains FAQs related to the new MMR Advice rules. The FCA has reviewed and provided comments on the questions set out below. Those views and comments are, of necessity, based solely on the facts and context of the question as presented to the FCA. If there were any facts or some context not drawn to their attention regarding each question, that could alter their view. Firms should consider seeking independent professional advice if they remain uncertain of their particular position and should not simply assume that the answers given will meet all similar circumstances. This document contains FAQs on: Advice FAQs... 1 General advice/tailoring advice/needs and circumstances test... 2 The advice boundary/perg review... 4 Provision of KFIs... 6 Advice and pre-arrears discussions... 6 Contract variations general... 6 Contract variations affordability assessments and execution only variations... 9 Advice and affordability assessments... 9 Contract variations interest-only... 9 Contract variations rate switches Rejected advice Advice and forbearance Advice: HNW customers and Mortgage professionals Advice and single products Execution-only sales Advice and debt consolidation Advice permissions and TPAs Definition of a contract variation Advice on specific aspects of change Execution-only rate switches Advice - record keeping address North West Wing Bush House Aldwych London WC2B 4PJ telephone fax website

2 General advice/tailoring advice/needs and circumstances test 1. When advising on a contract variation (MCOB 4.7A.2R) should advice be given on the further advance only, or in the case of the product transfer advice on the part of the loan it relates to, or should the lender advise on the whole mortgage? For further advances the advice can relate to the further advance only, advice does not have to be given on the entire borrowing. For rate switches, if the rate will apply to the entire loan, then advice should be given on the total amount borrowed. If the rate switch relates to only part of the loan, or to new borrowing only (ie the further advance element), advice only needs to be given on the element of the loan to which the rate switch applies. 2. Tailoring advice what is the potential for an 'advice lite' strategy/tailored advice process in an interactive process under the new rules especially for telephone advice. There is no potential for advice lite. The rules apply equally across all sales channels. Therefore telephone sales are subject to the same rules as face to face sales. The assessment of the customer s needs and circumstances requires a firm to assess the factors that make up this assessment insofar as relevant on a case-by-case basis for each individual customer. This means that firms can decide not to ask for information where they are clear that a factor is not relevant for that customer. There should be no upfront grouping or discounting of the factors in the needs and circumstances test. Where a customer states a preference for a product or product feature, it is up to the lender to decide whether that preference is appropriate to the customer s needs and circumstances. However, the record keeping requirements [MCOB 4.7A25R] require a firm to retain a record of information relating to the customer s needs and circumstances, therefore firms will need to demonstrate why a particular factor was not considered to be relevant to the customer s needs and circumstances. Providing this evidence effectively requires the firm to explicitly consider each factor even if the outcome is to discount certain factors as not relevant for a particular borrower. The rules are not prescriptive about what form records should take. Supervisors will want to see records that would allow them to reconstruct the advice process undertaken, and the resultant recommendation, for each case file. 3. Do the rules under MCOB4.6A relate only to new business or are they also intended to catch contract variations, particularly further advances but also product transfers and other contract changes where there is no new finance being made available? This could impact on the advice process when lenders are considering the needs and circumstances test and the position on fees under MCOB4.7A.6.R(9) MCOB 4.6A applies to contract variations (including product switches). Where there is a fee involved, the customer must be given the option whether or not to add the fees to the loan. There is no requirement for advice to be given under MCOB 4.6A. The customer can be presented with the relevant information (ie the facts about how the total cost of teh finance will be affected by adding or not adding the fee) - in order to make a decision. Where the contract variation is advised, however, the firm does need to consider whether it is appropriate for the borrrower to pay any fees payable up frong rather than to add them to the mortgage (see MCOB 4.7A.6 R)

