Second mortgages and independence

Since the introduction, on 21 March 2016, of rule changes around mortgage advice required by the Mortgage Credit Directive, we have had some questions about how this might affect a firm’s independent status.

In our article published on 7 March 2016 we stated –

Impact on Firm Status
FCA rules do not require firms to broaden their scope of service to include second charge as well as first charge mortgages. If firms choose not to offer second charge then their disclosure documentation should make this clear and they will not be able to use the term ‘Independent’ in relation to advice on mortgages. 

But, where a firm does offer both, it will need to take all these products into account when giving advice. If an existing mortgage holder wishes to borrow more, the rules require firms to make the customer aware that other forms of borrowing are available that may also meet the need (e.g. a second charge mortgage if a customer is considering a further advance, or if a customer is considering a second charge mortgage, the firm must make the customer aware that it might be possible to obtain a further advance). However, firms are not required to provide advice on the suitability of possible alternative options if these are outside the scope of service they have chosen to offer.

This is indeed the situation.

However, what if a firm does advise on second charge mortgages when appropriate but, for some reason, refers the client to a second charge specialist or lender for that advice to be implemented? Can the firm still be independent if it does not implement the advice?

Important Note: ATEB news is intended to provide general information ONLY. The content, including any views expressed or guidance provided, does not replace the need to comply fully with FCA Rules and Guidance. Unless you have discussed news article content with ATEB, and specifically how it relates to your circumstances, then ATEB disclaims all liability and responsibility and actions arising from any reliance placed upon it. For the avoidance of doubt therefore, any reliance you place on such information without our consultation is at your own risk.

ATEB Compliance offers compliance and regulatory advice.

ATEB Suitability provides report writing software for the financial services market.

Our View

This situation has arisen in some firms because they have been unable to obtain agencies with second charge lenders.

Our view, recently confirmed by the FCA, is that there is no problem here. Independence is about the advice not the implementation. So, provided that the firm advises on both first and second charge loans when appropriate to the client’s needs, it can continue to present itself as Independent.

Action Required By You

For information and action as required.

For further information, refer to MCOB 4.4A.4 (3) and guidance at MCOB 4.4A.5

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About the Author

Technical Manager - Often referred to as the Oracle or the Sage, Alistair has a wealth of financial services experience. He is our go-to Technical Manager and enjoys nothing more than a complicated conundrum. Feel free to test his renowned knowledge by getting in touch.

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