PERG 4.6 Advising on regulated mortgage contracts

Article 53A of the Regulated Activities Order (Advising on regulated mortgage contracts) makes advising on regulated mortgage contracts a regulated activity. This covers advice which is both:

1. (1)

   given to a person in his capacity as borrower or potential borrower; and

2. (2)

   advice on the merits of the borrower:

   1. (a)

      entering into a particular regulated mortgage contract (whether or not the entering into is done by way of business); or

   2. (b)

      varying the terms of a regulated mortgage contract entered into by the borrower on or after 31 October 2004 in such a way as to vary the borrower's obligations under the contract.

In the FSA's view, the circumstances in which a person is giving advice on the borrower varying the terms of a regulated mortgage contract so as to vary his obligations under the contract include (but are not limited to) where the advice is about:

1. (1)

   the borrower obtaining a further advance secured on the same land as the original loan; or

2. (2)

   a rate switch or a product switch (that is, where the borrower does not change lender but changes the terms for repayment from, say, a variable rate of interest to a fixed rate of interest or from one fixed rate to another); or

3. (3)

   the borrower transferring from a repayment mortgage to an interest-only mortgage or the reverse situation.

Although advice on varying the terms of a regulated mortgage contract is not a regulated activity if the contract was entered into before 31 October 2004, there may be instances where the variation to the old contract is so fundamental that it amounts to entering into a new regulated mortgage contract (see PERG 4.4.4 G and PERG 4.4.13G (2)). In that case, giving the advice would be a regulated activity.

For advice to fall within article 53A as set out in PERG 4.6.1 G it must:

1. (1)

   relate to a particular mortgage contract (that is, one that the borrower may enter into or, in the case of advice on a variation, one that he has already entered into);

2. (2)

   be given to a person in his capacity as a borrower or potential borrower;

3. (3)

   be advice (that is, not just information); and

4. (4)

   relate to the merits of the borrower entering into, or varying the terms of, the contract.

Each of these aspects is considered in greater detail in PERG 4.6.5 G (Advice must relate to a particular regulated mortgage contract) to PERG 4.6.17 G (Advice must relate to the merits (of entering into as borrower or varying)). Additionally, the following should be borne in mind:

1. (1)

   a person may be carrying on regulated activities involving arranging, whether or not that person is advising on regulated mortgage contracts (see PERG 4.5);

2. (2)

   the provision of advice or information may involve the communication of a financial promotion (see PERG 8 (Financial promotion and related activities); and

3. (3)

   PERG 8.25 ((Advice must relate to an investment which is a security or contractually based investment) to PERG 8.29 (Advice must relate to the merits (of buying or selling a particular investment)) will be relevant to any person who may be advising on other forms of investment at the same time as he advises on regulated mortgage contracts; this includes, for example, a person advising on the merits of using a particular endowment policy or ISA as the means for repaying the capital under an interest-only mortgage.

Advice will come within the regulated activity in article 53A of the Regulated Activities Order only if it relates to a particular regulated mortgage contract (or several different regulated mortgage contracts). The question is whether a recommendation is made to a customer which either explicitly or implicitly steers the customer to a particular regulated mortgage contract because of its features.

Advice would not relate to a particular contract if it consisted of a recommendation that a person should take out a mortgage with ABC building society without (expressly or by implication) specifying what kind of mortgage.

Generic or general advice will not fall under article 53A. Examples of generic advice are shown in PERG 4.6.7 G.

In the FSA's view, guiding a person through scripted questions or a decision tree should not, of itself, involve advice within the meaning of article 53A (it should be generic advice). But the combination of advice, which in isolation may properly be considered generic, with the identification of a particular or several particular regulated mortgage contracts may well, in the FSA's view, cause the person to be advising on regulated mortgage contracts; the FSA considers that it is necessary to look at the process as a whole; this is considered in more detail, in the context of scripted questioning, in PERG 4.6.22 G (Scripted questioning (including decision trees)).

For the purposes of article 53A, advice must be given to or directed at someone who is acting as borrower or potential borrower. As indicated in PERG 4.4.2 G (Which borrowers?), this means the individual or trustee to whom the credit has been provided by the lender or who is looking to obtain the credit on the security of his property. Advice given to a body corporate will not generally be caught because the advice will not concern a regulated mortgage contract, as defined. But this does not apply where the body corporate is acting as trustee.

Article 53A will not, for example, apply where advice is given to persons who receive it as:

1. (1)

   a lender under or administrator of a regulated mortgage contract; or

2. (2)

   an adviser who may use it to inform advice given by him to others; or

3. (3)

   a journalist or broadcaster; or

4. (4)

   an agent of a borrower unless appointed as the borrower's attorney and therefore entering into the regulated mortgage contract as agent (or proxy) for the borrower.