3 4. Can decision trees be used on a non-interactive channel (eg online) and a transaction remain execution-only? Online decision-tree processes for execution-only sales should consider the PERG guidance [ PERG4.6.22G] in order to ensure that they do not steer the customer towards specific product(s). Firms employing online decision tree processes must ensure that they review these processes regularly (eg in line with changing product ranges) to ensure that they remain compliant. 5. The advice process and small lenders with either: (a) a limited product range, or (b) who offer a single product what does this look like? Lenders with a limited product range, or who only offer a single product, must apply the needs and circumstances test during the advice process. If the firm does not offer a product which is suitable to the customer s needs and circumstances they must not advise the customer to enter into a contract for one of their products [MCOB 4.7A5R(3)]. A firm cannot recommend the least worst product in their range. [MCOB 4.7A.22G]. 6. If a firm gives advice to a customer on a new sale, or a contract variation, and the customer does not proceed with the sale/variation at that time, but subsequently returns to the lender and requests the specific product or variation they were advised on but wants to proceed on an execution-only basis (ie the customer now knows which product or variation they require) what period of time would have to elapse between the original enquiry and the new contract or variation for an execution only process to be allowed? Unless they are a vulnerable customer, there is nothing to prevent a customer from going on-line and completing an application on an execution-only basis at any time. It is the customer s choice whether they choose to go on line after receiving advice and proceed on an execution-only basis. There is nothing preventing them from doing that. MCOB 4.8A.7R(3) does not mean that once advised, a sale must always be advised. The rule is intended to capture a sale which started as execution-only sale but then a discussion between the firm and the customer happens. In such a case, the firm cannot complete the sale on an execution-only basis. Where it is the case that the firm wishes to continue to sell on the basis of its previous advice, it will be the firm's responsibility to ensure that the consumer's circumstances have not changed in the intervening period and to take a view as to whether the passage of time undermines the continuing validity of the advice given. 7. The new section on Advised Sales (MCOB4.7) now concentrates on suitability and needs and circumstances with little mention of the need to consider the affordability assessment when providing advice. In view of the way that the new section is structured, are there circumstances where the FCA is expecting lenders to advise customers without considering the affordability assessment? The requirements in MCOB 4.7A.6R are designed to ensure there is a clear line of responsibility between the intermediary and lender in terms of the affordability assessment. That doesn t mean that there will be no discussion between the intermediary and customer about affordability. It simply means that the only

4 regulatory requirement is for the seller to consider whether the customer s requirements are within the lender s eligibility criteria (MCOB 4.7A.6R). The lender has ultimate responsibility for assessing affordability when underwriting the case (MCOB R). It is for the lender to decide how to comply with these requirements. It would be acceptable for the lender to apply a high level affordability assessment as part of the advice process and conduct the detailed assessment required under MCOB R as part of the underwriting process. However, the rules do not preclude lenders from conducting the detailed affordability assessment as part of the sales process, as long as it meets the requirements under MCOB R. 7a. 'Expected affordability in the Advice process: The FCA have clarified that a high level affordability assessment can take place as part of the advice process with the detailed assessment required under MCOB R undertaken as part of the underwriting process. MCOB 4.7A.8G gives expected affordability as a suggested factor firms should consider when assessing whether a customers requirements are within a lenders eligibility for a mortgage product as part of the recommendation. Could the FCA give an indication of what they would consider expected affordability to entail, for example would a basic multiple of income assessment be deemed sufficient with the full affordability assessment taking place as part of the underwriting process? The firm could use a income multiple, or a more basic affordability assessment for example, in order to give an indication of affordability, with the full assessment made at underwriting stage. 7b. MCOB 4.7A.6R(4) states that prior to a recommendation being made, firms must consider 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;. Could the FCA give an indication of the type of factors they would expect to be considered at this stage, as if the full affordability assessment forms part of the underwriting process the impact of future rate changes as required under MCOB R(4) would not be undertaken until that stage. It will depend very much on the particular circumstances of each borrower, but it may be appropriate for a borrower to have a fixed rate product and some certainty about the payments they have to make given uncertainties about future interest rate rises. This is something the FCA would expect firms to consider with the borrower during the advice process. This is separate from the interest rate stress test required at the underwriting stage under MCOB R (4). The advice boundary/perg review 8. Review of PERG what are the timeframes for the review? Lenders need to know what impact the PERG review will have on the advice boundary before they make systems changes to implement the new advice rules. The FCA's intentions regarding the review of PERG were set out in the FCA quarterly consultation paper (CP13/3). These changes have now been implemented and PERG manual in the Handbook has been updated with immediate effect.

5 9. Review of PERG Is it possible for a non-qualified adviser to take an application to the 'agreement in principle' stage? Doing this is likely to require interactive discussions which go beyond 'collecting information' (eg a discussion of term) and under the new MMR rules this is likely to form advice even if the customer is not steered toward a particular product(s). Is this correct? The firm will need to consider if the customer s decision about the choice of product is influenced by the questions asked (see PERG 4.6 ). Asking the customer about the loan amount, the term, or other features of the mortgage, in order to provide an indication of the likely costs of the mortgage would not necessarily constitute advice. However, if the firm makes a judgement, expresses an opinion on the suitability of a product or products and/or steers the customer to a product or products, they are likely to be providing advice. 10. Following on from Q9, if it is permissible for a non-qualified member of staff to reach an agreement in principle is it intended that these staff members can provide indicative mortgage quote/costs at this point: a) on a specific customer requested product (with no steering), or b) via a generic indicative rate (so it is not actually a rate that is commercially available in the product range), or c) in line with current PERG, the "non-adviser" can question to narrow down the range to 2+ deals to give indicative quotes on. a) This would not be advice, but the provision of an illustration and therefore information b) The firm would need to be satisfied that in doing this they are compliant with MCOB 5.4.1R and 5.4.2R and MCOB 3, ensuring the illustration was clear, fair and not misleading and is an accurate reflection of the costs of the mortgage. c) The firm will need to consider if the customer s decision about the choice of product is influenced by the questions asked (see PERG 4.6 ). Asking the customer about the loan amount, the term, or other features of the mortgage, in order to provide an indication of the likely costs of the mortgage would not necessarily constitute advice. However, if the firm makes a judgement, expresses an opinion on the suitability of a product or products and/or steers the customer to a product or products, they are likely to be providing advice. Firms should remember that advice is about one product or a range of products. It is no longer about a product recommendation, which is the current approach to advice. 11. If a lender uses software to narrow down which products a customer is eligible for based on their circumstances, either as part of a sale or as part of a contract variation, is this considered to be 'steering' and therefore require advice? Firms will need to consider whether the filtering process is designed to steer the customers towards a particular product or range of products. Firms should refer to PERG 4.6 for guidance.

