MMR Heads Up #2 Affordability

 So you think that you won't have to worry about affordability after 26th April 2014 ?

Well that's not entirely correct, is it? It is true that under the FCA Handbook, responsibility for a client's affordability will transfer from the intermediary to the lender ( why on earth was it not so from October 2004?)  but that is not the only consideration.

Firstly, there is Treating Customers Fairly (TCF).  Under TCF a firm has to act with the client's best interests in mind  and quite obviously, their ability to afford the repayments on their mortgage is a key consideration in this. For a mortgage to be  recommended, the expectation is that it is affordable and the evidence of this is a meaningful discussion and assessment of the clients financial position both now and in the foreseeable future. For this to have any meaning (and to be able to demonstrate TCF) this would have to be  documented : you know the kind of thing, budget planners; lenders affordability calculations; your own affordability calculations; payslips, p60s; income-fed bank statements and so on.

Then there is the complaints culture. You may have seen the latest complaints figures published by the FCA yesterday. All this good stuff simply creates a culture where complaints  are inevitable. It is only a matter of time before complaints start hitting mortgage brokers about mis-selling of mortgages. At the moment lenders have by far the majority share in this area and of course it will always be so but one area where brokers will surely be exposed is along the lines that : "you sold me a mortgage that I couldn't afford" When this type of complaint comes in, the argument that it is the lender's responsibility simply won't hold up. There are things like "duty of care" and "negligence" to add to the matter of TCF. Evidence of course being crucial to successful responses by firms.

Thirdly, and not necessarily the least issue, is the matter of the Mortgage Credit Directive. Exactly what is meant by the statement that lender's and intermediaries will have  to  assess the consumer's ability to repay, based on information provided by the borrower? 

It has an ominous sort of ring to it and i don't know enough about it right now to be able to comment further - but I will at some point soon.

So in answer to the vexed question of affordability my suggestion is that. notwithstanding the transfer of responsibility to the lender from 26th April next year, affordability is something that should not  and probably will not permit intermediaries to switch off to the issue.

Warning Notices - how they could affect your firm.

One of the new powers available to the FCA that wasn’t available to the FSA is the power to publish a Warning Notice about firms or individuals who are referred to Enforcement and before the enforcement has concluded. In fact the notice can be made when the firm is referred to enforcement. Hitherto it was only possible for the FSA to notify after a successful enforcement action. This means that if a firm or individual is referred to enforcement and before the outcome has been determined, consumers and customers can be made aware of the matter identified by the FCA as a concern.

In the press release published recently, the FCA writes:

The FCA will consider the circumstances of each case in deciding whether it is appropriate to publish details of the warning notice and, if so, what details to publish.  Before making its final decision, it will consult the person under investigation and will take into account any evidence that publication would be unfair.

A published warning notice statement will ordinarily include a brief summary of the facts which gave rise to the warning notice to enable consumers, firms and market users to understand the nature of the regulator’s concerns.    

Just another no-small matter to be aware of.

The Mortgage Credit Directive 2015 (Now 21st March 2016 - Ed.)

Just for those of you  who like to keep ahead of things, here is an early piece on the Mortgage Credit Directive, which is currently  in the process of being signed off by the European Parliament, having finally been agreed in final form AND, thanks to the UK representation, without the inclusion of the Buy to Let Market.

The new rules, which will apply to all Member States once made law, shortly  this year will have to be  brought into each country within 2 years .This means that we have April 26^th 2014 for the MMR and probably October/November 2015 (Now 21 March 2016 - Ed.) for the Mortgage Credit Directive (MCD). That’s a lot of change in a short while so lets see what is underneath the hood, so to speak.

The EU have stated that the  focus  of the MCD is to ensure that all consumers purchasing a property or taking out a loan secured by their home are adequately informed about the possible risks and that all institutions engaging in these activities conduct their business in a responsible manner. The proposed Directive covers all loans which allow the consumer to borrow money in order to buy a home as well as certain loans to consumers to renovate a home. It also covers all loans to consumers that are guaranteed by a mortgage or another comparable security.

Let’s stop there a bit.

So, despite the FCA approach to reduce the level of disclosure at the outset and as a whole within the MMR ( on the basis that documented disclosure has not prevented customers from taking mortgages for which they are not suited) the MCD is looking to put something back. Furthermore, the European Standardised Information Sheet, (ESIS) will at some point replace our current KFI. Also , from the comments above, we can see that second charges will come under the remit of this law as will any loan guaranteed by a mortgage or other comparable security.

OK so what’s in the Directive? (I have  lifted some of this directly from the EU Press Release – the text in italics.)

The proposed Directive will require the European Member States to :

• ·      introduce certain requirements for the advertising of mortgage credit, for example wording that may create false expectations for a consumer regarding the availability or the cost of a credit will be prohibited – so we are probably well up the curve on that one but only time and the proposals of the FCA as set out in their Consultation Paper will tell.