Advice will still be covered by article 53A even though it may not be given to or directed at a particular borrower (for example advice given in a periodical publication or on a website).

In the FSA's view, advice requires an element of opinion on the part of the adviser which steers or is intended to steer a borrower or potential borrower in the direction of one or more particular mortgages. In effect, it is a recommendation as to a course of action. Information on the other hand, involves objective statements of facts and figures.

In general terms, simply giving balanced and neutral information without making any comment or value judgement on its relevance to decisions which a borrower may make is not advice.

Information relating to entering into regulated mortgage contracts may often involve one or more of the following:

1. (1)

   an explanation of the terms and conditions of a regulated mortgage contract, whether given orally or in writing or by providing leaflets and brochures;

2. (2)

   a comparison of the features and benefits of one regulated mortgage contract with another;

3. (3)

   the production of scripted questions for the borrower to use in order to exclude options that would fail to meet his requirements; such questions may often go on to identify a range of regulated mortgage contracts with characteristics that appear to meet the borrower's requirements and to which he might wish to give detailed consideration (scripted questioning is considered in more detail in PERG 4.6.21 G to PERG 4.6.25 G (Scripted questioning (including decision trees));

4. (4)

   tables that compare the interest rates and other features of different mortgages;

5. (5)

   leaflets or illustrations that help borrowers to decide which type of mortgage to take out;

6. (6)

   the provision, in response to a request from a borrower who has identified the main features of the type of mortgage he seeks, of several leaflets together with an indication that all the regulated mortgage contracts described in them have those features.

In the FSA's opinion, however, such information is likely take on the nature of advice if the circumstances in which it is provided give it the force of a recommendation as described in PERG 4.6.10 G. Examples of situations where information provided by a person ('P') are likely to take the form of advice are given below.

1. (1)

   P provides information on a selected, rather than balanced and neutral, basis that would tend to influence the decision of the borrower. This may arise where P offers to provide information about mortgages that contain features specified by the borrower but then exercises discretion as to which mortgages to offer to the borrower.

2. (2)

   P, as a result of going through the sales process, discusses the merits of one regulated mortgage contract over another, resulting in advice to enter into or not enter into a particular one.

Advice under article 53A must relate to the pros or cons of entering into a regulated mortgage contract as borrower.

A neutral and balanced explanation of the implications under a regulated mortgage contract of, for example, exercising certain rights or failing to make interest payments on time, need not, itself, involve advice on the merits of entering into that contract or varying its terms.

Neither does advice on the merits of using a particular mortgage broker or adviser in his capacity as such amount to advice for the purposes of article 53A. It is not advice on the merits of entering into or varying the terms of a regulated mortgage contract.

Without explicit or implicit advice on the merits of entering into as borrower or varying the terms of a regulated mortgage contract, advice will not fall under article 53A if it is advice on the likely meaning of uncertain provisions in a regulated mortgage contract or on how to complete an application form.

Scripted questioning involves using any form of sequenced questions in order to extract information from a person with a view to facilitating the selection by that person of a mortgage or other product that meets his needs. A decision tree is an example of scripted questioning. The process of going through the questions will usually narrow down the range of options that are available. Scripted questions must be prepared in advance of their actual use.

Undertaking the process of scripted questioning gives rise to particular issues concerning advice. These mainly involve two aspects of this regulated activity. These are that advice must relate to a particular regulated mortgage contract (see PERG 4.6.5 G) and the distinction between information and advice (see PERG 4.6.13 G). Whether or not scripted questioning in any particular case is advising on regulated mortgage contracts will depend on all the circumstances. If the process involves identifying one or more particular regulated mortgage contracts then, in the FSA's view, to avoid advising on regulated mortgage contracts, the critical factor is likely to be whether the process is limited to, and likely to be perceived by the borrower as, assisting the borrower to make his own choice of product which has particular features which the borrower regards as important. The questioner will need to avoid making any judgement on the suitability of one or more products for the borrower. See also PERG 4.6.4 G for other matters that may be relevant.

