FCA's take on the feared childhood jab, in the form of the alternative MMR – the Mortgage Market Review – mean that major changes to rules on selling regulated mortgages take effect from 26 April 2014.Andrew Barber and Emma Radmore look at what those who lend and advise under regulated mortgages must do to comply with the new rules.
What is the MMR?
Regulators perceived that the regulatory framework surrounding mortgages worked well for many customers but did not properly constrain high-risk borrowing and lending. It also did not adequately deal with the detriment customers could suffer when in arrears. As a result certain customers suffered significant hardship because of their mortgage arrangements. After a series of consultation papers, the (then) FSA announced a series of changes to its rules, chiefly to the Mortgages and Home Finance: Conduct of Business Sourcebook (MCOB). The changes take effect on 26 April 2014 and affect those who lend, and those who advise or intermediate on mortgage sales.
Changes for mortgage lenders?
- Affordability assessment: The onus of assessing whether a customer can afford a loan shifts from the intermediary to the lender. Although the lender can still use an intermediary to help, it will be responsible for assessing affordability and verifying a customer's income.
- Interest-only loans: Although there is no ban on interest-only loans, lenders must ensure that there is a credible strategy for repaying them before they grant them.
- Arrears handling: Lenders must ensure that they deal fairly with arrears, giving customers all necessary information.
Changes for intermediaries and to the sales process?
- No non-advised sales: The most fundamental change is that in principle all mortgage sales must be carried out on an advised basis. There is potential only for an execution-only sales process for non-interactive sales that are carefully managed and for customers in certain niche markets.
- Qualifications: Each seller must hold appropriate qualifications relating to mortgages.
- Disclosure documentation: Changes mean that firms need no longer provide an Initial Disclosure Document but must still communicate key messages about a firm's service. Also, a firm does not need to give out Key Facts Illustrations, except:
- where it makes recommendations;
- where the customer has indicated their choice of product in an execution-only sale; or
- where the customer asks for one.
FCA has held several road shows for firms to raise queries about the practical implementation of MMR changes. It has also carried out implementation readiness surveys, which indicate the market is well prepared. Among the issues which FCA has addressed are:
- The Retail Distribution Review (RDR) requirement to use labels such as "independent" or "whole of market" does not apply in the MMR context. Nevertheless, firms must explain to customers any limitations on their service.
- If firms plan to offer an execution-only sales channel they must put in place a policy regarding it. This includes an assessment of the amount of execution-only business it expects to carry out, and what it will do if levels of activity exceed its estimate.
- If a customer rejects a firm's advice and the firm does not offer execution-only sales, it cannot proceed with the customer's choice and get the customer to sign a disclaimer. It must either amend its advice if it can (because the product still meets the customer's needs and circumstances), or else not proceed with the sale.
- Even if a firm offers only one product, it is likely it will nevertheless provide advice. If the product is not suitable for the customer, it cannot advise the customer to take it even if it offers no alternative.
New Rules and Guidance
Most of the new rules are in MCOB. However, firms may also find useful certain key chapters in the Perimeter Guidance (PERG) (which has not changed because of MMR). PERG may be particularly relevant for a firm assessing where the boundary between information and advice falls and when reassessing their processes and policies.
Firms should note that the rules apply to regulated mortgages, home purchase plans, home reversion plans and where relevant regulated sale and rent back arrangements. The rules about second charge (unregulated) mortgages are not in MCOB although from 1 April 2014, FCA polices compliance with the relevant requirements following its assumption of regulatory responsibilities for consumer credit related activities.
To avoid the MMR causing too much unnecessary pain, all lenders and sellers of regulated mortgages and similar products should by now have assessed their offering, procedures and processes against the changes the MMR makes. They should also have implemented all necessary changes, both internally and at a customer-facing level.
Law stated as at 22 April 2014.