Mortgage distribution: FCA aims to remove regulatory barriers to consumer-facing innovation

In its Mortgages Market Study final report the FCA commented that, in contrast to other markets, there hasn't been much progress in consumer-facing innovation in mortgage distribution. Industry feedback suggested this is partly due to the FCA's advice rules and guidance. In response, the FCA has launched a consultation on changes to its mortgage advice and selling standards in MCOB and related Perimeter Guidance (PERG) which unpick some of the changes introduced by the Mortgages Market Review in 2014.

Firms are likely to welcome the increased clarity on the line between advised and execution-only sales. The proposals should also help in the design and implementation of effective online customer journeys, including bringing new consumer choice tools to market.

What are the key FCA proposals?

Increasing consumer choice by making it easier for firms to present options without giving regulated advice

  • PERG on mortgage advice needs to be clarified and aligned with updated guidance on retail investments.
  • The proposed revised guidance indicates that a tool allowing a consumer to search and filter based on simple objective criteria such as 'price alone' (as opposed to factors such as 'balancing customer preferences on price, interest rate and term') is not necessarily giving advice.
  • More generally, in aligning PERG on mortgage advice with the equivalent for retail investments the FCA proposes to:
    • include more detailed guidance on the boundary between advice and information and between generic advice and regulated advice;
    • bring across, with appropriate amendments for the mortgages market, other new material relating to different types of online tool that either give advice or information and that create prompts for consumers.

The FCA is particularly keen for stakeholder feedback on this last proposal to ensure that it has accurately characterised existing or potential tools in the mortgages market.

Modifying the 'interaction trigger' for advice

  • The current trigger is too sensitive in practice.
  • The trigger should be modified to exclude interactions that are unconnected with regulated advice, eg support with an application or ongoing case management.

Levelling the playing field for 'execution-only' versus 'advised' sales channels

  • Some Mortgages Market Study respondents commented that current execution-only requirements make it more difficult to sell in this way as opposed to the advised route. The FCA is proposing to address this by:
    • Removing the prescriptive requirements around a firm's execution-only policy;
    • Adding guidance to the rule preventing a firm from encouraging a consumer to opt out of advice to clarify that it doesn't prevent firms from marketing their execution-only channel or pricing execution-only and advised sales differently;
    • Updating the rule which allows an exception from the interaction trigger for internal rate switches if firms first present customers with a list of all products available to them to (broadly speaking) provide that a firm only has to re-send the list to the customer if it adds new products to its range, or makes interest rate or fees changes likely to be material to the customer's decision;
    • Allowing execution-only disclosure to be given and recorded by audio or video and allowing the disclosure and positive election to be in separate documents or recordings (this last change to separate documents being made with a view to helping firms to design good online customer journeys).

Tackling overpaying: Advisers to explain rationale if not recommending cheapest suitable mortgage

  • The Mortgages Market Study found that around 30% of consumers could have found an identical or better mortgage that was cheaper than the one they bought.
  • The FCA wants to introduce a requirement in advised sales that if advisers recommend a mortgage which is not the cheapest of the suitable mortgages from their product range, they must explain to the customer why they have not recommended a cheaper mortgage and record the reason.
  • To discourage a focus on price above all else, the FCA proposes that advisers must first find out about the customer's needs and circumstances and identify suitable mortgages.

Disclosure documents: Room for improvement in process, content and design

The FCA commissioned research on consumers' understanding of the disclosure given before execution-only sales. It hopes the suggestions for improvements in the research report (eg use of Q&A formats and avoiding technical language) will be of interest to firms in considering how they disclose the implications of buying on an execution-only basis.

Which types of mortgage are covered by the proposals?

The proposals apply to both first and second charge mortgages, but not to lifetime mortgages.

What's next?

The consultation closes on 7 July 2019. The FCA will publish its feedback and final rules in a policy statement in late 2019.

For more on the outcome of and next steps in relation to the Mortgages Market Study, take a look at our previous blog post on the FCA's final report.

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