The potential for variation in the form, content and manner of scripted questioning is considerable, but there are two broad types. The first type involves providing questions and answers which are confined to factual matters (for example, whether a borrower wishes to pay a fixed or variable rate of interest or the size of deposit available). In the FSA's view, this does not of itself amount to advising on regulated mortgage contracts, as it involves the provision of information rather than advice. There are various possible scenarios, including the following:

1. (1)

   the questioner may go on to identify several regulated mortgage contracts which match features identified by the scripted questioning; provided these are presented in a balanced and neutral way (for example, they identify all the matching regulated mortgage contracts, without making a recommendation as to a particular one) this need not of itself involve advising on regulated mortgage contracts;

2. (2)

   the questioner may go on to advise the borrower on the merits of one particular regulated mortgage contract over another; this would be advising on regulated mortgage contracts;

3. (3)

   the questioner may, before or during the course of the scripted questioning, give a recommendation or opinion which influences the choice of mortgage contract and, following the scripted questioning, identify one or more particular regulated mortgage contracts; the key issue then is whether the advice can be said to relate to a particular regulated mortgage contract (see further PERG 4.6.22 G)).

The second type of scripted questioning involves providing questions and answers incorporating opinion, judgement or recommendations (for example, whether a repayment mortgage or interest-only mortgage is a better option or whether interest rates are likely to rise). There are various possible scenarios, including the following:

1. (1)

   the scripted questioning may not lead to the identification of any particular regulated mortgage contract; in this case, the questioner has provided advice, but it is generic advice and does not amount to advising on regulated mortgage contracts; or

2. (2)

   the scripted questioning may lead to the identification of one or more particular regulated mortgage contracts; the key issue then is whether the advice can be said to relate to a particular regulated mortgage contract (see further PERG 4.6.22 G).

In the scenarios identified in AUTH App 4.6.23 G (3) and AUTH App 4.6.24 G (2), the FSA considers that it is necessary to look at the process and outcome of scripted questioning as a whole. It may be that the element of advice incorporated in the questioning may properly be viewed as generic advice if it were considered in isolation. But, although the actual advice may be generic, the process has ended in identifying one or more particular regulated mortgage contracts. The combination of the generic advice and the identification of a particular or several particular regulated mortgage contracts to which it leads may well, in the FSA's view, cause the questioner to be advising on regulated mortgage contracts. Factors that may be relevant in deciding whether the process involves advising on regulated mortgage contracts may include:

1. (1)

   any representations made by the questioner at the start of the questioning relating to the service he is to provide;

2. (2)

   the context in which the questioning takes place;

3. (3)

   the stage in the questioning at which the opinion is offered and its significance;

4. (4)

   the role played by any questioner who guides a person through the scripted questions;

5. (5)

   the outcome of the questioning (whether particular regulated mortgage contracts are highlighted, how many of them, who provides them, their relationship to the questioner and so on); and

6. (6)

   whether the scripted questions and answers have been provided by, and are clearly the responsibility of, an unconnected third party (for example, the FSA), and all that the questioner has done is help the borrower understand what the questions or options are and how to determine which option applies to his particular circumstances.

With the exception of periodicals, broadcasts and other news or information services (see PERG 4.6.30 G (Exclusion: periodical publications, broadcasts and websites)) the medium used to give advice should make no material difference to whether or not the advice is caught by article 53A.

Advice can be provided in many ways including:

1. (1)

   face to face;

2. (2)

   orally to a group;

3. (3)

   by telephone;

4. (4)

   by correspondence (including e-mail);

5. (5)

   in a publication, broadcast or website; and

6. (6)

   through the provision of an interactive software system.

Taking electronic commerce as an example, the use of electronic decision trees does not present any novel problems. The same principles apply as with a paper version (see PERG 4.6.21 G to PERG 4.6.25 G (Scripted questioning (including decision trees))).

Advice in publications, broadcasts and websites is subject to a special regime – see PERG 4.6.30 G (Exclusion: periodical publications, broadcasts and websites) and PERG 7 (Periodical publications, news services and broadcasts: applications for certification).

The main exclusion from advising on regulated mortgage contracts relates to advice given in periodical publications, regularly updated news and information services and broadcasts (article 54 of the Regulated Activities Order (Advice given in newspapers etc)). The exclusion applies if the principal purpose of any of these is neither to give advice of the kind to which article 53 (Advising on investments) or article 53A applies nor to lead or enable persons to:

1. (1)

   acquire or dispose of securities or contractually based investments; or

2. (2)

   enter as borrower into regulated mortgage contracts or vary the terms of regulated mortgage contracts entered into by such persons as the borrower.

This is explained in greater detail, together with the provisions on the granting of certificates, in PERG 7 (Periodical publications, news services and broadcasts: applications for certification).

Article 54A of the Regulated Activities Order excludes from advising on regulated mortgage contracts certain activities of an unauthorised person which is taking advantage of the exclusion from administering a regulated mortgage contract in article 62 (see PERG 4.8.4 G).

The Regulated Activities Order contains a number of other exclusions which have the effect of preventing certain activities from amounting to advising on regulated mortgage contracts. These are referred to in PERG 4.10 (Exclusions applying to more than one regulated activity).