The FCA has finalised changes to both MCOB and PERG in the hope that these will give firms comfort on what interactions will be seen as "advice" in the context of mortgage sales. Historically an area of concern for lenders and intermediaries, the new guidance aims to encourage firms to open up execution-only to customers by clarifying exactly what information can be provided, the use of comparison and search tools as part of the customer journey and other changes to make execution-only sales easier to use. Subject to transitional provisions, the changes take immediate effect. As well as providing some welcome clarity on the line between advised and execution-only sales, the changes should also help firms to create more user-friendly online customer journeys, including introducing new consumer choice tools.
The proposals which have now been finalised were consulted on in May 2019 (see our previous blog post), and are part of a package of remedies arising from the FCA's Mortgages Market Study (MMS). The MMS contained proposals for changes to the FCA's mortgage advice and selling standards to tackle some unintended harms that had arisen from the Mortgage Market Review in 2014. The FCA's advice rules and guidance have been seen as a barrier to tools which help customers choose a mortgage. Customers who would like to buy a mortgage on an execution-only basis have found they are diverted to advice. The FCA thinks some customers are still overpaying for their mortgages, even when they get advice.
How does the FCA hope to address these harms?
Amendments to its Perimeter Guidance (PERG) on mortgage advice
- The FCA has clarified its guidance in PERG so that a tool allowing a consumer to search and filter based on objective factors (i.e. those not using an element of judgement) should not, on the face of it, be seen as giving "advice".
- Typically firms use these types of tools to allow customers to filter the products based on factors selected by the customer, such as price or eligibility criteria. Where a firm makes clear that the tool is simply applying details provided by the customer and is only providing a view on whether that customer is eligible, this is unlikely to be seen as "advice".
- However, care needs to be taken where the input from the customer is much more extensive and the tool uses elements of opinion and skill (albeit automated) to produce a list of products. In these scenarios, PERG makes it clear that it is likely that this will be seen as "advice".
Aligning its approach with the recently updated guidance on advising on retail investments
- The activity of "advice" is now aligned in PERG with the language used for advising on retail investments.
- More generally, in aligning PERG on mortgage advice with the equivalent for retail investments, the FCA has included more detailed guidance on the boundary between advice and information and between generic advice and regulated advice.
Permitting more customer interaction before firms are required to give advice
- Firms had previously raised concerns that the 'interaction trigger' for advice is too sensitive.
- The FCA has confirmed that it's going ahead with its proposals to modify the trigger to exclude interactions that are unconnected with regulated advice, e.g. support with an application or ongoing case management where no personalised information is given.
- The FCA has also added clarity around the fact that neither of the following will trigger the need to give advice in execution-only sales:
o provision of an ESIS or illustration;
o the verbal disclosures given to customers about the fact that they will not benefit from the protection of the rules on assessing suitability.
Other changes that may help firms make execution-only sales channels easier to use
The FCA is also pressing ahead with a number of other changes aimed at encouraging firms to use execution-only sales channels by increasing their user friendliness. It has implemented the full range of proposals previously consulted on:
- Removing the prescriptive requirements around a firm's execution-only policy;
- Adding guidance to the rule preventing a firm from encouraging a consumer to opt out of advice to clarify that it doesn't prevent firms from marketing their execution-only channel or pricing execution-only and advised sales differently;
- Updating the rule which allows an exception from the interaction trigger for internal rate switches if firms first present customers with a list of all products available to them to (broadly speaking) provide that a firm only has to re-send the list to the customer if it adds new products to its range, or makes interest rate or fees changes likely to be material to the customer's decision; and
- Allowing execution-only disclosure to be given and recorded by audio or video and allowing the disclosure and positive election to be in separate documents or recordings to help firms design good online customer journeys.
Requiring advisers to explain why they have not recommended a cheaper mortgage, where other products meet the customer’s needs and circumstances
- Finally, the FCA is implementing the requirement in advised sales that if advisers recommend a mortgage which is not the cheapest of the suitable mortgages from their product range, they must explain to the customer why they have not recommended a cheaper mortgage and record the reason.
- However, it has also added a new requirement for firms to tell the customer about any limitations to the range of products under consideration in their initial disclosure e.g. where this is limited to mortgages available through the in-branch sales channel. The FCA believes this should help address concerns raised in the consultation that customers understand exactly which mortgages the adviser will consider.
Which types of mortgage are covered?
These rules will apply to both first and second charge mortgages, but not to lifetime mortgages.
Subject to some transitional provisions which apply to some of the changes to MCOB, the changes take immediate effect. Where transitional provisions apply, the rules will be in force from 30 July 2020.