From discussions with our regulator it appears that they have a tangible concern over how well some intermediaries are dealing with customers who are undertaking debt consolidation. This will apply equally in relation to advice on both purchase and remortgage cases.
It is expected that all transactions where there is any element of debt consolidation should be on an advised basis. In undertaking any advised sales, the intermediary is expected to know where all funds within the transaction are coming from and going to and this should be documented in any fact-find, so that it can be explained to the lender and also to the FCA or FOS in the event of later enquiry.
In making any recommendation the adviser will have to consider whether the repayment of any unsecured debt is actually in the customer’s best interests. Whilst some firms undertake calculations to show the relative costs of both the unsecured and secured debt, this may not be enough to satisfy the new advice standards. The broker will, as a minimum have to establish the amount of the debt, its current interest rate and term outstanding. Where the customer could afford to keep this debt on an unsecured basis and pay it off within their affordability, the rationale for consolidation will have to be provided.
The broker will need to make clear to the customer both verbally and in any suitability letter the relative costs of the existing loan and the total costs of the new mortgage over what will normally be a longer term, possibly at a lower interest rate. Whilst it may reduce the monthly payments that the customer is making and even where the total overall costs are similar, this may not be justified as the increased loan might increase the risk of mortgage default which has more significant consequences than unsecured defaults. A customer desire to reduce their out-goings is not sufficient justification on its own to support the advice to consolidate.
Another key consideration is the level of fees that are being taken by some firms operating in this sector of the market. Whilst it is not unusual to see broker fees of around £500 in the standard market, instances have been cited where fees can range from £1,000 to £4,500. Where the consumer is considering debt consolidation, they might in some instances be considered as “vulnerable” therefore a blanket approach to significant fees may be open to challenge. In addition, whilst the FCA is not a price regulator, the MCOB rules do demand that any fees levied are a reasonable representation of the amount of work involved. Of course a profit margin is permissible, but particularly where the fees are added to the loan with the impact of the additional interest costs, then they need to be justifiable. There is often more work and advice risk in debt consolidation cases, but firms need to base their fees on more than customers’ willingness to pay.
The regulator is also unlikely to look kindly on disclaimers signed by the customer. In undertaking this work the adviser is responsible for the advice to consolidate the debt. Stating that it was the customer’s choice is not sufficient following MMR.
As an aside, those brokers who are taking both broker and procuration fees in relation to product transfers (arranging a new deal with the same lender) will need to be able to demonstrate that they have undertaken a full review of circumstances and the market in order to recommend that the customer stays where they are.