In today's article, we take another look at the final rules and feedback from CP186. In last week's article, we examined how AMI had successfully lobbied for lighter penny accuracy and client money regulation. This time we will be considering our lobbying activity regarding another crucial element – the advice process. Again, the FSA has listened to the voice of the industry and moved accordingly.
It's interesting to consider that when I first took up my position at AMI, industry cynics said the FSA would never listen to a trade association. We had “come too late to the party” or “the FSA is too big to listen to us”, and even “it's better never to argue about regulation, otherwise you'll get something worse”. Well, the proof has been in the pudding. In its short but busy life, AMI has delivered more than 10 changes in policy from the FSA. We have also been active at the Treasury and at the Financial Ombudsman Service.
In CP186, the FSA consulted on a range of issues. One that particularly concerned AMI was the considerations around lowest cost or cheapest rate. The FSA was thought to say that intermediaries must always recommend a product with the lowest rate to their clients. We were concerned that the FSA was boxing in intermediaries with a restriction to recommend the product with the lowest rate. Apart from rate factors such as the lender's attitude to further advances, availability of follow-on rates, quality of service and speed of service all play a part.
It appeared that an intermediary could be forced to recommend a particular product simply because of the rate even though they knew it would be the wrong product, or lender, to put forward. If one of the customer's driving factors was the need for a fast offer, but the lender with the lowest rate had the longest turnaround times, the intermediary would be put in a difficult position.
So we are pleased to see that one of the FSA's key movements has been to recognise that intermediaries consider a number of factors in advising clients on which mortgage products are best for them. To restrict this to merely a matter of lowest rate, or cheapest cost, was too limited. Mortgage intermediaries are professionals giving professional advice. The FSA has recognised this and has amended its proposals to allow intermediaries to consider the range of factors in determining which product is most suitable.
There is another reason why this is a positive move for our industry. The FSA has always said that it sees mortgages as 'simple' and 'low risk' products (excluding lifetime mortgages). There was a risk that this would mean that the role of advice could become undervalued – “if the products were that simple, best rate would always be best advice”.
Yet we know that mortgages are not simple with around 14,000 products on the market. And, with customer needs varying so widely, what initially could look like a simple matter can become hugely complex. Good advice is central to the mortgage process. The FSA has recognised that advising on mortgages is about far more than looking up the best rate. This recognition of the role advice plays in our industry is another step forward to us being seen as true professionals.
A second part of this jigsaw is the work of the Financial Services Skills Council. Professor Jackman's team can help us by introducing an examination system that serves the needs of the intermediary as well as the consumer. Regulation and industry qualifications are never popular topics, but they can serve to leverage up the whole industry. AMI will be working hard to make these moves as positive as possible.
Your chance to ask ami
Charles Gooding, AMI chairman
Q: I've heard not all mortgages are to be regulated. Which are going to fall under the new regime?
A: While we all talk about mortgage regulation, the actual wording refers to 'loans secured on land'. So, if the loan (or mortgage) was for a caravan, it wouldn't be caught under the new regulations of a regulated mortgage contract. A regulated mortgage contract must meet the following conditions:
The borrower must be an individual (or a trustee)
The lender must be taking a first charge over the property
The property must be in the UK
At least 40% of the property must be occupied by the borrower – or intended to be occupied by the borrower or their immediate family.
Buy-to-lets would normally fall outside the regulation unless the tenant is a member of the borrower's immediate family or is the borrower himself.
It must also be noted that other loans may be caught if there is a first charge over the borrower's residential property and include:
Lending for home improvements
Lending for debt consolidation
Loans outside the scope of regulation include:
Buy-to-let mortgages (but see the note above)
Second charge loans
Loans to companies (except in the case of trustees)
The FSA has published a helpful factsheet setting out the rules on this topic. You can find a copy at www.fsa.gov.uk/mgi/factsheets