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

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

Mortgage Advice and Debt Consolidation - Questions & Answers This Q&A is designed to deal with the most common queries arising from the Mortgage Advice and Debt Consolidation Policy and the Process Guide for Debt Consolidation Mortgages for ARs. It is recommended that ARs and Employees are familiar with the Policy and Process Guide in full. What is Debt Consolidation in the context of a Mortgage transaction? Debt consolidation is the process of repaying one or more pre-existing unsecured debts from the proceeds of a new mortgage or re-mortgage. Consolidating debt will reduce the number and monetary amount of the pre-existing unsecured debts held by a customer and replace them with a new mortgage. The previously unsecured debt is effectively repaid by the customer over the term of the new mortgage. What is the new Policy with regard to Debt Consolidation Mortgages? The two main policy changes that will impact on ARs are: Fact-find and Research: All information with regard to pre-existing debts must be collected from the customer* at the earliest possible opportunity. This information must be recorded as liabilities in the relevant fields on the Horizon fact-find. Suitability Assessment: As part of the suitability assessment, the AR is required to calculate the impact of consolidating each individual debt proposed to be consolidated. The calculations must be saved as a PDF and (1) uploaded to the customer file on Horizon and (2)explained to the customer at the same time as the presentation of the before and after Mortgage Illustration (see below).. The AR is required to conclude, following discussions with the customer, whether it is appropriate and suitable for the individual debt to be consolidated with justification for the advice to the customer being detailed in the Suitability Letter. *a Customer Debt Information Record Template that can be used by customers to collect this information is available from the Network via the Pink Website, however this is not a substitute for detailed completion of the Horizon fact-find which will act as the definitive record of the customer s pre-existing debt situation. In addition, the following requirement continues to apply: Presenting the Advice Mortgage Illustration: The AR must present a before and after Mortgage Illustration to the customer in order to summarise and demonstrate the discussions held and compromises agreed. Both the before and after Mortgage Illustrations must be uploaded to the Horizon record. 2

Why have these Policy changes been introduced by the Network? We have worked through some completed mortgage transactions that involved debt consolidation and considered relevant decisions issued by the Financial Ombudsman Service. The conclusions were that: simply requiring ARs to discuss a before and after mortgage illustration with customers did not draw out the impact on the customer of consolidating each individual debt with sufficient clarity standards of fact-finding with regard to the terms that apply to pre-existing debts, and the recording of those terms within the customer file, required improvement the detail and quality of the explanations provided to customers in the Suitability Letter as to why it was appropriate to consolidate debt required updating. These issues could impact on customers receiving suitable mortgage advice that is specifically tailored to their needs and circumstances. This could be particularly relevant where customers are in an acutely pressurised financial situation, which might influence their judgement and lead to poor decisions, unless all options were properly and appropriately explored and explained during the advice process. We therefore consider the new requirements are necessary to appropriately discharge our duty of care, and that of the ARs, to potentially vulnerable customers. The adoption of these policy changes will also assist ARs in their ability to show compliance with a specific rule within MCOB which requires advice on debt consolidation mortgages to take account of: any costs associated with the period over which the debt is to be repaid whether it is appropriate for the customer to secure a previously unsecured loan; and where the customer is known to have payment difficulties, whether it would be appropriate for the customer to negotiate an agreement with creditors rather than take out a mortgage Does the new Policy only apply to regulated re-mortgages which feature Debt Consolidation? What about Buy to Let? No. The policy applies in full to any mortgage transaction (including re-mortgages, purchases, Help to Buy or similar Government schemes) that involves any element of debt consolidation, even if it is only one debt, and whether a regulated or buy to let mortgage. ARs are reminded that the arrangement of a buy to let mortgage still carries with it a requirement to exercise a reasonable level of skill and care and to look after the interests of a customer accordingly. It is Network policy that an AR follows a process that is identical to that for regulated mortgage contracts in order to meet this standard. This is an essential risk management policy, designed to protect the Network and its ARs in the event of mis-selling claims. 3