• ·        ensure that all institutions involved in the origination and distribution of mortgage credit to consumers are adequately regulated and supervised – yes I think we have done that one to death in this country and once Consumer Credit is under the FCA, then that is surely pretty much job done.

• ·     establish principles for the authorisation and registration of credit intermediaries (companies who provide information and assistance to consumers looking for a mortgage credit and sometimes conclude mortgage agreements on behalf of the lender) and for the establishment of a passport regime for those intermediaries. This means that once authorised in one Member State, the intermediary would be allowed to provide its services throughout the Internal Market. Well we have had something in place since the dear old MCRI/MCCB days. I suppose there is always a risk that goal posts might change on qualifications or capital adequacy but only a closer reading of the MCD and the FCa proposals will tell. The good news is that you will now be able to operate in other Member States by the sound of it.

• ·        ensure that lenders benefit from provisions enabling them to access information in credit databases on a non-discriminatory basis. I have to say that I don’t actually understand this one right now so I’ll have to do a bit more reading.

Lenders and credit intermediaries will be required to:

• ·        make general information available at all times on the range of credit products they offer; This has an ominous ring to it. After all the MMR has taken a reasonable and rational approach to disclosure but what does it mean at all times. This warrants closer scrutiny and may offer some additional requirements for in process disclosure / repetition and so on.

• ·        provide personalised information to the consumer through a European Standardised Information Sheet or so called "ESIS". This will allow consumers to compare mortgage conditions from different providers; Standardisation is good of course but we have resisted ESIS for many years now and offered up the Key Facts Illustration. If the intention is to allow competition across borders then a more specific standard document will surely be  required otherwise the thing is meaningless. I have seen reference ( I think on the FCA site) to the opportunity to keep the KFI for a further 5 years after MCD implementation but I have not read detail of this and so treat it with caution at this point in time.

• ·        give explanations and meet certain standards for the provision of advice; More reading needed here just in case we have  enhanced education requirements

• ·        assess the consumer's ability to repay, based on information provided by the borrower; OK this is cute. Does that mean that although the MMR leaves the responsibility squarely with the lender that there is going to be a shift back also towards the broker?Well if it is the case that is hardly surprising and would only reinforce that which consumers should know is available under negligence laws and a duty of care.

• ·        finally, credit intermediaries will be required to disclose certain information concerning for example, their identity, status and relationship with the creditor, to render transparent any potential conflicts of interest. Well that sounds reasonable and we probably have that covered , at least for residential mortgages at present although I couldn’t speak for Second Charges Market at the present time.

I think that is enough to be getting on with but one final thought. If the MCD has to be  implemented by say October 2015 and the FCA will have to undergo consultation as a part of its process ( which it will) and given the time that it has taken to implement MMR, then we surely are going to have  our work cut out to get the MCD changes in place in time. I suggest that it is going to be a bit of a roller-coaster ride into 2016.

Have you been to a risk awareness workshop?

This is just a quick note about the likelihood of you receiving a request for an online survey from the FCA if you have previously been to an FSA/FCA Risk Awareness workshop. Some firms are receiving these requests even if they went to it late last year / early this year. Those requests, particularly in the NW are landing in people's inboxes as I write.

If you have been to recent workshops then you will already have been told about these surveys  and when you can expect to be asked. If you have not yet been on the workshops, then you can expect to be asked to carry out the survey and all will be  explained when you attend.

I previously blogged about this back in July 2013 so have a look at this link as well :

 http://ukmortgagecompliance.blogspot.co.uk/2013/07/fca-online-survey-update.html

MMR Heads Up # 1 Execution-only

Does my firm have to offer execution only ?

Actually, no it does not. If for example a client refuses to accept your recommendation, you do not have to offer them an  execution only option. You 'may simply choose not to proceed with the sale' as the FCA puts it or, of course, you might equally apply  little more persuasion. Arguably it could be a mistake to offer execution-only in such  a circumstance as you could be setting yourself up for a future complaint - not necessarily on  a breach of FCA rules but on the basis of negligence and duty of care.

MMR Readiness Tracking

Last week the FCA published the results of its initial survey of 5400 firms on readiness tracking for the rule changes for April 2014. generally they seem pleased with firms' progress and brokers appear more ready than lenders. Hardly surprising considering the scope of  the lender changes and their relative size.

The FCA will be using the readiness tracking results to design their second round of communications ( which have started) and  will be conducting a series of regional half-day workshops in October and November 2013.  Invitations are already going out ( have already been received by some).

They are also proposing  further support in the form of factsheets and possibly a webcast.

AND

The FCA also plan to offer firms face to face meetings with the Implementation Team in February 2014. Not sure exactly what that means  right now or who it is aimed at. Is it a carrot or a stick?

