General
At a glance
· A newevidential provisionwas introduced on 26 October 2012 to ensure existing borrowers are not treated unfairly because they are trapped.
· New mortgage rulescame into force on 26 April 2014.
· The rules change the way lenders sell mortgages and the responsible lending standards that they have to apply.
Background
The FSA published apolicy statement and final rules (PS 12/16)on 25 October 2012.
The new rules cover areas including:
· Advice and execution only sales.
· Responsible lending (including new affordability requirements and stress testing).
· Interest only mortgages.
· Professional standards.
MMR policy and background notes
The following pages draw together the MMR rules, policy statement guidance, and any additional information that we have received.
· Advice background
· Interest-only rules from 26 April 2014
· Trapped borrowers (mortgage prisoners) background
Updated: 23/12/2013: Responsible lending: guidance for firms with respect to assessing future circumstances/life changes
This guidance note has been produced by the CML and the BSA. It is intended to assist mortgage lenders in the UK to understand their obligations under the Equality Act 2010 and the MMR rules, and how they may handle the issue of responsible lending, including affordability, when taking into account the future changes to income and expenditure of mortgage applicants.
Advice background
This page contains information on the following:
· The boundary between information and advice
· Advised Sales under MMR [MCOB 4.7A]
o When is a sale advised?
o The advice process
o Exceptions to advice rules for interactive sales
o Rejected advice
· Execution-only sales under MMR (MCOB 4.8A)
· Contract variations
o Contract variations involving rate switches
o Contract variations not involving rate switches
· The application of avice and execution-only to contract variations
The boundary between information and advice
1.The boundary between information and advice has not changed as a result of the new MMR rules. The definition of regulated mortgage advice remains as it is in article 53A of theRegulated Activities Order, ie advice on the merits of entering into, or varying the terms of, a particular regulated mortgage contract or contracts.
2.The FSA’s view of advice, therefore, remains unaltered – ‘…where a firm steers a customer towards particular identifiable products that the customer could enter into, that is regulated advice.’ [PS12/26, para 2.8]
3.The provision of general information to customers, the gathering of background information from customers, or ‘pre-screening’ of customers is not regarded as advice.
4.ThePerimeter Guidance Manual(PERG) provides additional guidance on the boundary between information and advice [PERG 4.6]. PERG 4.6.3G states that for advice to fall within article 53A of the Regulated Activities Order, it must:
(1) relate to a particular mortgage contract (that is, one that the borrower may enter into or, in the case of advice on a variation, one that he has already entered into);
(2) be given to a person in his capacity as a borrower or potential borrower;
(3) be advice (that is, not just information); and
(4) relate to the merits of the borrower entering into, or varying the terms of, the contract.
5.PERG 4.6.13 G states: ‘In the FSA’s view, advice requires an element of opinion on behalf of the adviser which steers or is intended to steer a borrower or potential borrower in the direction of one or more particular mortgages. In effect, it is a recommendation as to a course of action. Information on the other hand, involves objective statements of facts and figures.’
6.The FSA is undertaking a review of PERG with a view to clarifying the boundary. This review will take place over the next year such that any changes can be implemented in line with the MMR rules in April 2014 [PS 12/26, page 13].
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Advised Sales under MMR [MCOB 4.7A]
When is a sale advised?
7.Under MMR, the existing non-advised sales process is removed. Sales under the MMR rules will either be advised, or execution-only.
8.In general, advice must be given wherever the sales process involves spoken or other interactive dialogue with the customer [MCOB 4.7A.1G (3)].
9.Where there is interactive dialogue and the firm steers the customer towards a product or products, either when taking out a new mortgage contract or varying an existing mortgage contract, the sale will be advised.
10.Interactive contact will include: face-to-face sales (eg in branch), telephone sales, and online sales where there is an ‘adviser chat’ function where the customer can interact with an adviser who then steers them towards a product(s).
11.Interactive contact which simply involves a firm providing information, pre-screening, or gathering information will not constitute advice as long as the customer is not steered towards a particular product or products.