The customer is very clear that they want to consolidate their debt why can t the AR just do this? ARs are required to provide a customer with advice this means challenging what the customer wants and making an assessment of whether it is appropriate taking into account the needs and circumstances of that customer to put in place a new mortgage and consolidate debt. Just because there is a new mortgage available to the customer does not necessarily mean that it is appropriate and suitable for the customer, especially where debt consolidation has failed as a strategy for the customer in the past. Is there any type of debt that should not be consolidated? Advice to consolidate 0% rated credit cards with a relatively long period to run on the 0% period and/or loans with 12 or less months remaining on their term will be considered indicators of a poor customer outcome, unless the needs and circumstances of the customer are such that consolidation is appropriate when all relevant factors are taken into account. Advice to consolidate an overdraft balance or amounts due under a short term high cost loan (i.e. pay day loans) will very rarely be suitable for customers. These are short term debts designed to provide emergency or crisis funding. Regular use of these facilities by a customer is likely to indicate a wider reliance on credit and living beyond means and should be a material factor to be taken into account by the AR in deciding whether to advise a customer to consolidate debt or refer the customer for formal debt counselling. Switching a customer from a repayment mortgage to interest only (whether in whole or in part) and which also involves debt consolidation is also highly likely to give rise to a poor customer outcome, giving rise to the customer having no prospect whatsoever or repaying the debt. Customers for whom this strategy appears to be the only option should be referred for formal debt counselling or debt management advice How does the Network expect ARs to come up with the calculations that the new policy requires? The Network has developed and launched a new calculator tool, the output of which will satisfy the new record keeping and Suitability Letter content requirements. The calculator can be used for credit cards, store cards, personal loans, term loans and hire purchase agreements. ARs who are active in this sector must ensure they understand the assumptions on which the calculators have been built and ensure that the calculator, and the results it produces, are used in accordance with the guidance that accompanies the calculator. The calculator and the guidance can be found via the Pink Website. 4

How should an AR use the calculations in the course of the discussion with the customer? The advice process for a debt consolidation mortgage requires the AR to go through the calculations with the customer, to draw out the costs of consolidating each debt so that the advantages and disadvantages of the consolidation can be debated and agreed with the customer. This needs to be pitched in terms and language that a customer is likely to understand. The Network considers that the point of delivery of the before and after Mortgage Illustrations is the most appropriate time to have the discussion regarding the output of the calculator. ARs are required to upload the summary produced by the calculator in PDF format to the Horizon record. The calculator cannot provide the AR with the calculation for a debt held by a customer that is not in the nature of a credit card or loan what should the AR do? The AR should discuss the debt with its ACM to decide on the most appropriate course of action, having considered the needs and circumstances of the customer. An AR wants to use a different calculator to that provided by the Network is this permitted? Only calculations that have been generated by the Network approved calculator will be acceptable as meeting the new policy requirements. This is because the calculator has been subject to extensive testing, and the assumptions upon which it has been built are understood. This may not be the case for calculators that are designed by ARs or available from the internet. The Network requires consistency in the application of its policy so that outcomes for customers can be monitored and compared. An AR thinks the results from the calculator are wrong what should it do? Raise this with its ACM, highlighting why along with details of the inaccuracies so that these can be investigated by the Network. How accurate do the calculations need to be? The calculations discussed with and presented to the customer should be based on the most up to date information available from the providers of the debt. However, pin-point accuracy is not required what is required is the taking of reasonable care to ensure that the customer receives a tailored explanation of the approximate impact on them, of consolidating each individual debt. The calculations should ideally be timed as close as possible to the making of the recommendation but in reality the net effect on the customer of using base data that is a few weeks old (i.e. the date 5

