MOGI 2.2 Advising and selling standards (MCOB 4)

This section of the Guide sets out the advising and selling rules in chapter 4 of MCOB (MCOB 4). These rules apply generally to mortgage intermediaries. There are separate obligations depending on whether you give mortgage advice or not.

When advising on or selling mortgages you must take reasonable steps to ensure the service you offer (MCOB 4.3.1 R) is based on:

1. (1)

   whole of market;

2. (2)

   a limited number of lenders; or

3. (3)

   a single lender.

If you offer a whole of market service, you must consider a sufficiently large number of mortgages generally available from the market. This consideration needs to be informed by adequate knowledge of the current mortgage market (MCOB 4.3.4 R). You can use a panel of representative firms to provide a whole of market service (MCOB 4.3.6 G (2)).

If you wish to describe yourself as 'independent' you must intend to:

1. (1)

   offer a whole of market service; and

2. (2)

   give the consumer the option of paying a fee that will be the only remuneration you receive for the service (MCOB 4.3.7 R). If the consumer exercises this option, you will have to pay them any commission you receive on the mortgage sale.

If you sell both mortgages and investments, you can choose to be 'independent' for mortgages but not for investments (or vice versa). However, you will need to take care to ensure that consumers correctly understand the scope of the service you are providing (MCOB 4.3.8 G (2)). Remember, all your communications with consumers must be clear, fair and not misleading.

When you anticipate giving a consumer advice or personalised information about a mortgage, you must give them an initial disclosure document or IDD (MCOB 4.4.1 R). The IDD explains to the consumer:

1. (1)

   how to use the disclosure;

2. (2)

   the scope of service you offer. If you base your service on a limited number of lenders you must tell the consumer that he can ask for a list (MCOB 4.4.6 R);

3. (3)

   the service that you will provide;

4. (4)

   what he will have to pay for your service;

5. (5)

   whether any fees are refundable;

6. (6)

   your regulated status;

7. (7)

   your contact point if he has a complaint; and

8. (8)

   that you are covered by the Financial Services Compensation Scheme and the level of protection provided.

If dealing with a consumer on the telephone, you must tell them certain pieces of this information (MCOB 4.4.7 R (1)(a) - MCOB 4.4.7 R (1)(d)). After the call, provided that you think the consumer is still eligible for the mortgages you offer and you have his contact details, you must then send him an IDD within five working days (MCOB 4.4.7 R (2)).

The initial disclosure document will promote consumer understanding about the services on offer. You must give an IDD out as early as you can within a mortgage discussion. However, you do not have to give out the IDD when the consumer is simply booking a mortgage appointment (MCOB 4.4.3 G (2)).

Where you are also advising on or selling general insurance or investments, you can instead give out a combined initial disclosure document. This means you can describe the service you are providing on all these products in one place (MCOB 4.4.1 R (1)(c)(ii)).

The rules on advised sales are in MCOB 4.7 (Suitability). These rules apply when you make a "personal recommendation" (this term has a special meaning - see Appendix A for further details) to a consumer to buy or sell a regulated mortgage contract.

A personal recommendation has three elements:

1. (1)

   you must give advice relating to the merits of the borrower entering into, or varying the terms of, a regulated mortgage contract;

2. (2)

   the advice must relate to a specific mortgage e.g. "I recommend ABC Building Society's 2 year fixed rate mortgage at 4.6%"; and

3. (3)

   the advice must be to a specific person in his capacity as borrower or potential borrower.

There is guidance on the regulated activity of 'advising on regulated mortgage contracts' in the guidance in the Authorisation manual (AUTH App 4.6).

Where you give advice, you must not recommend a mortgage (or a variation to an existing mortgage) unless it is suitable for the consumer (MCOB 4.7.2 R). (The table in paragraph 2.2.14 explains the suitable advice rules.) Your assessment of suitability (MCOB 4.7.4 R) must address the following questions:

1. (1)

   can the consumer afford a mortgage? If the answer is no, you must not recommend a mortgage;

2. (2)

   what mortgages are appropriate to the consumer's needs and circumstances? If you do not have access to an appropriate type of mortgage you must not recommend a mortgage; and

3. (3)

   of the appropriate mortgages available through you, which is the most suitable?

The suitable advice rules:

When deciding if a mortgage is affordable, you must explain that you are basing your assessment on:

1. (1)

   current rates, which may rise in the future; and

2. (2)

   the consumer's current circumstances, which may change (MCOB 4.7.5 R).

You can generally base your assessment of affordability on information from the consumer, unless you have reason to doubt it (MCOB 4.7.8 G).

Where one of the major purposes of the mortgage is to consolidate existing debts, you must also consider the following in assessing suitability:

1. (1)

   the costs associated with extending the period for repaying existing debts;

2. (2)

   if it is appropriate to secure any existing unsecured debt; and

3. (3)

   whether it would be better for a consumer already in payment difficulties to negotiate an arrangement with their existing creditors (MCOB 4.7.6 R).

There are a range of factors you should consider when assessing if a mortgage is appropriate to the consumer's needs and circumstances (MCOB 4.7.11 E). These include the consumer's preference or need for:

1. (1)

   payment stability, especially having regard to the impact of future interest rate changes;

2. (2)

   reduced payments at the outset; and

3. (3)

   product features such as payment holidays, cashbacks etc.

To identify the most suitable of the appropriate mortgages you have available, you can use 'price' as a basis. In this case, 'price' means the least expensive mortgage based on those elements of price the consumer told you were most important (MCOB 4.7.13 E). Depending on what the consumer told you, this could be, for example, the overall cost, the lowest cost over a given period or the absence of early repayment charges.

You can recommend a mortgage on a basis other than 'price', for example because another lender has a more flexible underwriting approach (MCOB 4.7.14 G (2)). If you do this, you still need to have reasonable grounds to conclude that the mortgage is the most suitable of those that you offer.

Where you give advice you must keep, for three years, a record:

1. (1)

   of the information you gained from the consumer, including that relating to their needs and circumstances; and

2. (2)

   that explains why any recommendation given is suitable for the consumer, including (if this is the case) the reasons you used a criterion other than 'price' to identify the mortgage recommended (MCOB 4.7.17 R).

Where you do not give advice but instead give information only, any questions you ask about the consumer's needs and circumstances must be scripted (MCOB 4.8.1 R).

Any person using scripted questions in a non-advised sale must be:

1. (1)

   trained in using the script;

2. (2)

   trained in the difference between giving advice and giving information; and

3. (3)

   aware that advice must not given - unless that person is appropriately trained and competent (MCOB 4.8.3 R).

If you have staff that are not competent to give advice on mortgages and they use scripted questions in non-advised sales, they should be appropriately supervised. This is to ensure that they stick to the script when asking questions about the consumer's needs and circumstances and do not give advice (MCOB 4.8.4 R).

You must keep a record of the scripted questions you are using. The scripted questions must be clear, fair and not misleading (MCOB 4.8.5 G (1)). When you change the script you must make a record, and keep a record of the previous script for one year (MCOB 4.8.7 R).