The National Association of Mortgage Brokers and Advisers has today published its response to the FSA's consultative paper on mortgage advice (CP 146).
NAMBA has formed a strategic alliance with the Association of Independent Financial Advisers to build an effective trade body for mortgage intermediaries.
Both organisations are therefore keen to contribute to the development of a regulatory regime which allows mortgage advice and sales to flourish.
Charles Gooding, chairman of NAMBA's steering committee says: “We are setting up a trade association for mortgage intermediaries and this response to the FSA's consultation is our first major step towards representing the industry.
“We believe that proportionality is the key to regulation of this industry. Regulation should be proportionate to the risk of consumer detriment and currently there is little evidence of this in the mortgage intermediary market.
“A new regime should work with the grain of market forces and should build on best practice in the market place. The cost effectiveness of regulation is also a significant issue for an industry which largely consists of small firms.
“We hope that we can work constructively with the FSA to help them create an appropriate regulatory regime.”
AIFA has contributed to the drafting of NAMBA's response to CP 146.
Scroll down to read NAMBA's full response to CP 146 or go to: www.namba.org.uk
NAMBA's RESPONSE TO CP146
NAMBA in alliance with AIFA – RESPONSE TO CP146
This response is written by the National Association of Mortgage Brokers and Advisers. We have consulted the Association of Independent Financial Advisers with whom we have a strategic alliance. These two bodies are intending to form a trade association for mortgage intermediaries and are therefore keen to see a regulatory regime developed which allows mortgage advice and sales to flourish.
The mortgage intermediary sector comprises many different types of firm, from major businesses with many advisers through to one-man bands. All have a part to play in meeting consumer needs and the FSA should set itself an objective of creating a regime which allows all competent and ethical advisers to flourish and which does not favour one type over another.
This will require the following criteria to be satisfied:
Proportionality: the regulation should be proportionate to the risk of consumer detriment. The mortgage intermediary market has been largely free of scandal and the regulation should reflect this.
Working with the grain of market forces: regulation will be most effective when it builds on best practice in the market place and does not try to require changes of process simply to meet regulatory requirements.
Cost effectiveness: the higher the cost of regulation (both the direct cost of FSA fees and the indirect costs of supplying information, meeting capital and other requirements), the more regulatory requirements will determine the shape of the market. Proper cost benefit analysis will be an important ingredient in developing the regime.
Co-operation with the industry: we hope that the new trade body for mortgage intermediaries will be able to work constructively and positively with the FSA in creating an appropriate regulatory regime.
Legislative scope of the regime
Q1. Do you have any comments on the proposed guidance and are there any areas where it would be useful to expand on it?
The omission of buy to let, home reversion plans and second charge loans is disappointing as borrowers are left unprotected and major product areas are excluded.
As regulation will not commence until October 2004 we suggest the Government should review this exclusion and we would hope that these products will become regulated as soon as possible. Where products and activities are so similar, there should not be such a bald distinction between those that are regulated and unregulated.
It is confusing to cover buy to let in respect of a borrower's immediate family only.
Home reversion mortgages are high risk and borrowers will often be at their most vulnerable. We are concerned that customers will not have the same degree of protection as with similar products and that an opportunity for product bias will arise.
Should HM Treasury be unable to take the suggested action we will ask the CML to recommend to lenders, as best practice, to only accept home reversion mortgage applications from regulated advisers.
The exclusion from regulation offered to newspapers etc is satisfactory, but should not be extended to include their publication of best buy “style” tables. These should be subject to the Financial Promotion Rules in order that proper comparisons can be made, by the inclusion of all relevant data, e.g. listing the APR, early repayment fees etc.
Our comments on advice re. Table 4.1 are included under Q2.
Mortgage selling: the context for regulation
Q2. Given the safeguards for each process do you have any comments on our proposal to distinguish between three selling processes (advised sales, non-advised filtering questions and non-advised execution only sales) for regulating mortgage selling?
Many intermediaries do not consider that the proposed sales process matches their own customer business process. Most believe they are giving advice when their recommendation is for the customer to select one of several very similar products.