12.Sales to certain vulnerable customers (right to buy, equity release, sale and rent back, or debt consolidation) will always require advice [MCOB 4.2.1 G (2)(d)]. However, with the exception of sale and rent back, customers can reject the advice and proceed on an execution-only basis [MCOB 4.2.1 G (2)(f)].
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The advice process
13.Under the MMR rules, determining appropriateness lies at the heart of giving advice. Firms advising customers must determine whether the contract, or contract variation, is suitable for that customer [MCOB 4.7A.2R].
14.Whether a contract, or contract variation, is suitable for a customer depends on whether it is appropriate to the needs and circumstances of that customer [MCOB 4.7A.5R (1)]. Firms must base their advice on facts disclosed about the customer, and other relevant facts about the customer about which the firm is, or should reasonably be, aware [MCOB 4.7A.5R(2)]..
15.The factors which firms must consider when assessing the customer’s needs and circumstances are [MCOB 4.7A.6 R]:
· Are the customer’s requirements within the lender’s known eligibility criteria?
· Should the customer have an interest-only mortgage, a repayment mortgage or a combination of the two?
· Should the customer take out the mortgage for a particular term?
· Does the customer need stability in the monthly payments, bearing in mind the impact on the customer of significant interest rate changes in the future?
· Is it appropriate for the customer to have their payments minimised at the outset?
· Is it appropriate for the customer to make early repayments?
· Is it appropriate for the customer to have any other features of a mortgage?
· Is the mortgage appropriate based on the information provided by the customer on his credit history?
· Is it appropriate for the customer to pay any fees and charges up front, rather than adding them to the mortgage?
16.The list in MCOB 4.7A.6 R is not exhaustive. Firm must assess the factors that make up the needs and circumstances assessment ‘insofar as relevant’ on a case-by-case basis for each individual customer. 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.
17.Firms must not advise a customer to enter into a regulated mortgage contract if there is not a product in their range which is suitable to that customer’s needs and circumstances [MCOB 4.7A.5R (3)]. A firm cannot recommend the ‘least worst’ product in their range [MCOB 4.7A.22 G].
18.The record keeping requirements [MCOB 4.7A25R] require a firm to retain a record of information relating to the customer’s needs and circumstances and how the firm’s advice to the customer was suitable and appropriate. Therefore, if as part of assessing needs and circumstances, a factor in MCOB 7.7A.6 R is not considered relevant to a customer’s needs and circumstances, firms will need to demonstrate why that is so. Recording 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.
19.Records must be kept for a minimum of three years from the date on which the advice was given.
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Exceptions to advice rules for interactive sales
20.Interactive sales will, in general, always be advised, except:
· Where the customer is a mortgage professional; or
· Where the customer is a high net worth mortgage customer; or
· Where the loan is for a business purpose.
21.In each case, a-c above, the customer can undertake the sale via an execution-only process. To do this, the customer must be informed, clearly and prominently and in a durable medium, of the consequences of undertaking an execution-only sale [MCOB 4.8A.14 R(4)], and, the customer must confirm in writing that they are aware of the consequences and make a positive election to undertake an execution-only process [MCOB 4.8A.14 R(5)]
22.Aprofessional customeris defined in the MCOB glossary of definitions as ‘a customer who works or has recently worked in the home finance sector for at least one year in a professional position, which requires knowledge of the home finance transactions or home finance services envisaged, and who the firm reasonably believes to be capable of understanding the risks involved in the transaction or transactions contemplated.’ For joint applications if only one applicant is a mortgage professional advice would be required for the non-professional applicant and therefore the whole transaction would be advised [PS12/26 para 98, page A1]. A professional customer who is also vulnerable (see paragraph 12 above) will be required to receive advice [PS12/26, page A1].
23.Ahigh net worthmortgage customer is defined in the MCOB glossary of definitions as ‘a customer with an annual net income of no less than £300,000 or net assets of no less that £3,000,000, or whose obligations are guaranteed by a person with an income of assets of such an amount’. High net worth customers who fall into one of the vulnerable categories (see para 12 above) will not require advice [PS 12/26, para 4.27, page 26].
