It was with an element of trepidation that I clicked on the link in an email at the end of January to read the long awaited and much discussed policy statement and final rules on mortgage advice and selling standards from the FCA. The preceding consultation had received reems of coverage with cries of disbelief at the FCA’s seemingly blatant u-turn away from decisions taken as part of the Mortgage Market Review. The regulator’s drive to promote technological development within the industry seeming likely to open the floodgates for execution-only sales to overtake advice.
This change of heart seemed to stem from the Mortgages Market Study findings that “some consumers are being channelled unnecessarily into advice”. It continued, “but perhaps more importantly, there has been little significant consumer-facing innovation in mortgage distribution. For example, unlike other markets, for purchases of new products it is usually not possible to complete a mortgage transaction online (from initial search to acceptance of offer).”
Published under cover of Brexit, the policy statement arrived very quietly and took two days to appear on the FCA’s list of publications. The AMI policy team, unusually all in the office together, devoured it. Our reading punctuated, at the start, with moans and groans, and as we reached the rules, with “hmmms” and “okays”. We started to make sense of what the changes would mean to mortgage intermediaries, the firms that we represent. Having had a couple of months to digest and discuss, I want to share AMI’s view of the new rules that according to the FCA would “make it easier for firms to present options to consumers without giving regulated advice” and “help firms make execution-only sales channels easier to use”.
Within MCOB, the interaction trigger has been maintained and strengthened, meaning that execution-only sales are allowed where there is no spoken or other interactive dialogue between the firm and the customer. The definition of interactive dialogue, whilst including SMS, mobile instant messaging, email and communication via social media sites, stipulates that a sale conducted entirely on the internet where a customer inputs the details on the options and contract required in order to select a product, would not be entering into interactive dialogue.
Interactive dialogue is only allowed in execution-only sales if it is limited to factual information that is not personalised to the customer or is about the application process and other practical matters. The FCA felt that there was a need to clarify this to counter overzealous interpretations of previous guidance which saw customers who telephoned with a query on how to fill in an application form switched to a fully advised route merely because they had spoken to someone.
Additional guidance has been issued to help firms understand what is generic, factual information and what would be classed as personalised. Explaining the advantages and disadvantages of fixed and variable rate mortgages is permitted as long as it is generic information and does not include the implications tailored to the customer. Giving an estimate of the monthly payment due in respect of the amount that the customer wishes to borrow under the product they wished to take is not permitted as this is personalised to the customer. However, the new FCA guidance states that the provision of a European Standardised Information Sheet (ESIS) or an illustration does not in itself trigger the need for advice so theoretically a customer could walk into a branch and ask for an ESIS for a particular rate. More usually, the ESIS can be issued at the end of an aggregator search. If that same customer walked into the same branch and asked for an indication of how much their mortgage loan would cost on a monthly basis on a 1.54% two-year fixed rate however, this would not be allowed and would trigger the need for advice. In the FCA’s words, “Broadly, if an interaction results in the customer receiving personalised information it is likely to trigger the need to give advice. A consumer receiving personalised information may incorrectly believe they had been advised.”
Whilst sales conducted entirely on the internet have not been included in the FCA’s definition of interactive dialogue, any information given will still need to adhere to the rules providing generic factual information only. As chatbots are often perceived by the general public to be a person sitting somewhere answering questions as they come through to their computer rather than the result of technological advances, there is the potential that they could be more likely to taken by the customer as advice than information. So any information given out needs to be carefully checked to ensure that it is indeed factual information only and will be perceived as such by the customer.
Amendments to the perimeter guidance (PERG) specify that giving out generic or general advice is permitted and the advice only comes into the terms of the regulated activities order if it relates to a particular regulated mortgage contract (or several different ones). Whilst giving generic advice is not generally a regulated activity, if following the generic advice, a firm identifies a particular rate, product or lender for the customer, the generic advice then forms part of the regulated activity.
PERG has been updated with clarification of whether something is advice or information including examples but, in general, it is suggested that advice requires an element of opinion and is a recommendation to a course of action whereas information involves objective statements of facts and figures. Regulated advice is objectively likely to influence the customer’s decision whether or not to enter into or vary a particular mortgage contract.
With this is mind, if a customer asks for a recommendation, any response is likely to be regarded as advice. Talking someone through a decision tree is therefore not permitted as the act of talking them through a decision making process is likely to involve more than merely providing the customer with factual information.
Websites’ filtering methods are also considered in some detail in PERG. Where tools allow customers to filter products on simple objective factors like price or eligibility, this is unlikely to be advice. Similarly, a firm can rank products objectively and, as long as this is clear to the customer, then it does not fall under advice. However, if the filtering is based on balancing a number of factors and customer preferences, where the production of a list of results uses an element of opinion and skill (albeit automated) in translating the customer’s input into a display of a particular product or products which is presented as meeting the customer’s requirements, it is more likely that the firm is advising the customer.
Any customer wishing to proceed on an execution-only basis needs to be able to specify, as a minimum: the lender; the interest rate; the interest rate type (whether fixed, variable or something else); value of the property; term of the loan; sum of loan required and whether the loan is required on an interest-only or repayment basis. A website that allows a customer to input this information and then select a suitable product, before proceeding to the application and information gathering stage is clearly allowing a customer to proceed on an execution-only basis and this is the approach that AMI expects lenders will take.
However, the product selection process becomes more complicated when there are multiple lenders within any process as well as products to consider. So where does this leave the digital aggregators? Taking personal information from the customer in order to give a propensity score on suitability certainly seems to fall outside the regulatory perimeter and our discussions with the regulator have confirmed this. Where personal information is used to point the customer towards a reduced range of suitable products then, as long as the filtering process is clear to the customer, factual and does not include any skill or opinion that steers a customer either towards or away from particular products or lenders, this is likely to be acceptable and not fall within the regulatory perimeter. Where aggregators are facilitating a complicated filtering process to enable a consumer to select their lender and mortgage product and fulfilling directly to a lender on an execution-only basis, lenders would need to be quite certain that they were not entering into an unenforceable credit arrangement, which is defined by law, not regulation.
A regulated firm with advice permissions considering developing an execution-only fulfilment process might want to think quite carefully about its decision. Any brand known for giving mortgage advice that then promotes execution-only business could potentially be in breach of the clear, fair and not misleading rule. A mortgage adviser may also want to take this into consideration. Any lender manufacturing a mortgage loan must have due regard to how it is sold to the customer. A move away from advised to execution-only fulfilment will have to have been carefully risk assessed and documented within the firm. The key question, as laid out in the perimeter guidance will be “whether an impartial observer, having due regard to the FCA rules and guidance, context, timing and what passed between the parties, would conclude that what the adviser says could reasonably have been understood by the customer as being advice.” Time, and I suspect the Financial Ombudsman Service, will be the judge.
Senior Policy Adviser, AMI