There is no objection to a filtered questions process, per se, but it does require that appropriate arrangements, systems and controls are in place to ensure advice is not given.
It is possible that many intermediaries will choose to “non-advise” customers because they will perceive that the process will involve,
– less stringent compliance arrangements, systems and controls
– less training and competence requirements
– less likelihood of complaints arising (although this could be a misconceived reason)
Our reasoning is that the requirement to consider affordability, when giving advice, is not sufficiently specific. It appears to create a loophole whereby any customer experiencing difficulty meeting mortgage payments at any future time could complain to the intermediary about poor advice. We believe the intermediary should have to record a statement relating to his view of customer affordability, but that this responsibility should be discharged when the customer accepts the lender's mortgage offer.
Is it possible to apply the FSA definition of advice to a self-certification or non-status mortgage, where limited assessments are made of affordability?
Q3. Do you have any comments on our proposals to differentiate higher and lower risk products in our rules and on the definitions proposed for lower risk products?
We support the definitions but the terminology should be reconsidered so that more descriptive terms are used, e.g. short term, standard and lifetime.
Q4. Do you agree with our proposal that a statement of the APR should be required as part of disclosure for secured overdrafts?
We believe that the same rule should apply to all personal borrowing. This would be helpful for flexible mortgages where there is an overdraft facility.
Q5. Do you agree that the simplified approach we propose in relation to qualifying credit promotions is equally appropriate for the new controlled activities of “advising on” and “arranging” mortgages?
We welcome the simplified approach which will benefit the consumer and remove confusion.
However the approach will slow the activity of third party Packagers as they may not be directly authorised.
In the case of third party Packagers (not authorised), representing a panel of lenders, it means for each product qualifying credit promotion they would require approval of promotions from each lender on that panel, which would be a long process.
There is a case for Packagers to be directly authorised for qualifying credit promotions only.
Independence in the mortgage market
Q6. Given this analysis of potential advantages and disadvantages of restricting use of the term independent, do respondents prefer option 1 or option 2? Are there any other possible advantages and disadvantages that we need to consider?
See answer to Question 7.
Q7. Might it be justifiable to have different requirements for independent mortgage firms compared to the requirements that are proposed for independent investment business firms? (For example, could the term be restricted to “whole of market” for mortgages even if it were extended to include other requirements for investments?)
The regulatory status for intermediaries is likely to change following the outcome of CP121. It is difficult to arrive at a firm conclusion until status and the rules that will apply are re-defined. Whilst it is important that the mortgage market should operate in the same way as for investment business to avoid consumer confusion, we do not believe that such changes mean that whole market access needs to be restricted.
Therefore Option 2 continues to provide a clear way forward as it presents no contractual bar to the whole market, it operates in the interest of the client and maintains professionalism.
There is no reason why “best advice” panels cannot be created from the whole market but the initial disclosure proposals must be extended. It is not good enough to say “I deal with a limited range of lenders”.
A range (or panel) of lenders and their products should be defined by class and could be high street, niche and non-conforming with the appropriate number of lenders used clearly identified for each category. The content of a panel must be transparent to the consumer. We acknowledge that some lenders have products that fit each category.
The volume of providers and products is too large for any intermediary to have true whole of market knowledge.
Relationships exist between insurers and lenders for reciprocal business and these must be declared and be classed as non-independent advice.
Q8. Can you provide any information on the likely costs to the industry and the benefits to consumers of either option 1 or option 2?
We are unable to provide figures but we believe the FSA must consult on the cost of P.I. cover.
Q9. What are your views on extending the definition of independence to non-advised sales? Do you see any major difficulties/costs with this approach?
We believe that independence from the product provider is the critical factor and this applies equally to each sales process. Therefore all advised and non-advised sales are capable of being independent.
Q10. In principle, do you think that firms should be able to have a different status in relation to different regulated products or different consumers, providing this is made clear in the initial disclosure document?
