The business of Terms of Business

If brokers offer advice on areas such as pensions along with mortgage advice they need to provide customers with a Terms of Business letter as well as an Initial Disclosure Document, says Neal Smith

One frequently asked question regarding compliant initial disclosure requirements is do I still need to provide Terms of Business letters and Mortgage Code leaflets to my clients?
MCOB rules have introduced the financial services industry to Initial Disclosure Documents and these will soon be rolled out to cover all regulated areas of financial advice.

Effectively, all the information previously supplied to regulated mortgage customers under the Terms of Business letter is now contained in the mortgage IDD. Mortgage brokers will therefore not be required to double up and provide regulated mortgage customers with a Terms of Business and IDD.

If, however, brokers offer regulated mortgage advice and advice on other areas of regulated financial advice, for example on pensions, they need to provide both an IDD and Terms of Business. For this example the IDD will cover the regulated mortgage advice and the Terms of Business covering the pension advice. It should be noted that this will not be the case indefinitely because following polarisation brokers will be required to produce an IDD and a menu to customers covering all areas of regulated financial advice. The relevant policy statement is expected any day, so watch this space.

A number of brokers have asked whether the You and Your Mortgage leaflet should still be issued; the answer is no, because the Mortgage Code became defunct on October 31. Some brokers have asked whether or not the MCCB’s rainy day leaflet can still be provided to customers – again, no.

The FSA has an equivalent document available at (this link provides access to the updated November 2004 version). Any documents that suggest regulated mortgages are not regulated by the FSA should not be issued.

One potential banana skin has been provided by buy-to-let mortgages. Buy-to-let is not regulated by the FSA, so to issue a customer with an IDD covering buy-to-let could lead them to believe the product they are buying is regulated by the FSA and covered by the Financial Ombudsman Service, which is not the case. My advice is to refrain from providing your introductory document to customers in the IDD format; it is vital that the Key Facts logo is not used.

As far as an introductory document for buy-to-let business is concerned, my advice to mortgage brokers is to keep a simplified version of their old Terms of Business Letter. As an example the document could look like this:

Terms and conditions of buy-to-let mortgage business

• Firm’s name, address and telephone number.

• Whether independent/representative of a company/panel

• The Financial Services Authority does not regulate buy-to-let mortgages.

• Firm is insured for negligence by way of professional indemnity insurance.

Provision of information
• Completion of fact-find is required to enable appropriate advice to be given.

• While recommending a suitable mortgage for the buy-to-let property the broker is not providing advice on the suitability of a buy-to-let as an investment.

• Broker will confirm recommendation in writing and that this should be kept as a record of the transaction.

Fee and benefit disclosure
• We may receive fees from lenders.

• Detail any administration or processing fee the customer could be charged for the advice.

Duty of privacy/data protection
• All information is treated as private and confidential etc.

• You have a right of access under the Data Protection Acts 1988 to your personal records held on our files.

Complaints procedure
• We aim to provide a first class professional and confidential service, so should a compliant arise you should contact (firm’s name and address). Please note the Financial Ombudsman Scheme does not cover buy-to-let. It would also be prudent to have the customer sign and date the document.