of a most recent statement) will be negligible. ARs should update any calculations that are over a month old before any advice is given to a customer. Does the customer need to provide the AR with their actual credit card or loan statements? Not necessarily, unless the AR considers this the most efficient way to gather the information that is required for fact-finding purposes. The Network does not require actual statements of each debt to be saved to the Horizon record unless the AR wishes to do so. Having used the calculator it is apparent that the customer will be worse off in relation to each debt if they proceed with the consolidation, however the pressures on their financial situation are acute and they risk falling into arrears on their mortgage what should the AR do? Transactions such as this are very finely balanced and will be judged by the quality of the assessment of the circumstances of the customer, the risks that the customer is prepared to take and the compromises that they are prepared to accept. The AR must explain why it was appropriate for the customer who is in this situation to go on to consolidate debts and take out a new mortgage. The AR should ask sufficient questions of the customer to establish their attitude and feelings towards their own situation have they done a similar thing before? If so what is it about this mortgage and the plan devised now that suggests their behaviour will be any different? ARs can expect to be challenged where they simply put forward weak rationale for debt consolidation cases e.g. the customer wanted one manageable repayment or the customer needed to reduce their monthly outgoings without clearly explaining why: especially when any of these factors are also present: fees charged for taking on the mortgage, early repayment charges, switching from repayment to interest only (whether in whole or in part), increases in the interest rate paid by the customer. Where the financial circumstances of a customer are very tight the AR must discuss whether it would be appropriate for the customer to negotiate an agreement with their creditors rather than take out a new mortgage. This must be reflected in the contents of the Suitability Letter, along with the reason why it was discounted in the event that the mortgage goes ahead. In all cases, when the advice is to proceed with a mortgage that involves debt consolidation the Network expects the file and the Suitability Letter to clearly explain why the advantages outweigh the disadvantages from a customer perspective. Why hasn t the Network updated the text of the Suitability Letter that can be generated via Horizon for Debt Consolidation Mortgages? 6

Changes to Horizon content require development by an external contractor. The Network needs to assess the true volume of mortgages that involve debt consolidation prior to preparing a cost benefit analysis for Horizon development. The Network has produced separate Debt Consolidation Horizon Guidance, this includes how to use the new Suitability Letter text with the system generated document, whether the debt consolidation is completed within the context of a re-mortgage or a purchase transaction. Where can ARs find the template content for the Suitability Letter? The paragraphs that should be inserted into the Suitability Letter on any mortgage transaction that involves debt consolidation can be found within the Debt Consolidation Horizon Guidance via the Pink Website. Are there are changes as to how an AR needs to record a Mortgage transaction onto Horizon? We have produced a separate step by step guide on how to complete a Horizon record for a debt consolidation mortgage, both in relation to a re-mortgage and a purchase. This includes a guide on how to make the required changes to the standard Suitability Letter produced by Horizon for both a re-mortgage and purchase transaction. When will the new policy be applied by the Network? 13 February 2017. The policy will apply to all new mortgage advice processes commenced with customers on or after 13 February 2017. The Network requires a high standard of compliance on debt consolidation mortgages so a failure by an AR to meet the requirements of the new policy and process is likely to result in a grading of advice fail with a consequent direction to the AR to address any customer issues that may then arise. How will pipeline mortgage transactions be reviewed by the Network? Mortgage transactions where the advice process with the customer has already commenced (which for these purposes will be the date of the issue of the AR Disclosure Document prior to 13 February 2017) where they are subsequently reviewed by the Network will not be subject to a strict application of the new policy. However ARs can expect to receive feedback as if the new policy had applied with a view to improving standards for future transactions. What are the boundaries between Mortgage Advice involving debt consolidation and the Consumer Credit Regulated Activities of Debt Counselling (including debt management) and Debt Adjusting? The Network holds the regulatory permissions for itself and its ARs, of Advising in relation to Regulated Mortgage Contracts and Debt Counselling (limited to Counselling, no debt management). 7

ARs must ensure that they conduct their own activities with customers within the boundaries of these permissions. All of the following steps that will be taken by an AR in the course of discussions with and advice to a customer are permitted within the permissions that the Network holds: a detailed discussion regarding a customer s budget, including how discretionary spending may be reduced in order to free up cash to repay debts general advice on borrowing within what is affordable by the customer a discussion with a customer regarding how they feel about attempting to agree an informal agreement with their creditors, such as asking a loan provider for a reduction in the interest rate charged helping a customer establish what their priorities are when it comes to repaying their debt a recommendation that a customer seeks advise from a qualified insolvency practitioner ARs are reminded that they should not undertake any of the following steps with or on behalf of customers as they are outside the permissions that the Network holds: Negotiating with providers of credit on behalf of a customer Act as a conduit for payment between a customer and providers of credit Will the Network be providing ARs with any training? Yes. Mandatory reading and testing will be set to ensure the materials have been read and understood. Where can ARs go for further assistance? ARs should refer to the Mortgage Advice and Debt Consolidation Policy, the Process Guide for Debt Consolidation Mortgages and the Debt Consolidation Horizon Guidance in the first instance. If questions still remain these should be directed to the relevant ACM. 8