6 Provision of KFIs 12. Provision of KFIs: If a customer requires a KFI on request without going through advice, can the lender provide this on an execution only basis without covering off execution only requirements? Yes.This is a requrest for product information. 13. Current MCOB is written such that lenders can provide KFIs quickly and easily to customers who are shopping around and provides provisions for lenders to be able to ask questions to do this thereby providing the KFI on a non-advised basis. Lenders are concerned that the new rules mean that the process necessary to provide the KFI, and the questions that need to be asked (eg regarding term), will be captured by the new advice rules. This would make the provision of KFIs advised is this the FCA's intention? The FCA do not see how the provision of a KFI would necessarily require advice. The key is to consider whether the customer s decision about the choice of product is influenced by the questions asked (as per PERG 4.6). Asking the customer questions about the product they want, loan amount etc does not necessarily constitute advice. However, if the lender makes a judgement, expresses an opinion on the suitability and/or steers the customer to a particular product or range of products, they are likely to be providing advice. Firms should therefore take account of PERG As per MCOB there is a requirement to issue a KFI on request by the customer. Can this quote be provided by any internally suitably franchised person (i.e. not an adviser) or should it come from an adviser? Following on from this, what information would lenders expect the customer to provide so not to be deemed to have provided advice under the PERG definitions? How would this be expected to be evidenced to ensure it is not seen as a breach of the new MCOB 4 rules? If the customer requests a KFI on a particular product, this can be done without advice. The firm can also ask the customer information in order to provide the KFI, such as loan amount, term etc. However, if in doing so the lender makes a judgement, expresses an opinion on the suitability and/or steers the customer to a particular product or range of products, they are likely to be providing advice. Firms should therefore take account of PERG 4.6 (PERG sets out what is considered to be information). Advice and pre-arrears discussions 15. Telephone contact with pre-arrears cases does this constitute advice even though forbearance is exempt from advice? It will depend on the nature of the discussion. If there is a potential impairment indicator (as per the guidance on forbearance and impairment provisions for mortgages), or any other indication of potential payment difficulties, this will be considered forbearance even if the payment shortfall has not yet occurred. If there is no potential impairment indicator and the discussion is about a variation to the contract, MCOB 4.8A.10R sets out when execution-only is permitted for contract variations. Contract variations general 16. Where a customer requires advice on a contract variation or retention activity can the advice be limited to that aspect of the mortgage only eg, term on a term extension?

7 For further advances the advice can relate to the further advance only, advice does not have to be given on the entire borrowing. For rate switches, if the rate will apply to the entire loan, then advice should be given on the total amount borrowed. If the rate switch relates to only part of the loan, or to new borrowing only (ie the further advance element), advice only needs to be given on the element of the loan to which the rate switch applies. The same applies to other variations, such as term. If the term will apply to the entire loan, then the needs and circumstances assessment should be applied to the whole loan, insofar as relevant. Advice can be given on the variation only (ie a term change), but it will depend on the circumstances of the customer, and other aspects of the needs and circumstances assessment may need to be considered. 17. Contract variations/rolling up of fees and charges: MCOB 4.6A.1 states that a Lender must not offer a regulated mortgage contract to a customer on the basis that fees or charges are automatically added to the sum advanced. Is this applicable to contract variations were no additional sums are advanced and the variation is purely administrative but an administration fee is charged? Yes. MCOB 4.6A.1 applies to fees relating to contract variations, therefore the customer must elect to add these fees to the loan, they should not be automatically added. 18. Contract variations execution-only: What is the FCA s view as to a range of affordable loans (from most stringent affordability rate to least) being provided to customers, eg as quick quotes, as part of an enquiry as to their potential borrowing for a contract variation in an execution only process. Lenders can provide more than one illustration to a customer on an execution-only basis provided they are not steering them towards a particular product. 19. Advice and contract variations when is it an execution-only sale? There is a table in PS12/16 in Chapter 2, which provides an overview of when advice is required and when execution-only is permitted for contract variations. In summary, if the contract variation does not involve additional borrowing, it can be carried out on an execution only basis as long as the customer has specified the variation they wish to enter into [see MCOB 4.8A.10R & MCOB 4.8A.14 R(3)]. This applies to interactive and non-interactive sales. Rate switches are treated slightly differently and will generally be advised where there is interactive dialogue. However, execution-only is permitted where: the rate switch is made via a non-interactive channel; and all the product options available to the customer are first presented via a non-interactive channel [MCOB 4.8A.10 R1(b)], with no additional new borrowing and the customer accepts a product via an interactive channel.

