New rules for first charge mortgage advisers

You need to be aware of new rules that have come into force as a result of the Mortgage Credit Directive being implemented.

Main changes

There are some important changes to the Mortgages Conduct of Business (MCOB) rules. You also need to be aware of changes to other areas of our Handbook, eg Training and Competence (TC) and the Prudential Sourcebook for Mortgages (MIPRU).

The changes mean that your firm:

  • needs to provide a binding mortgage offer and 7-day (minimum) reflection period
  • needs to give an adequate explanation of a product’s essential features
  • is subject to new disclosure requirements.

Disclosure

The rules require you to issue a European Standardised Information Sheet (ESIS). This is a mandatory product disclosure document that is replacing the Key Facts Illustration (KFI).

You must issue an ESIS by 21 March 2019, but you can choose to use it before that date. If you issue a KFI rather than an ESIS, you must give your customers:

  • information on the 7-day right of reflection
  • information on the APRC and the borrowing rate where the interest rate is variable
  • extra information for foreign currency loans, including an illustration of the impact of a 20% change in the exchange rate.

Adequate explanations

You must provide an adequate explanation of the proposed mortgage contract and any ancillary services. The explanation must include the:

  • pre-contract information
  • essential features of the product
  • potential impact on the consumer (including the consequence of default).

The manner and extent of the explanation can vary depending on the circumstances of the sale. You should consider how an adequate explanation is provided for both advised and execution-only sales.

Commission disclosure

If you are paid by commission, you must tell consumers they have the right to ask for information on the commissions paid by different lenders. You must also ensure they have access to relevant market data to allow them to respond to such a request.

Remuneration

The MCD introduces the requirement that advisers’ remuneration must not depend on achieving sales targets.

Second charge mortgage business

Our rules do not require firms to broaden their scope of service to include second charge as well as first charge mortgages. But if you do offer both, you will need to take all these products into account when giving advice.

If an existing mortgage holder wishes to borrow more, the rules require you to make the customer aware that other forms of borrowing are available that may also meet their needs (see MCOB 4.4A.8AR).

You do not have to provide advice on the suitability of possible alternative options if these are outside the scope of service you have chosen to offer.

Your existing mortgage permissions permit you to arrange or advise on second charge mortgages. If you do undertake second charge activity, you need to be aware of the new requirements when second charge mortgage regulation becomes subject to our mortgage rules. See more information on second charge mortgages.

Key dates

MCD implementation – firms required to meet the rules for mortgages entered into from this date

21 March 2016

Disclosure document can be either ESIS or KFI with ‘top up’ disclosure

21 March 2016 until 20 March 2019

Transitional arrangements for MCD knowledge and competency requirements

Until 21 March 2017

Professional experience of staff can be relied upon to meet MCD knowledge and competency requirements

Until 21 March 2019

Disclosure document must be ESIS

21 March 2019

 

Further information