Feb 16 – Regulation on the run

The hiatus over the launch of selfcert.co.uk appears to have subsided as it became clear that the FCA was uncomfortable with the idea and that the £50m of funds was not going to change the UK mortgage market.  In addition the clarification that UK consumers would have to engage on-line, on an effectively execution only basis will limit its appeal. It is to be hoped that the limitations around the lack of advice and no consumer protection will put most sensible consumers off.  There are however a number of principles that need to be remembered by UK advice firms who operate under the permission of the FCA.

Firstly, because a product or service is not regulated an advisor cannot ignore the duties imposed by their regulator.  There is an expectation that a reasonable duty of care will be applied by any regulated adviser whether the eventual product recommendation is regulated or not.  In being given the permission to advise, there is an expectation that the adviser will act in customers best interests at all times and is not expected to hide behind labels.

The industry should recognise that some of the largest fines imposed on firms have been where advisers have gone off panel and advised inappropriately on unregulated products.  As we move to a post MCD world, where there will be a varied range of product types in buy-to-let and bridging, regulated advisers will have to apply similar disciplines irrespective of the solution.

By now firms should have decided how they are going to bring second charge loans into their scope.  This will be by fully advising themselves, passing the customer to a specialist master broker or advising the consumer that this option exists but that they do not advise on it.  Where seconds are in scope, the first mortgage firms need to have advised the FCA via the Connect system of this intention.  For second charge advisers, they will have to make similar decisions in terms of their scope and disclosures particularly around whether or not first charge mortgages are in scope and the availability if other firms of finance.  In addition, where a firm opts to advise on the new Consumer buy-to-let category, they should have applied to the FCA for this new permission.

In order to meet the new requirements, firms will have to have new initial disclosure documents which set out their scope of service, how they will be paid and any limitations on the number of lenders they might have on panel.  If this is the case the document needs to set out the lenders they can engage with.  This needs to be issued as early as possible in the advice process.  This does not replace adequate oral disclosure but is in addition.

The final significant change for firms is to issue the new mortgage illustration (ESIS) or more limited KFI plus as part of the recommendation.  The lender will issue this as part of their offer, but the broker must issue a version when making a recommendation.

These changes are nowhere near as significant as the advice changes under MMR, but add a degree of bureaucracy that firms need to address in order to be compliant.  Second charge firms have the real challenge of coming to terms with the complexity of the advice process and ensure that they are acting in the customers best interests.  This has been a long journey in first charge lending and advisers in seconds will have to run hard to catch up.