8 MCOB 4.8A11 G (3) reminds firms, if, in presenting all the available options to a customer, they explicitly or implicitly steer a customer to a specific product(s) then the sale will be advised. As such, a contract variation that involves a rate switch without additional borrowing but the customer is steered towards a particular product(s) will be advised regardless of whether the sale takes place via an interactive or noninteractive channel. A contract variation that involves a rate switch and additional borrowing will be advised. 20. Offset mortgages does a borrower taking advantage of a drawn down facility on an offset mortgage require advice? If the drawdown facility was part of the original product recommendation, there is no need to provide advice. 21. Post-application changes what happens post-application if changes need to be made (eg underwriting amendments) would this constitute advice? What would happen if the case was originally transmitted online in a non interactive (and therefore execution-only) sale but during underwriting changes had to be made? It will depend on the nature of the change and whether it has an impact on the advice given. For example if the customer was advised to have a 25 year term but when the case is underwritten the decision is that they can only have a 20 year term, this may not meet the customer s particular needs and circumstances and a further discussion will be needed to establish this. It will be up to the firm to decide how to manage this - the underwriter may refer it back to the advisor (the lender s staff or the intermediary) for the advisor to discuss the change with the customer. If it is the underwriter who will consider whether the change meets the customer s needs and circumstances, the underwriter would be expected to provide advice and be suitably qualified to do so. If the case was originally carried out via an execution-only process, it will be for the lender to decide whether any issues that are raised during the underwriting process will have an impact on the customer s needs and circumstances such that the sale/variation would need to proceed on an advised basis. Under MCOB 4.8A.7R(3) where a sale starts on an execution-only basis but then a discussion between the firm and the customer happens, the firm cannot complete the sale on an execution-only basis. 21b. Where post completion contract variations are carried out on an execution-only basis, are the FCA able to confirm that it is at the lender s discretion whether they wish to offer the customer the option of advice or to provide advice if asked for by the customer? The rules on execution-only contract variations state that the customer must be able to confirm the variation they wish to enter into (MCOB 4.8A.14R (3)) and positvely elect to have the variation made on an execution-only basis (MCOB 4.8A.14R (4) and (5)) If one or all of these rules are not fulfilled, advice must be given. The lender does not have to give advice themselves and can use an intermediary, but this will be a commercial decision for the firm.

9 Contract variations affordability assessments and execution only variations 22. Is there a conflict in the contract variation rules that mean a contract variation carried out via a non-interactive channel which would have otherwise been execution-only, is captured by the advice rules because it requires an affordability assessment under the responsible lending rules (eg due to additional borrowing)? Do affordability assessments need to be carried out by qualified advisers? Will variations such as these be execution-only or advised in reality? The advice rules in MCOB 4.7 are separate to MCOB 11. If an affordability assessment is required under MCOB 11, this does not mean that the firm must also provide advice. The FCA would expect the affordability assessment to be carried out as part of the underwriting process. Advice and affordability assessments 23. The new rules do not make it a requirement to provide advice on a transfer of equity, with no additional finance required. However, some other customers requiring a transfer of equity will get advice where additional borrowing is required. Are the FCA aware of the difference in service propositions the current definitions will have on potentially what is defined as the same customer type? Which level of service is in the "best interests" of these customers? Should advice be provided where a new person is being added to the mortgage so that they can understand their commitment? Where advice is required, what would the lender be expected to advise on if there is no change in the product, term or repayment method? If no additional borrowing is involved, then advice is not required. If there is additional borrowing then advice will be required. This is the FCA s intention. If the firm wants to provide advice even where there is no additional borrowing, then they can do so and the requirements in MCOB 4.7A apply. 24. If a lender decides to advise on simple rate switches (change unlikely to be material to affordability ), is this possible without considering affordability, in accordance with MCOB R and MCOB R? Is it possible to make an advised recommendation without considering affordability? If not, and affordability is to be assessed, what does that mean in the context of a simple rate switch, and how does it add value? With regards to contract variations involving rate switches, an affordability assessment will only be required if the rate switch also coincides with additional borrowing or there is a material impact on affordability [MCOB R]. In this case, there is no additional borrowing and the change does not have a material impact on affordability, therefore the lender is not required to undertake an affordability assessment. If the rate switch is an advised sale, the lender must have regards to MCOB 4.7A and ensure that the variation is suitable for that customer [MCOB 4.7A.2R] by ensuring that it is appropriate to the needs and circumstances of the customer by applying the needs and circumstances tests at MCOB 4.7A.6R. Contract variations interest-only 25. Will advice be a requirement in all instances when an IO customer expresses an interest in moving to capital repayment or part and part but is not clear which of these options they want?