We accept that firms may be tied for investment advice and independent for mortgages, (although we recognise that this would not be possible where the firm is directly authorised). “Independent” in this context would include firms who have access to the whole market, but where such firms could in effect be regulated by their Principal for mortgages. But there would need to be uniformity of terminology and regulatory definition across all markets and it may be necessary to create a new description for firms who operate under a different status for different categories of advice. We would be happy to discuss this further once the outcome of CP121 is known.
Q11. Do you agree with our approach to initial disclosure and the proposed content of our initial disclosure document?
We agree with the overall approach, which must incorporate technology as a likely method of both performing and storing compliance data. Many intermediaries do this as part of their mortgage sourcing system capability.
An Initial Disclosure Document must still be required for Execution Sales at least for procuration fees and the refund of any fees paid by the applicant.
Other suggested changes to the document, – S1, consider change of “will give you details” to “will advise you details”; S2, define nature of limited range of lenders.
Suitable advice requirements
Q12. Do you have any comments on our approach to suitability, including views on the two options proposed? What are your views on the two options proposed for the third stage of the process?
We have previously expressed our view on affordability but an additional reference to MPPI would be beneficial.
We agree again with the overall proposal and prefer Option 2. It is essential that it is understood that whilst price is a key factor there are other influences on selecting a particular lender. The most usual are speed of service and underwriting requirements, e.g. the best priced product may be of no use if it cannot be “offered” within a required period or if the customer is unlikely to be able to meet the underwriting criteria, or both.
We agree that there should not be a requirement for a Suitability Letter but most intermediaries and customers would wish to record the reasons for a recommendation. The PAI provides the essential information and this could include a free format section for the insertion of the reasons for the recommendation. This also reduces the paper chase.
Some brokers will wish to produce their own suitability letter as a risk management tool. Some would see it as good practice even if not required by the FSA.
Requirements on filtering questions
Q13. Do you agree with our preferred option for dealing with filtering questions used in non-advised sales (i.e. option 1 in paragraph 13.6)
We agree with the FSA and prefer Option 1.
We believe that an industry standard set of questions will quickly emerge. These are likely to be reprocated on the mortgage sourcing systems.
Q14. Do you agree with our proposal that filtering questions should be scripted and that staff administering the questions should be supervised to prevent them from inadvertently offering advice? Or do you see merit in an examination as an alternative to requiring questions to be scripted for sales using filtering questions?
We agree that the questions should be scripted but we are concerned with the potential for inadvertent advice being given and how this can be identified by appropriate arrangements, systems and controls.
On this basis an exam would be beneficial.
Training and Competence
Q15. Do you agree with our overall approach to training and competence and, in particular with the conclusion that an examination is not generally required for non-advised sales apart from lifetime mortgages?
We do not believe that reliance on Commitments is sufficient.
Q16. Do you have any views on proposed transitional arrangements for training and competence requirements?
We accept the proposal including the topup exam.
Product disclosure-pre-sale and offer stage
Q17. Do you have any comments on the template and the proposed content of the PAI?
We welcome the PAI and its content as, at last, a key feature document for mortgages.
We also agree with the need for “quick quotes”.
Q18. What are your views on whether firms should be required to unbundle the costs of advice/distribution from the cost of the product in the mortgage market?
We believe that unbundling of costs offers no real benefit to the borrower. The process and results would be complex.
We agree that the “bottom line” is the critical factor and that a standard PAI offers the best means of comparison.
Q19. What are your views on whether commission/remuneration should be disclosed when mortgages are sold through intermediaries or by lenders directly?
We accept that broker fees must be disclosed on the PAI and confirmed by the lender at offer stage, as there may be some slight variation due to amount of mortgage finally offered.
We see no advantage in lenders disclosing staff costs etc unless they are acting as a Correspondent Lender where all fees and costs should be shown for the sake of transparency.
Broker Packagers should be subject to the same disclosure requirements.
Packagers, Networks and clubs/distributors must disclose fees paid to brokers but not the amount paid by lenders for their support services. This amount may vary by type and volume but those packagers doing the most would receive the highest fees and therefore could appear to be the most expensive. In fact it is usual for these firms to offer some of the best deals.
