The Financial Conduct Authority (FCA) has been outlining the wide range
of potential issues and responsibilities mortgage advisers will need to
prepare for in order to comply with the European Mortgage Credit
Directive (MCD) which will be introduced from the 21st March 2016.
Speaking at today’s Financial Services Expo (FSE) Manchester, Keith Hale from the FCA covered the high-level approach the regulator has attempted to take with the new rules but stressed firms will need to prepare thoroughly and there could be a ‘three-year period of flux’.
Hale also queried the Directive and the benefits it would bring to the industry. “As far as the FCA is concerned it adds little of consumer benefit and we have recognised that we already go well beyond what it is trying to achieve,” he said. “We want to do the bare minimum. We are not going to be prescriptive and tell you exactly what you to need to do.”
The MCD brings second-charge lending and advice within the FCA’s regulatory remit and also introduces a range of changes for advisers to introduce in their provision of mortgage advice covering off diverse areas such as service and product disclosure, remuneration policies and commission disclosure, passporting, permissions, and advertising.
Key changes to be introduced include:
• The regulation of second-charge loans in exactly the same way as first-charges.
• Remuneration policies for advisers cannot be contingent on a specific number of loans being sold or a certain type of loans being sold. The Directive bans this.
• A ban on the tying in/bundling of products, for example, loans with protection.
• Firms are able to passport their services to other EEA States; conversely firms from other EEA states will be able to offer their services in the UK.
• Permissions – if the firm already has its mortgage permissions it will be able to offer second-charge loans, however if it does not, it needs to apply for permissions. A new permission for lending not secured on land but used to acquire or retain property has been introduced, for example, a farmer securing his farm house mortgage on his outbuildings or machinery. For this type of advice, a new permission must be applied for.
• Advertising – the rules are being simplified. The approach is to be ‘fair, clear and not misleading’ in adverts with no ongoing requirements for the publication of risk statements and advice fees.
Hale suggested that one of the major changes for advisory firms could be a around the disclosure of their service scope and the remuneration they receive. He suggested there could be “challenges” for firms particularly around service disclosure which now has to be in a ‘durable medium’.
Rob Sinclair of AMI said this could be a major problem for those firms speaking to clients over the phone as the service disclosure can’t be provided via the conversation. Instead Sinclair suggested that disclosure documentation would have to be provided either via email or text, and the firm would need to know this had been opened and read before they could continue with the advice process.
One other major market interference is likely to be the replacement of the Key Facts Illustration (KFI) with the European Standardised Information Sheet (ESIS). All second-charge loan customers will need to be issued with an ESIS from the 21st March 2016, however the move from KFI to ESIS for first-charge mortgages doesn’t need to be introduced until the 21st March 2019. Those who choose to keep using the KFI will have to provide ‘top-up information’ described by the industry as ‘KFI-plus’.
Hale described these next few years as a “three-year period of flux” for advisers given that the MCD rules can be implemented early from the 21st September 2015 and different lenders and providers may choose different timescales to move from the KFI to the ESIS. He said advisers will need to get used to issuing different disclosure documents for different clients from different lenders. He said: “The market will need to accommodate those differences, and work with those differences.”
However Hale did not share the concerns of one adviser attendee who suggested there could be potential confusion because of the ‘similarities’ between the ESIS and the Islamic terrorist group, ISIS. When asked if there were plans to rebrand the ESIS because of this potential confusion, Hale responded in the negative. He also said there was no consumer awareness campaign planned by the FCA to coincide with the introduction of the new document.