10 MCOB 4.8A.10 R(1) allows for a contract variation not involving additional borrowing to be carried out on an execution only basis as long as the customer has specified the variation they wish to enter into [MCOB 4.8A.14 R(3)]. If the customer is merely expressing an interest in varying the terms of their mortgage and cannot specify the variation that they require, then any interactive dialogue which steers the customer in making a choice will require advice. If the customer is clear which variation they require, then the variation can proceed on an execution-only basis even if carried out via an interactive channel as long as the lender is simply acting on the customer s instructions and there is no additional interactive dialogue. Firms should have regard to PERG 4.6 in determining whether they are providing advice or information. Separate to the advice requirements, the change in repayment method is likely to have a material impact on affordability [see MCOB E(1)(b)]. Under this rule, contract variations which have a material impact on affordability would require an affordability assessment to be carried out by the lender even where there is no additional borrowing UNLESS the lender uses its discretion and applies the transitional arrangements [MCOB 11.7]. The transitional arrangements [MCOB 11.7] allow a lender to make an exception, for an existing customer, where they do not meet the requirements of the affordability assessment. In order to make the exception and allow the change to the contract, the mortgage must have been in existence prior to 26 April 2014 [MCOB R (1)], there must be no additional borrowing [MCOB R(2)] and the change would be in the customer s best interests [MCOB R(3)]. In practice, however, the lender may carry out some form of affordability check, in order to consider whether the transaction is in the customer s best interests (as required by MCOB R(3)), and to consider the rationale for the decision (which they need to record as per MCOB (6)(d)). Lenders are required to include an exceptions policy within their responsible lending policy, to cover their approach to assessing whether a borrower should fall under the transitional arrangements [MCOB R(10)]. Firms must also keep a record of the rationale behind lending decisions made under the transitional arrangements [MCOB R(6)(d)]. 26. Are there any opportunities to create a decision tree process with the inclusion of an affordability assessment that helps an existing interest-only customer arrive at some suitable repayment strategy options for them? A decision tree can be used where the sale is execution-only (eg non-interactive sales), but firms should take account of PERG4.6.22G. Decision trees can also be used during interactive advised sales and contract variations which require advice. The affordability assessment required under MCOB R is separate to the advice requirements, but lenders can conduct this assessment as part of the advice process as long as they can demonstrate compliance with MCOB R.

11 27. Advice/interest-only: under the new rules, contract variations following proactive contact with IO borrowers are likely to be advised, this is because it is unlikely that a customer presented with a range of options in a proactive contact letter will know which specific variation they want if they then contact their lender. In the case of existing interest-only customers, an advised process may not be in the best interests of the borrower as the lender would be restricted in the options it is able to recommend/discuss particularly with reference to third party investment vehicles. Is this the FCA s intention? If the customer does not know the variation they wish to make, then the FCA would expect the firm to give advice. Under the interest only advice guidance in MCOB 4.7A.10 G, the firm is not expected to give advice on the adequacy of a repayment strategy. However, the firm may wish to refer the customer to professional advice elsewhere and ask them to contact the firm once they have obtained that advice to discuss the options. Contract variations rate switches 28. Contract variations and rate switches do all product options have to be provided via a noninteractive channel to ensure execution only? Could a strict scripted and recorded telephony process provide the information and as such the variation be execution only? The rules do not permit execution-only for rate switches via an interactive channel, except in the specific circumstance set out in MCOB 4.8A.10R (b). This is regardless of whether a scripted process is used. 29. Contract variations rates switches and execution only The cost of developing letters informing the customer of all products available to them to transfer onto may be prohibitive especially as for product ranges to remain competitive they will change frequently. What is the FCA's intention with regards to firms having to keep customers informed of changing product ranges? Firms will need to consider whether the rates have changed to an extent that the customer has not been made aware of rates which they could be eligible for. In such instances the FCA would expect firms to contact the customer with the revised rates available. 29a. At what stage in the process for an execution-only rate switch does a firm need to re-inform customers in a non-interactive form that a product range has changed? For example, a customer has chosen a product from a non-interactive list and submitted an execution-only application for a rate switch in accordance with the rules, after which the list of eligible products changes - in this circumstance would a firm then need to re-inform the customer in a non-interactive way of the new list of eligible products? Once an application has been submitted for a rate switch on an execution-only basis, lenders do not need to go back out to customers setting out their new products. Nor does the lender need to keep the customer up to date with available products before an application is made. If a customer contacts the lender to ask for a product that is no longer available, the lender can tell the customer at that time and, for example, point them in the direction of the lender s website for the currently available products, failing which they will need to send out a revised list. But the FCA would expect that to happen only once the customer made contact after the initial mail-out.

