MCOB 4.7A Advised sales

If a firm gives advice to a particular customer to enter into a regulated mortgage contract, or to vary an existing regulated mortgage contract, it must take reasonable steps to ensure that the regulated mortgage contract is, or after the variation will be, suitable for that customer.

In MCOB 4.7A, a reference to advice to enter into a regulated mortgage contract is to be read as including advice to vary an existing regulated mortgage contract.

For the purposes of MCOB 4.7A.2 R:

1. (1)

   a regulated mortgage contract will not be suitable for a customer unless the regulated mortgage contract is appropriate to the needs and circumstances of the customer;

2. (2)

   a firm must base its determination of whether a regulated mortgage contract is appropriate to a customer's needs and circumstances on the facts disclosed by the customer and other relevant facts about the customer of which the firm is or should reasonably be aware;

3. (3)

   no advice must be given to a customer to enter into a regulated mortgage contract if there is no regulated mortgage contract which is suitable from the product range offered by the firm; and

4. (4)

   if a mortgage lender is dealing with an existing customer with a payment shortfall and has concluded that there is no suitable replacement regulated mortgage contract, the firm must nonetheless have regard to MCOB 13.3.

When a firm assesses whether the regulated mortgage contract is appropriate to the needs and circumstances of the customer for the purposes of MCOB 4.7A.5R (1), the factors it must consider include the following, insofar as relevant:

1. (1)

   whether the customer's requirements appear to be within the mortgage lender's known eligibility criteria for the regulated mortgage contract;

2. (2)

   whether it is appropriate for the customer to have an interest-only mortgage, a repayment mortgage, or a combination of the two;

3. (3)

   whether it is appropriate for the customer to take out a regulated mortgage contract for a particular term;

4. (4)

   whether it is appropriate for the customer to have stability in the amount of required payments, especially having regard to the impact on the customer of significant interest rate changes in the future;

5. (5)

   whether it is appropriate for the customer to have their payments minimised at the outset;

6. (6)

   whether it is appropriate for the customer to make early repayments;

7. (7)

   whether it is appropriate for the customer to have any other features of a regulated mortgage contract;

8. (8)

   whether the regulated mortgage contract is appropriate, based on the information provided by the customer as to his credit history; and

9. (9)

   whether it is appropriate for the customer to pay any fees or charges in relation to the regulated mortgage contract up front, rather than adding them to the sum advanced (see also MCOB 4.6A.2 R).

In relation to MCOB 4.7A.6R (2), where a firm has identified an interest-only mortgage as appropriate for a customer, the firm must ensure that the customer is aware that he will have to demonstrate to the mortgage lender that he will have in place a clearly understood and credible repayment strategy, in order for the mortgage lender to be able to satisfy MCOB 11.6.41R (1).

1. (1)

   3In considering whether a retirement interest-only mortgage that will be used to release capital is appropriate to the needs and circumstances of the customer for the purposes of MCOB 4.7A.2R, a firm must consider, in addition to the factors set out in MCOB 4.7A.6R, whether the benefits to the customer outweigh any adverse effect on:

   1. (a)

      the customer’s entitlement (if any) to means-tested benefits; and

   2. (b)

      the customer’s tax position.

2. (2)

   In considering the factors set out in MCOB 4.7A.10AR(1), where a firm has insufficient knowledge of the customer’s means-tested benefits or tax allowances to reach a conclusion, the firm must refer the customer to an appropriate source or sources such as the Pension Service, HM Revenue and Customs or a Citizens Advice Bureau (or other similar agency) to establish the required information.

3. (3)

   If a customer declines to seek further information on means-tested benefits, tax allowances or the scope for local authority (or other) grants, a firm can advise the customer (in accordance with the remaining requirements of this chapter) to enter into a retirement interest-only mortgage where there is a retirement interest-only mortgage that is appropriate to the needs and circumstances of the customer; but must confirm to the customer, in a durable medium, the basis on which the advice has been given.

When a firm assesses whether a bridging loan is appropriate to the needs and circumstances of the customer for the purposes of MCOB 4.7A.5R (1), the factors it must consider include, in addition to the factors listed at MCOB 4.7A.6 R:

1. (1)

   whether it is appropriate for the customer to make regular payments; and

2. (2)

   whether it is appropriate for the customer to access finance quickly.

Where a firm has identified a bridging loan as appropriate for a customer, the firm must ensure that the customer is aware that he will have to demonstrate to themortgage lender that he has a clearly understood and credible repayment strategy in place.

