No regulation without representation

On we go with the final set of questions from CP146, this time Q23 to Q35. An extended version of this examination of CP146 is available on the Mortgage Strategy website, which you can access by visiting www.mortgagestrategy.co.uk.

Qs 23 to 26 concern rules for the fair treatment of consumers, with Q23 concerning excessive fees and non-refund of fees. The good news is that the infamous section 155 of the Consumer Credit Act, with its maximum £5 fee, will be ignored under the FSA regulations. You would be a brave person to argue about excessive fees, on which the FSA is consulting, and the fees issue is largely addressed with the inclusion within the pre-application illustration of the broker fee to be charged (in monetary terms) and the broker&#39s policy on refunds.

The FSA acknowledges that the broker is entitled to charge a fair fee for his time – even if the client withdraws the application.

Q24 ask if you agree with the measures proposed to address high-pressure sales tactics.

This section does include the ban on cold calling and I was wrong in the column on October 14 to suggest that this subject could be covered in the response to Q1. Again, on this point see the Mortgage Strategy website for more details.

Q25 asks for views on the FSA&#39s approach to lenders&#39 inducements to brokers, such as procuration fees and volume overrides.

The FSA is non-committal on its intended approach to this, apart from the fact that it definitely does not like the concept of volume overrides, which are already specifically prevented for investment business.

Q26 refers to the retention of a &#39responsible lending&#39 provision (see box).

Having read the contents of the box, you may well ask; what about self-cert mortgages?

Self-certification is specifically mentioned on page 138 as being allowed under the draft rules, but that leaves it hanging in the air. Will the lenders be held responsible?

The CML response to Q26 simply posed a number of questions to the FSA, asking for clarification.

Q27 to Q30 relate to lifetime (equity release) mortgages, with Q27 asking for views on the FSA proposals for assessing suitability, i.e. has the right product been recommended to the client?

While lifetime mortgages fall into the FSA&#39s &#39higher risk&#39 category, it is nevertheless amazing to find that the FSA is insisting that home reversion plans (which it does not regulate) should be considered as an alternative and explained to the client.

When considering lifetime mortgages, the adviser must fully take into account the possible loss of any means-tested benefits and the tax position.

Q28 asks whether additional training and competence requirements are appropriate for lifetime mortgages. In view of the comments above, the answer can only be yes.

Q29 asks for comments on the special pre-application illustration. See the website for full details.

Meanwhile, Q30 relates to offer stage disclosure. The answer here can only mirror the logic for standard mortgages, where the broker&#39s life can only get more complicated if the client queries differences between the PAI and offer stage disclosure. They should be in the same format to avoid confusing the client.

Q31 asks if you agree with the FSA approach to the regulation of lower-risk mortgages, ie. those for £10,000 or less or for a term of less than one year.

For brokers dealing with loans of less than £10,000, I would assume these are generally secured loans (second-charge mortgage) or unsecured loans, neither of which fall under the FSA regulations. I suspect first-charge mortgages of this size are more trouble than they are worth and it is difficult to pursue this question with any enthusiasm.

Q32 refers to business loans, being mortgages provided to sole traders and unincorporated partnerships. These types of commercial loans, secured as a first charge on the trader&#39s residential home are a specialised area and traditionally the domain of banks and specialist brokers. If anything, the FSA is recommending a lighter touch than for normal residential mortgages.

If you are active in this area, you would be best advised to consider Chapter 20 of CP146 in some detail.

Q33 asks for views on addressing post-sale variations in the mortgage contract. This would only involve brokers who involved in further advances, keeping the client with the same lender but switching to a different product or switching from interest-only to repayments or vice versa.

The whole tone of Chapter 21, which considers these post-sale variations, betrays that the FSA has already made up its mind and it would take very forceful and concerted arguments to get it to reconsider. I would say that these issues are mainly of concern to lenders rather than brokers.

The final two questions in Chapter 22 relate to redress for consumers – complaints and compensation. I would suggest that you follow the minimalist approach taken by the CML in its response to these questions in CP146, and answer no comment/evidence to Q34 and yes to Q35.

The &#39responsible lending&#39 shock

So lenders thought they had got away with it; not having to take responsibility for information handed out by intermediaries to their clients.

Think again.

Page 138 in CP146 refers to “responsible lending” and says that the FSA has concluded (no further consultation here) that responsible lending rules will remain valid for non-advised sales, but should not apply for advised sales.

In the latter case, brokers provide the advice and, as part of their responsibilities, are required to consider the affordability of the mortgage.

But for non-advised sales, the lender must be able to show that it has taken account of the consumer&#39s ability to repay the loan and to maintain records to that effect.

Ominously, this requirement for responsible lending follows immediately on from a discourse on page 137 of the “Unfair Terms in Consumer Contracts Regulations 1999”, and how the FSA intends to use its powers as a qualifying body under these regulations.

So imagine the situation where a non-advised sale results in the consumer ending up in a mortgage contract that he cannot afford.

My reading of the situation is that the consumer can simply walk away from the mortgage under these unfair terms regulations, blaming the lender for “irresponsible lending”.

So how will this influence the lenders; will they continue to accept mortgage application from brokers who engage in non-advised sales?

Answer on a postcard please.