12 30. For online non-interactive execution only sales, are drop down boxes (showing the full product range) permitted or would a blank box for customer input be required? Drop down boxes would be permitted, subject to firms providing a list of the FULL product range. Providing less than the full product range in the drop down boxes could be interpreted as steering the customer to one or more product(s). Rejected advice 31. Can a customer reject advice in part during the advice process? How should this be reflected in the lenders records? The rules allow a lender to change their advice, if the customer rejects the advice (in whole or in part) as long as the change is appropriate to the customer s needs and circumstances [MCOB 4.7A.4G(2)]. The lender must keepa record showing why the final recommendation was appropriate to the customer s needs and circumstances and the record must be sufficiently clear and complete to allow the advice process to be reconstructed from the case file. 32. Rejected advice and early repayment charges If a customer wants to transfer from a product to another one, and this would involve paying an ERC, in the vast majority of circumstances it would not be appropriate to advise them to do so. As all interactive sales will be advised under the new rules, how should a lender proceed in this instance, if the customer is adamant that they want to proceed? The rejected advice rules in MCOB 4.7A.24R and MCOB 4.8A.12 R allow a customer to reject the advice given and proceed with a product of their choice on an execution-only basis. The firm will need to fulfil the requirements of MCOB 4.8A.14R in order to do so. Advice and forbearance 33. Paragraph 2.17 of PS12/16 confirms the policy intention of the FCA in that forbearance will remain exempt from the advice requirements. However MCOB 4.7A.5 (4) requires a firm to consider MCOB 13.3 when for the purposes of MCOB 4.7A.2, a firm is dealing an existing customer with a payment shortfall and has concluded that there is no suitable replacement regulated mortgage contract The wording of MCOB 4.7A.5 (4) appears to indicate that an assessment of suitability (as detailed in MCOB 4.7A rather than MCOB 13.3) is required when initially considering whether a customer with a payment shortfall should be provided with a replacement regulated mortgage contract. Could the FCA confirm whether this is their intention or whether it considers that MCOB 4.7A would benefit from the provision of an explicit exemption from MCOB 4.7A (as provided for in MCOB 4.8A.19) for forbearances cases? In addition, the provision of clarification from the FCA on what type of variations would be considered to be replacement regulated mortgage contracts would be very helpful. The FCA has stated that forbearance is exempt from the advice and execution only requirements. However, firms can still provide advice on forbearance if they wish (and some firms do), therefore this is reflected in the rules, and guidance is provided on what firms should consider in such instances.

13 The rules do not just apply to contract variations and will apply for new lending with another firm. For example, where a customer with a payment shortfall seeks to remortgage with another lender. The rules are therefore written in such a way to account for new contracts with another lender, as well as contract variations. The FCA has clarified in the PS and final rules that replacement contracts and variations with the same lender are considered to have the same effect. 34. If the lender writes to a customer at the end of his mortgage term of an interest-only mortgage and the customer is unable to repay the mortgage, should this be dealt with under the forbearance rules or would the consideration of an extension of term be deemed as giving advice in these circumstances and consequently need to be discussed with a qualified person? MCOB 13 does not apply where the capital is not repaid as expected at the end of the mortgage term. This is a breach of contract rather than payment difficulties/arrears. Therefore any variation to the contract, or new regulated mortgage contract, would need to be dealt with under the new rules, and may require advice. Advice: HNW customers and Mortgage professionals 35. A lender may choose not to tailor their direct-sales approach for HNW customers or mortgage professionals, delivering instead, the normal advised sales process and standard disclosure documentation (KFIs and Offers). However, it is quite possible that mortgage brokers may well provide tailored services prior to submission of the application. Will this have any implications for lender underwriting processes or mortgage offer documentation? No. There is no reason why the advice provided by the intermediary should impact on the lender s underwriting processes or documentation. Advice and single products 36. Given the change in the professional standards, and therefore qualification requirements, due to the MMR, can small lenders that provide a single product (or any lender that provides one product of a specific type - eg an Islamic home finance product, or self-build mortgage): a. interact with a customer to gather information without providing advice? b. sell the product on an execution-only basis? And, if so, can the sale be completed by a nonqualified member of staff? The FCA clarified in PS12/16 that lenders who only offer one product would inevitably be steering the customer towards that one particular product, therefore this would be advice and the FCA would expect the firm to apply the advised sale rules to determine if the product meets the customer s needs and circumstances. If the product does not meet the customer s needs and circumstances then the lender cannot recommend it to them [MCOB 4.7A.5 R(3)]. A firm must not recommend the least worst product in their range [MCOB 4.7A.22 G]. The customer can reject the advice and proceed on an execution-only basis provided they are not a sale and rent back customer.

