As the regulator makes clear its expectations of adviser firms at this stage, Compliance First's Janice Laing provides a handy guide to the upcoming Mortgage Market Review.
The Mortgage Market Review (MMR) rules come into force in just under five months’ time (26 April 2014) and the Financial Conduct Authority (FCA) is expectant that all firms offering advice on mortgages should be reasonably far along in their planning for the implementation of this new regulation.
In fact, the regulator started tracking the progress of all licensed firms that hold permissions to conduct mortgage business during Q2 of this year with an online questionnaire.
The MMR has been likened to a Retail Distribution Review (RDR) for the mortgage sector and I am sure everyone who witnessed the RDR’s implementation at the end of last year will be aware they should not underestimate either the rigidity of the FCA’s intentions when it comes to regulatory change or the importance of early and rigorous preparation.
MMR: What you need to know
The key points likely to fall under the FCA’s microscope can be summarised under the following headings:
- Advice must be given where there is spoken or other interactive dialogue during the sale. ‘Advice’ can be defined as assessing whether a product or a range of products meets the customer’s needs and circumstances.
- Advice must, at all times, be given by a suitably qualified adviser.
- Firms will not be permitted to conduct non-advised sales from 26 April 2014.
Advisers can continue to conduct execution-only business but only in circumstances where:
- There is no spoken or interactive dialogue during the sale.
- The customer has rejected the advice (except in the case of sale and rent back) and positively elected to proceed on an execution-only basis.
- The customer is a mortgage professional, high net worth client or the loan is solely for a business purpose.
- It is a variation to an existing contract or a product switch (subject to meeting certain criteria).
- Execution-only must never be used where the client may fall under the definition of a vulnerable customer (i.e. debt consolidation, equity release, sale and rent back, and Right to Buy).
- Firms must act at all times in the best interests of their customers. This includes the firm ensuring the customer meets the lender’s eligibility criteria.
- Firms must make customers aware of the availability of further advances and the new rules take a positive stance on clients and firms rolling up fees or charges into the loan itself.
- All relevant records must be retained for a minimum of three years.
- All messages must be “clear, simple and prominent”. If the initial contact includes spoken interaction, the information must be communicated orally. If not, the messages must appear separately from other messages in the communication.
- Firms must disclose two key messages about the service they provide:
- Any limitations to the range of products or providers.
- How the adviser will be remunerated.
- Firms must also issue a key facts illustration to the client at various points throughout the advice process:
- Before the customer submits an application.
- At the point when advice is given.
- When the customer requests an illustration.
- When the product is known in an execution-only sale.
- The responsibility for assessing affordability lies with the lender; however, the intermediary will need to check the customer meets the lender’s eligibility criteria.
- Evidence of income will be required in all cases and, going forward, fast-track or self-certification mortgages will be outlawed.
- The FCA has also confirmed what it defines as relevant expenditure:
- Committed expenditure (e.g. loans, credit cards, child support).
- Basic essential expenditure (prescribed items e.g. utility bills, council tax, insurance).
- Basic quality of living costs (e.g. clothing, household items).
More to come...
While this covers many of the major points affected by the MMR, we would also advise you keep an eye on European market developments, as the Mortgage Credit Directive (MCD) is also heading our way. We may have a few years grace but it is likely the MCD will alter some of the regulation put in place by the MMR.
These new regulations may seem daunting and I cannot emphasise enough the regulator’s clampdown on those it deems straying from the agreed rules. However, this review has been laid out in order to ensure the mortgage market is sustainable and works better for consumers in both the short and long term.
The mortgage sector has built a strong reputation for itself over many years and, with correct preparation and implementation, we can make sure this reputation is upheld and strengthened.
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