Where a firm is considering giving advice to a customer to enter into a bridging loan, the reasonable steps in MCOB 4.7A.2 R include considering why it is not appropriate for the customer to take out a regulated mortgage contract which is not a bridging loan.

2When a firm assesses whether a shared equity credit agreement is appropriate to the needs and circumstances of the customer for the purposes of MCOB 4.7A.5R (1) it must consider, in addition to the factors listed in MCOB 4.7A.6 R, whether it is appropriate for the customer to:

1. (1)

   take out the shared equity credit agreement for a particular term, taking into account the customer's intentions about the repayment of that shared equity credit agreement and the term of the customer's associated first charge regulated mortgage contract;

2. (2)

   have flexibility over the payment of interest;

3. (3)

   have flexibility over the repayment of capital; and

4. (4)

   purchase a property by using his own resources, rather than by borrowing under the shared equity credit agreement.

When a firm advises a customer in relation to entering into a regulated mortgage contract where the main purpose for doing so is the consolidation of existing debts by the customer, in addition to the factors at MCOB 4.7A.6 R, it must also take account of the following, where relevant, in assessing whether the regulated mortgage contract is suitable for the customer:

1. (1)

   the costs associated with increasing the period over which a debt is to be repaid;

2. (2)

   whether it is appropriate for the customer to secure a previously unsecured loan; and

3. (3)

   where the customer is known to have payment difficulties, whether it would be appropriate for the customer to negotiate an arrangement with his creditors rather than to take out a regulated mortgage contract.

When advising a customer on the suitability of a regulated mortgage contract, a firm must explain to the customer that the assessment of whether the regulated mortgage contract is appropriate to his needs and circumstances is based only on the customer's current circumstances and any reasonably foreseeable changes to those.

1. (1)

   6This rule applies if the firm’s product range includes more than one regulated mortgage contract that is appropriate to the needs and circumstances of the customer (see MCOB 4.7A.5R and 4.7A.6R).

2. (2)

   If:

   1. (a)

      the firm advises the customer to enter into a particular regulated mortgage contract; and

   2. (b)

      that regulated mortgage contract is not the cheapest of those contracts in the firm’s product range which are appropriate to the needs and circumstances of the customer;

   the firm must explain to the customer why it is advising the customer to enter into that regulated mortgage contract rather than any other cheaper regulated mortgage contract in the firm’s product range which is appropriate to the needs and circumstances of the customer.

3. (3)

   For the purposes of this rule:

   1. (a)

      one regulated mortgage contract (“contract A”) is cheaper than another (“contract B”) if the total amount payable under contract A in respect of the relevant period is less than the total amount payable under contract B in respect of the relevant period;

   2. (b)

      the “total amount payable” means:

      1. (i)

         the aggregated monthly payments; and

      2. (ii)

         includes any product fee or arrangement fee if the customer proposes to pay that fee directly rather than add it to the sum advanced under the contract (and such a fee must be treated in the same way for contract A and contract B when comparing the two contracts);

   3. (c)

      the “relevant period” means:

      1. (i)

         any discounted or introductory period under contract A; or

      2. (ii)

         the term of contract A; and

   4. (d)

      monthly payments should be calculated on the assumption that there is no variation to the interest rate that would apply if the regulated mortgage contract were to be entered into immediately, unless the contract expressly varies the interest rate (in which case, the monthly payments should be calculated by reference to rates specified in the contract in relation to the relevant periods).

If a customer has rejected the advice given by a firm and instead wishes to enter into a different regulated mortgage contract as an execution-only sale, the firm may enter into or arrange that contract as an execution-only sale provided the requirements in MCOB 4.8A.14 R are satisfied.

1. (1)

   A firm must make and retain a record:

   1. (a)

      of the customer information, including that relating to the customer's needs and circumstances, that it has obtained for the purposes of MCOB 4.7A;

   2. (b)

      that explains why the firm has concluded that any advice given to a customer complies with MCOB 4.7A.2 R and satisfies the suitability requirement in MCOB 4.7A.5R (1);6

   3. (c)

      of the customer's positive choice in MCOB 4.6A.2 R (Rolling up of fees or charges into loan) where applicable; and6

   4. (d)

      of the explanation given under MCOB 4.7A.23AR where applicable.6

2. (2)

   The records in (1) must be retained for a minimum of three years from the date on which the advice or explanation6 was given or, in the case of (1) 4(c), the making of the choice.

   4