14 A product cannot be sold on an execution-only basis via an interactive channel, unless the customer is a high net worth mortgage customer, a professional customer, or the loan is solely for a business purpose. Execution-only sales 37. Execution-only sales: When collecting the seven pieces of information from the customer in an execution-only sale as stated in MCOB 4.8A.14 is this all to be collected in one place or can the information be gathered throughout the course of the point of sale system? One of the pieces of information to be captured is the name of the lender if the firm is a lender rather than a broker is this still required? During a direct sale with the lender, the name of the lender will be captured by defaultthe FCA are not prescriptive about how the information is collected, as long as the customer can provide the required information as per the rules and the firm maintains a record of this. 38. Managing execution-only sales: MCOB 4.8A.17 states that a firm which intends to transact execution only business must have in place, and operate within, a clearly defined policy which sets out the amount of business the firm reasonably expects to transact by way of execution only business and steps to be taken by the firm if that business exceeds the expected levels. If a firm transacts execution only business within the MMR contract variation rules, are they expected to outline their volume of business within a policy if the contract variations conducted are administrative variations ( with no additional borrowing)? Yes, contract variations are included. 39. Execution only policies: when lenders are setting out the levels of execution only business under MCOB 4.8A.17 R do they have to specify what level of execution only business they expect to carry out as (a) contract variations, and (b) via direct vs indirect business? A firm s execution only policy should clearly set out the amount of execution only business a firm reasonably expects to carry out. This could be broken down in various ways, for example, by direct and intermediated business and by new sales or contract variations. 40. Online execution-only channels: If a firm carries out all its retention activity via an online channel purely set up to manage retention activity, can all business conducted via this channel be carried out on an execution-only basis? If the online channel is completely non-interactive, eg there is no adviser chat facility, and the information on the channel provides details of all the products for which the customer is eligible, then any retention deals/contract variations carried out via that channel can be carried out on an execution-only basis. The rules do not prohibit firms from making the customer aware of execution-only channels, however firms should have regard to MCOB 4.8A.5 R and 4.8A.6 G. Customers cannot be encouraged to take an execution-only route. This does not prevent firms from making retention deals available to all of its customers only via an online channel.

15 41. In the requirements for execution-only sales, MCOB 4.8A14 R 5 requires a customer to confirm 'in writing' that they are aware of the consequences of undertaking an execution-only sale. Can the FCA clarify what is meant by 'in writing' - for example, does the customer need to provide a signature? Or would the customer 'ticking a box' to confirm their understanding be adequate? There is no requirement in the rules to have a signature from the customer, but you will need to consider whether a box ticking process adequately demonstrates a customer s decision to opt in to the executiononly process. Firms should consider how their processes ensure they have sufficient evidence to show compliance with the rules. 41a. For the introduction of MCOB, the FCA helpfully produced some examples of different disclosures. It would be useful to have some model wording that firms could use to disclose to customers that their sale is execution-only and that they will not benefit from the protection of the advice rules (as per MCOB 4.8A.14 R (4) and (5)). Are the FCA intending to produce any guidance in this regard? No, the FCA will not be producing any guidance on this. The required disclosures are set out in the rules and it will be up to the firm to decide how this should be given to the customer. 41b. Under MCOB R there is a range of information a customer must specify for an execution only sale, which they must provide in conjunction with the positive election to proceed via execution only under MCOB 4.8A.2G. For joint mortgages, is it acceptable for one party to provide the information and positive election (e.g. in the initial sales call, or via an online sale where the customer may be asked to tick a box to confirm they wish to proceed with an execution only sale), confirming that they are acting on behalf of both parties. The joint party would receive copies of all sales documentation and be required to sign appropriate documentation before the mortgage proceeds. If not acceptable, can the FCA give an indication of how firms can comply in such a scenario? Consent must be obtained from both parties, but it would be acceptable to obtain this only in writing from the party not involved in the interactive dialogue (see MCOB 4.8A.14 (4) and (5)). If any party does not consent to proceed on an execution-only basis, the sale must not proceed on this basis. Advice and debt consolidation 42. Advice and debt consolidation: MCOB 4.7A.15R, includes factors additional to those in MCOB 4.7A.6R for the assessment of "needs and circumstances", which have to be taken into account when advising on a mortgage where debt consolidation is the main purpose. What does FCA expect to see to evidence compliance with (1) the costs associated with increasing the period over which a debt is to be repaid, and (2) whether it is appropriate for the customer to secure a previously unsecured loan? In particular, for (2) what options should the lender be considering to provide the appropriate evidence? The evidence requirements in relation to debt consolidation are not prescriptive. When advising on a mortgage where debt consolidation is the main purpose, the lender must consider whether the loan is appropriate and suitable for that customer. Lenders will have to consider each application on a case by

