The FCA’s Mortgage Market Study (MMS) identified three potential harms relating to mortgage advice and selling standards:
- Rules and guidance may be a barrier to developing tools that help consumers choose a mortgage;
- Consumers looking to buy an execution-only mortgage (i.e. without advice) are diverted to advice and execution-only sales channels are not always easy to use;
- Many consumers are overpaying for their mortgages, even when they get advice.
The outcomes desired from these changes are:
- to encourage firms to make execution-only sales channels easier to use; and
- prevent consumers being diverted to advice where the interaction does not influence purchasing decisions
Why the focus on execution only?
The MMS indicated that the rules and guidance around execution only mortgages could be stifling firms’ mortgage advice processes, with the result that some consumers might be forced in to a formal advice process without any precursor generic information that could aid their understanding of potential options and inform any subsequent decision they make in relation to borrowing.
The restrictions on doing mortgages on an execution only basis remain pretty much as they were previously but further guidance should enable firms to understand what they can do without going into a formal advice process.
Subject to certain limited exceptions, the rules in MCOB 4.8A restrict execution-only sales (which includes variations of existing contracts) to cases where:
- there is no spoken or other interactive dialogue* between the firm and the customer during the sale; or
- if there is spoken or other interactive dialogue between the firm and the customer during the sale:
– the customer is a high net worth mortgage customer*; or
– the customer is a professional customer*; or
– the loan is solely for a business purpose; AND
- in each case the customer has positively elected to proceed with an execution-only sale and (in the case of a professional customer) identified the product he wishes to purchase; or
- the customer has rejected advice, identified the product he wishes to purchase and positively elected to proceed with an execution-only sale.
Interactive dialogue includes, but is not limited to, SMS, mobile instant messaging, email and communication via social media sites.
A high net worth mortgage customer is one with an annual net income of no less than £300,000 or net assets of no less than £3,000,000, or whose obligations are guaranteed by a person with an income or assets of such amount.
A professional customer in relation to these rules is one 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.
Where a sale is carried out entirely on the internet, a firm merely permitting the customer to input details in order to select from the firm’s product range the regulated mortgage contract he wishes to purchase, or the variation he wishes to enter into, would not be engaging in interactive dialogue unless the process steers the customer towards any one or more of the products offered by it, so as to constitute advice.
Cases where execution-only sales are not permitted
Firms must not enter into or arrange an execution-only sale for a regulated mortgage contract if:
- the customer is intending to use it to exercise a statutory “right to buy” the customer’s home; or
- the main purpose of the customer’s entering into it is to raise funds for debt consolidation; or
- there is spoken or other interactive dialogue between the firm and the customer at any point during the sale; or
- the regulated mortgage contract is a shared equity credit agreement.
Exception for variations
The requirement for advice does not generally apply where an existing mortgage is merely being varied, for example being replaced by a new mortgage on a different interest rate or basis with the same lender, or where the mortgage is ported to a new property. There are some conditions attached, the main one being that the new mortgage is not for an amount greater than the existing loan.
The changes to the rules and guidance came into force on 31 January 2020. However, to allow firms time to adapt their processes to comply with the changes in MCOB 4.4A.1R(1A) and MCOB 4.7A.23AR, transitional provisions will run to 30 July 2020.
What is changing?
The rules and guidance are amended as follows:
- Changing perimeter guidance (PERG) relating to mortgage advice, making clearer that using tools to search and filter options based on objective criteria is not necessarily giving advice – this more closely aligns the approach taken in the recently updated guidance in relation to advising on retail investments;
- Permitting more customer interaction before firms are required to give advice;
- A number of other changes that may help firms make execution-only sales channels easier to use;
- Requiring advisers to explain why they have not recommended a cheaper mortgage where other products meet the customer’s needs and circumstances.