Following the Mortgages Market Study (MMS), in May 2019 the FCA consulted on changes to mortgage advice and selling standards in CP19/17. The FCA has now published its policy statement surrounding this, which can be found here.
The main findings were:
The above changes came into force on the 31st of January 2020; however, the industry has until the 30th of July 2020 to fully implement these changes.
Aligning mortgage advice with how advice is given on investments will allow advisers to provide clients with a greater amount of information to help them make more informed decisions.
Advisers must ensure that their discussions remain generic and that they avoid providing monthly costs and discussing eligibility etc. as this involves personalisation, which the FCA sees as drifting into advice.
Historically, execution-only sales have been seen as posing a greater client risk as they were, by definition, not receiving any advice from their adviser. Through this policy statement, the FCA has brought an execution-only sales process in line with its advised sale requirements.
Whilst firms are still required to have an execution-only sales policy, this is now governed by the SYSC Sourcebook rather than being an MCOB requirement. This means that accountability for execution-only sales has been brought firmly under the senior manager’s responsibility.
The completion of an execution-only sale is usually cheaper for the firm as there is no adviser to pay for, no additional admin, report writing time etc. However, the regulator has found that in several cases firms are not passing these savings onto their execution-only clients.
Through this policy statement, the regulator has set out that firms must pass on their savings to their execution-only clients. In addition to this, firms are required to ensure that the price difference between receiving advice or proceeding on an execution-only basis is clearly documented and is communicated clearly.
Where you offer an execution-only sales channel or an online intermediary service, you need to ensure that you are disclosing the costs clearly and that you are fully complying with the FCA’s initial disclosure requirements.
Firms need to make it clear that through an execution-only sale, clients will not receive any advice on the suitability of the mortgage. Similar to the pre-recorded triage processes used in Defined Benefit Pension Transfer cases, before an execution-only mortgage is completed, firms can now offer a pre-recorded video/audio which confirms this to the client.
Permitting the use of pre-recorded disclosure will hopefully speed up the sales process. Please note, however, that where you decide to offer a pre-recorded option you must retain a copy of this recording for a minimum of three years.
There is an exception in place which means that firms do not need to give advice where the discussion with the client is regarding a rate switch or where new products are added to a firm’s mortgage range.
The regulator has updated this exception to make it clear that the above can only be used where changes in interest rates or fees are material to the client’s decision to change the product.
For clients and advisers alike, this should speed up the sales process where a client is merely changing product owing to a better rate or product now being available.
Through the MMS the regulator identified that advisers do not always recommend the cheapest mortgage available. In fact, the FCA found that 30% of clients could have found equivalent or better mortgage products cheaper elsewhere.
When comparing mortgage deals for clients you must compare them fairly. The approach to identifying the cheapest mortgage can be found in MCOB 4.7A.23AR and involves comparing the total amount payable over the relevant period, including any fees paid directly by the client where this is the case. The relevant period is any discounted or introductory period or the full mortgage term in cases where there is no discounted or introductory period.
Where you are only able to offer broker specific deals you do not have to explain why you have not recommended that the client goes directly to the lender. Nor if the client wants a fixed rate, do you need to explain why you have not selected a cheaper variable rate.
Whilst the above will hopefully assist clients in finding the best deal, there is a risk that focusing on the price of the mortgage could mean that advisers spend more time on the cost of the mortgage rather than the suitability of the product.
Overall, there was nothing particularly surprising in this paper and these changes will help ensure that clients, and in particular execution-only clients, understand the implications of not receiving formal mortgage advice.