We believe that the education of the borrower to compare the overall cost of the mortgage from the PAI is the only real way forward.
Q20. What are your views on our proposals for a PAI for mortgages without a regular repayment plan and mortgages requiring a regular minimum repayment that does not cover all the interest that has accrued?
We agree with the proposal.
Q21. Do respondents have any comments on our proposals regarding when a PAI should be provided to a customer?
We agree customers should be given a PAI before applying for a mortgage. However brokers should be permitted to provide a quick quote when they are approaching lenders for a Decision in Principle and then the PAI prior to submitting the completed application form itself.
A statement could be added to the Lender Application Form for the customer to sign acknowledging receipt of a PAI. This would give comfort to the lender, who would not have any legal responsibility but who would not process without the signed statement.
Q22. Do you have any comments on our proposals for offer stage disclosure?
We agree with the view that the offer should appear in the same order as the PAI, for easy comparison.
The lender is unlikely to have seen the PAI and should not be involved in any verification process.
Rules to ensure fair treatment of consumers
Q23. Do you agree with our approach to addressing excessive fees and the non-refund of fees?
We support this approach although we expect many brokers to introduce their own fee cap in their Terms of Business. The FSA will have to be vigilant in its monitoring procedures!
Q24. Do you agree that the package of measures proposed (the existing financial promotions rule, the principles for businesses and consumer education) to address high pressure sales provide consumers with the protection they need?
We agree with the approach and trust the measures will be sufficient.
Q25. Do you have any views about our approach to inducements?
Similar disclosure rules to the investment market should apply to all in the distribution chain, with appropriate records being created.
We support the banning of volume overrides but believe trail fees should be allowed provided their existence is properly disclosed. These may give greater benefit to a lender when designing a product and greater initial benefit to the customer.
Q26. What are your views on retaining a responsible lending provision for mortgage sales other than advised sales?
We disagree with this approach and recommend retention of the rule for all lending. As previously stated we see the affordability rule as the problem, particularly post offer.
Q27. What are your views on our proposals for assessing suitability for lifetime mortgages? Q28. Do you agree that additional training and competence requirements are appropriate for lifetime mortgages?
We agree with the areas to be covered in 18.22 and prefer Option 2 in 18.25.
We also agree with the higher level regime for filtered questions and T&C requirements for Lifetime Mortgages.
Q29. Do you have any comments on the template and the proposed content of the PAI for lifetime mortgages?
The documentation appears complex but we accept this is a complicated product. Any simplification would be welcome.
We are not sure that all the terms cover all the conditions applied by each lender. Lenders must be required to sign off a template relevant to each product to avoid errors as this should not be left to the intermediary.
Q30. Do you have any comments on our proposals for offer stage disclosure for lifetime mortgages?
We have no comments on offer stage disclosure for lifetime mortgages.
Lower Risk mortgages
Q31. Do you agree with the proposals to vary our approach to regulation for lower risk mortgages?
We agree with the FSA approach.
Q32. This chapter describes the way in which we propose to adapt our general approach to reflect the differences that exist between business loans and standard mortgages. Do you support the approach we propose - and do you have any views on the practicality or proportionality (either in the use of individual tools or on the overall package)?
We support the approach but would like to see clear definition of a business loan and its interaction with a standard mortgage.
Variations to contract
Q33. What are your views on these proposals for addressing post-sale contract variations?
We agree with the proposal.
Redress for consumers: complaints and compensation
Q34. Do you agree with this analysis of the possible detriment? Can you provide any evidence of how widespread claims of these types are, or of the typical amount of loss, or or other loss scenarios?
We agree with the analysis but NAMBA has not made enquiries of its members to provide figures.
Q35. Taking cost factors and the likelihood of claims occurring into account, do you think that the provision of mortgage advice and arranging should be covered by the Scheme?
In principle it would seem inclusion is appropriate but this has to be measured against the cost, number of claims etc. More information is needed.
Dated 8 November 2002
NAMBA in alliance with AIFA