Services to Conduct?

Just checking but presumably all out there have completed the changes of letterheads and stationery to reflect the new regulator as 30th September was the six-month deadline for this action. You should not also be using logos for the FSA or the FCA or the PRA for that matter although you can continue to use the FOS logo . Unlike the FSA, the FCA does not permit the use of its logo by firms.

Typical stationery to check if not already done so:-

• Letterheads, business cards, email footers, web pages
• Initial Disclosure Documents, Terms of Business - don't forget insurance disclosure as well
• Financial Promotions of any sort ( obviously if there is something in a trade publication with a life span greater than six months from 1st April, there is nothing you can do about it.)
• Client letters,  declarations, fact finds
• Suitability Letters or Reasons Why, Demands and Needs Statements
• Telephone answering messages
• Signage

Obviously the list is not exhaustive.

Are there enough hours in the day?...publications, booklets, staff training manuals, procedure documents, fee agreements...AR documents...

Even More about Consumer Credit

In some respects this whole consumer credit thing seems to be  taking up more time than the changes for the MMR. I make no apologies therefore for the following post , albeit that it is a few days after the FCA published CP13/10  - The Detailed Proposals for the FCA regime for consumer credit.

The following is in part recap , in part a few concerns and in part some pointers about what is next. So, in a word , it is a game of three halves!

Since the beginning of September firms with OFT consumer credit licences have been able to register with the FCA for  ‘interim permission’ to enable them to continue to carry out their consumer credit activities from 1 April 2014 until they are fully authorised. There is a 30% discount offered to firms that register before 30 November 2013. Mortgage brokers generally fall on the fringes of Consumer Credit activity, usually on the basis that they may occasionally made recommendations or offer advice on the repayment of consumer credit regulated loans.  

As the rules currently stand, such activity has the ability to fall under the ‘high risk’ category for firms as set out in the new Consultation Paper CP13/10 which sets out that, amongst other things, the activities of Credit Brokerage, Debt Adjusting, Debt Counselling and Credit Information Services are high risk consumer credit activities. All of these activities are the type of activity that a mortgage broker might undertake at some point in time in the course of a given year even though this might be no more that discussing a credit reference report or recommending that an existing Consumer Credit loan be rolled up into a mortgage.

There is a real risk that the new proposals could be top heavy on the smaller firms unless there is some common sense approach adopted somewhere along the line. After all there is a world of difference between pay-day loans and recommending that a mortgage client pay off their bank loan before,  or roll up their bank loan into,  their new mortgage. However, if you are tempted to think that the role of a mortgage broker in this matter is on a not-for-profit basis ( on the basis that any advice or activity relating to consumer credit loans is consequent to the main business of mortgage sales and you do not charge for the service) then think again. You actions are in the way of business and have a bearing on the income that you will ultimately glean from the mortgage transaction.

I have only just started to read the CP13/10 that sets out the rules to come into place on 1^st April next year and will provide ongoing updates on this as i progress over the next few days or so.

For now, over and above my comments and concerns above, please consider the following:-

The new rules come in on 1^st April 2014. There will be  a 6-month transitional period during which, if a firm is able to demonstrate that it has acted  in accordance with old CCA requirements and OFT guidance, the FCA will not take action against it  in relation to those corresponding new rules that are substantially the same from 1 April 2014.

The FCA have  stated that they  have tried to make the transfer as smooth as possible for the vast majority of firms, and do not expect many firms to need to make significant changes to their systems.

An important part of the regime is the distinction between higher-risk and lower-risk activities. Firms will be regulated and supervised differently depending on which category they fall into. Consumer credit will follow the same FCA firm classification model that is applied to all firms  .Firms will fall into one of the four conduct categories: C1, C2, C3 or C4. Mortgage brokers will already have been given a conduct classification, earlier this year and I suggest that that is unlikely to change as a result of new consumer credit  rules.

If you do not register for an interim permission you must stop carrying out regulated consumer credit activities after 31 March 2014. If you do not, you may be committing a criminal offence and you could face enforcement action.

If you are already authorised by the FCA or PRA you will not automatically be given an interim permission; you still need to register for an interim variation of permission if you wish to continue to carry on regulated consumer credit activities.

AND , of course, you must pay the required fee when you register, unless you are exempt ( which as mortgage brokers you will not be). 

AND, of course, your consumer credit licence must still be valid on 31 March 2014 for you to qualify for an interim permission so do not let it lapse!  If you need to correct your consumer credit activities you should do so before registering for interim permission. However, be aware that there is a processing period so that if you apply now to the OFT you may not get the amendments made before 30^th November to qualify for the discount. The longer you leave any application, the greater the risk that you may not be  authorised in time for 1^st April.