The FSA published the final mortgage rules on October 16 as a hard-to-read set of rules which comprise the Mortgage Conduct of Business sourcebook.
I decided to wait until the easy-to-read policy statement was published by the FSA and this duly appeared on October 31, precisely 12 months to the day before the onset of mortgage regulation next year. The document contains the feedback from CP186.
The policy statement makes it quite clear that the FSA fully expects to be regulating mortgage sales from October 31 next year and does not see any reason why this should be date should be delayed, saying: “Developments in Brussels since we published CP186 have not caused us to change this view so we are proceeding to put in place our domestic plans for regulating mortgages from October 31 2004.” That date now seems to be set in stone and it is difficult to envisage circumstances in which it may change.
The policy statement talks about the early implementation of the general insurance regime whereby firms can elect voluntarily to implement certain processes before the regulation date of January 14 2005.
A major consideration for brokers will be whether to make a single application to the FSA for both mortgages and insurance rather than two separate applications which would incur two sets of costs for the application fee.
As the consultation process on the FSA's annual fees does not begin until January and publication of the final rules for insurance is not due until that time either, it will not be surprising to see the majority of brokers who are intending to apply for direct authorisation leave it until March when they will be better informed.
Looking at the content of the policy statement the FSA has made some amendments to its rules to reflect the different product structure of Islamic mortgages, plus some revisions for better disclosure of the risk factors associated with shared appreciation mortgages.
Regarding record keeping, the FSA has decided to require mortgage firms to keep a record of the suitability decision for three years, though firms may of course hold records for a longer period if they choose to do so.
When it comes to responsible lending the FSA has listened to the arguments from several lenders and the CML against restricting self-cert lending to self-employed applicants and has amended the rules to address this, saying: “A firm may now rely on self-certification in appropriate cases where it has no reasonable grounds to doubt the information provided”.
So what are “appropriate cases” and “reasonable grounds”? For guidance purposes the FSA has provided some examples but then adds: “Lenders must always ensure that they comply with the main rule requiring them to consider the consumer's ability to repay before lending the money.” Whichever way you look at it, the onus seems to remain firmly with the lender to adhere to the concept of responsible lending.
Moving onto the accuracy of the Key Facts Illustrations, the FSA has allowed a slight tolerance for KFIs produced by the sourcing systems saying that a small inaccuracy in the figures is unlikely to cause significant consumer detriment, and that “the consumer will get a KFI anyway as part of the mortgage offer to give the accurate position”. One can only hope.
The FSA's tolerance has been defined as 1% or £1 (whichever is the greater) and this can apply to the initial and subsequent monthly payments, the APR and the total amount payable. However no tolerance is allowed for fees and early repayment charges which must be entirely accurate.
The anomaly in this is that, for many products, the early repayment charge is derived from the monthly payments so if the latter is inaccurate then it follows that the former will be inaccurate too. The FSA says that it discussed this issue with the major sourcing system providers. It would appear that one or more of these providers don't know arses from elbows.
Regarding the tolerance in the APR figure, this has been defined as not more than 0.1% from the true figure, but that has always been the case under the Consumer Credit Act so not much hot news there.
On the question of commission disclosure the FSA has for a second time changed its mind on the subject. It is encouraging that the FSA does listen to arguments and has the grace to do a U-turn – or indeed a double U-turn – when it believes this to be the correct course of action. The issue concerns the procuration/packaging fee paid to packagers. The rules have been redrafted “to make clear that payments to firms unconnected to the broker for pure outsourced activities do not need to be disclosed”. So the intermediary need only disclose the amount of the procuration fee he received, not the total payment from the lender to the packager.
The rule requiring the KFI to mention an FSA risk leaflet remains in place. This is meant to prompt consumers to consider the risk to their homes if they could not meet their mortgage payments because of accident, sickness or unemployment. Firms would be free, but not required, to give out the leaflet. The leaflet also warns consumers of the risk of not meeting their mortgage payments in the event of rising interest rates.
The proposed rules for segregation of client money have been dropped but there remains the larger capital adequacy requirement for firms that do hold client money. The FSA reminds us that, unlike general insurance, there are no EU Directives on the requirement for client money rules.
The transitional provisions of moving into the FSA regimes, voluntary early adoption of rules for general insurance sales, and the use of a combined initial disclosure document will be covered in detail in later articles.
To complete this preliminary round-up of the final rules, the use of the term 'independent' will be restricted to those intermediaries that provide a whole of market service and give consumers the option to pay a fee for the service. This begs the question – pay a fee instead of what? Are consumers meant to get a refund of the full amount of the procuration fee paid by the lender?
All will be revealed in due course.
Build-up to the FSA takeover
November: Firms can register for FSA application pack
Mid-January 2004: FSA will start accepting applications
January: Final rules for insurance sales
January: FSA consultation on annual fees
March 31: Last date for fee discount for early application
October: Definite authorisation given
October 31: FSA regulation of the mortgage market
January 14 2005: FSA regulation of the insurance market