24.A mortgage sale which is undertakensolely for a business purposedoes not require advice. However, unlike high net worth customers, business borrowers who also fall into the definition of a vulnerable borrower must receive advice [PS 12/26, paras 4.53-4.55, pages 30-31].
25.The FSA has also confirmed that interactive discussions for the purposes of forbearance will be exempt from the advice requirements [MCOB 4.8A.19R].
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Rejected advice
26.If a customer rejects the advice given by a firm, the sale may proceed on an execution-only basis provided the requirements in MCOB 4.8A.14R are satisfied.
27.The FSA has recognised that an applicant may not reject advice in its entirety. In these cases, it is the FSA’s intention to allow firms the flexibility to amend the product(s) offered in the light of their final preferences [MCOB 4.7A.4G (2) and PS12/26 page A1], for example, if a customer wants a 20 year mortgage instead of the 25 year one recommended, provided it still meets their needs and circumstances.
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Execution-only sales under MMR [MCOB 4.8A]
28.The execution-only sales route allows a firm to enter into, or vary, the terms of a mortgage contract without providing advice – ie, without assessing the needs and circumstances of the customer and therefore the suitability of the mortgage contract.
29.MCOB 4.8A.2 G restricts execution only sales to cases where:
· There is no spoken or other interactive dialogue with the customer, eg a postal or strictly non-interactive internet sale.
· Interactive sales where the customer is a mortgage professional, a high net worth mortgage customer or a business customer and the customer has positively elected to proceed on an execution-only basis.
· The customer has rejected advice, identified the product they wish to purchase and positively elected to proceed on an execution-only basis.
30.When undertaking an execution-only sale, firms are reminded that they must act in the customer’s best interests. Firms must not encourage customers to opt-out of, or reject, advice.
31.The requirements for execution-only sales are set out in MCOB 4.8A.14 R. Firms must not enter into an execution-only sale, or variation, unless these requirements are met. The FSA has said ‘There is nothing in our rules to prevent firms from telling customers that they offer both an execution-only service and an advised service….The simple act of informing the customer that the firm offers some products on an execution only basis would not be considered to be encouraging them down this route’[PS12/26 page A1].
32.For a new mortgage contract to be taken out on an execution-only basis, the customer must have identified the contract they wish to purchase, and specify to the firm:
· the name of the lender
· the rate of interest
· the interest rate type
· the value of the property
· the length of term
· the amount to be advanced and
· the repayment type. [MCOB 4.8A.14 R (1)].
33.Where the customer purchases a mortgage on an execution-only basis they must be informed, clearly and prominently and in a durable medium, that the firm is not required to assess the suitability of that mortgage. If the customer chooses to purchase a mortgage that the customer has been advised is unsuitable then they must be informed that that is the case [MCOB 4.8A.14 R(4)]. In all cases the customer must be advised that they will not benefit from the protection of the rules regarding suitability. The customer must confirm in writing that they are aware of the consequences and make a positive election to undertake an execution-only process [MCOB 4.8A.14 R(5)].
34.The MMR rules are clear that firms wishing to carry out execution-only business must have an execution-only business policy in place [MCOB 4.8A.17R]. This policy must set out the amount of business that the firm reasonably expects to carry out via execution-only channels, and what steps the firm will take if execution-only business exceeds those levels. The policy must also set out the processes and procedures the firm will put in place to ensure it is compliant with the execution-only rules in MCOB.
35.The FSA has said that ‘firms and customers may try to circumvent our rules, which is a major concern’.It has stated that‘we recognise that the amount of execution-only business a firm undertakes will vary. It is not our intention that firms set hard limits, but rather that they take a risk-based approach…We intend to closely monitor and supervise the levels of execution-only business undertaken by firms and any unexpected spikes will be investigated further’[PS12/26 page A1].