16 case basis and provide supporting evidence to support the advice given to the customer. 43. Advice and debt consolidation: What is the significance, if any, of the change in the rules about debt consolidation advice and their application where it s the main purpose (see MCOB 4.7A.15 R), as opposed to the current a main purpose? It is a drafting change to ensure the intent of the rule is clear. Advice permissions and TPAs 44. It is clear that lenders will need to have advice permissions to undertake new lending, however, it is not clear whether TPAs acting on behalf of lender clients (some of whom do not currently have advice permissions because they do not give advice under current MCOB) will need their own advice permissions or whether they will be able to piggy back on the permissions of the relevant lender. Initial feedback we have received suggests that TPAs will need to have their own advice permissions in addition to those held by the lender. Are the FCA able to confirm whether or not this is the case? In terms of when the TPA needs the permission, the following applies: 1. The TPA holds no regulatory permissions The TPA will not need the advising permission themselves, as long as the lender that has outsourced to them holds the permission. If the lender does not hold the advising permission, or is an unregulated firm, the TPA will need to obtain the permission in this situation. It is also worth noting that this applies to each lender the TPA works for. So if they work for Regulated Firm A and Unregulated Firm B, they can t rely on A s permission for the work they do for B. The TPA would need to hold the permission themselves. 2. The TPA holds a regulatory permission (eg for administering or arranging) The TPA needs the advising permission. As the TPA already holds a permission, they are not exempt from being authorised for some activities and not others. This is regardless of whether the lender also holds the advising permission. 45. Will a TPA still be able to rely on the outsourcing lender s advice permissions after the formal introduction of CF31 (in effect, the TPA will need to obtain CF31 approvals for its staff but would not need to hold advice permissions when acting on behalf of a lender which holds advice permissions)? CF31 applies to individuals and is not expected to impact on the firm s permissions. 46. Where a TPA does not hold advice permissions but relies on the advice permissions held by the outsourcing lender, is there an expectation from the FCA that the lender will need to provide greater oversight of the TPA with respect to the advice process carried out on its behalf? And if so, what would supervisors be looking for as evidence of this oversight? The rules about outsourcing are set out in SYSC 8.1 and this has not changed with the MMR. The key point is that a lender cannot outsource their responsibilities and will remain fully responsible for its regulatory obligations (see SYSC 8.1.6R). Therefore if a lender outsources the provision of advice to a TPA, the lender remains responsible for compliance with the advice rules. This is regardless of whether the TPA holds its own permission or not. The lender needs to have sufficient oversight, as they would need to

17 do now if they currently outsource functions to a TPA, again this has not changed with the MMR. The only way a lender would not be responsible is if the TPA was acting as an intermediary. In this situation the TPA would need to be advising in their own right, not as if they were the lender and they would need to hold the advising permission themselves, they could not rely on the lender s permissions. Definition of a contract variation 47. Are the FCA able to confirm the legal definition of a contract variation (for the purposes of MCOB 4.8A10) and what variations this captures? Do technical variations which do not have any practical implications/changes for the customer (eg, a consent to let without any actual changes to the underlying contract/pricing) need to be considered from a sales perspective (eg advice or execution-only basis)? If no change to the contract terms is made (eg no change in the product type or parties to the mortgage), then it would not be a variation and the FCA would not expect the advice or execution-only rules to apply. If the change only relates to the consent to let being granted and in all other respects the contract is unchanged, then the FCA would also not consider this to be a variation. Advice on specific aspects of change 48. The FCA has confirmed that firms are able to limit advice on contract variations to the aspect of the variation (eg term on a term change) as long as the firm takes into account the circumstances of that customer and whether additional advice (as per the needs and circumstances test) will be necessary. Where are firm believes that the advice can be limited to the aspect of change only, can the FCA confirm how firms should evidence that they have complied with the advice rules, and also how this should be disclosed to the customer (eg via the KFI which doesn t accommodate advice on anything less than all aspects of the contract)? The needs and circumstances assessment in MCOB 4.7A.6R sets out the factors that need to be considered insofar as relevant when providing advice. Allowing lenders to consider the factors within the needs and circumstances test insofar as they are relevant provides the lender with flexibility in what factors need to be considered when making a variation to the contract. The focus of the new advice rules is assessing appropriateness and ensuring that the product or variation is suitable for the customer at the point at which advice is given. Where a customer has a specific preference (eg a preference for the shortest possible term), lenders can take that preference into account, but the lender must ensure that any customer preference is appropriate and that it meets their needs and circumstances when giving advice. The advice rules do not require the lender to only advise on the optimal product or outcome, it is purely based on what is appropriate at the time advice was given. For example, a customer wishes to move from a variable rate product to a fixed rate product with their existing lender, but does not want to change any other aspect of their mortgage. The lender is aware that the customer could reduce their term, which would reduce the overall cost of their mortgage, but the customer does not want to do this, so the lender does not advise them to change their term. This is within the rules. However, this is subject to the lender not being aware of any reason why the existing term is no longer appropriate (MCOB 4.7A.5R (2) applies here)