So far, the industry has reacted fairly positively to the regulators’ push for more relaxed financial services regulation, aiming to stimulate economic growth in line with the Government’s request. Some mortgage providers have begun to change their affordability assessments and the lending community has coalesced around the argument for increasing the Loan-to-Income flow limits, though the Financial Policy Committee (FPC) has not yet moved the dial on the latter.
However, the FCA’s suggestion that it may consider allowing more borrowers to sidestep the advice process could set the cat among the pigeons. Let’s examine the facts.
In May, as part of its Mortgage Rule Review, the FCA laid out four possible options for consultation with the industry. The first three have been widely welcomed as sensible topics for discussion: getting rid of outdated rules from the Handbook; simplifying the process of remortgaging and simplifying term reductions.
The fourth, which has caused concern in the industry, is the proposal to remove the ‘advice interaction trigger’. It describes the aim as to ‘remove the requirement to provide advice when there is spoken or other interactive dialogue between the firm and the customer at any point during a sale […] firms and customers will have greater scope to interact during a sales or contract variation process without needing to provide regulated advice. Firms will need to determine when an interaction constitutes advice – using our Perimeter Guidance and Regulated Activities Order – and act accordingly.’
Under current MCOB rules, the ‘interactive dialogue’ firms are permitted to have with customers without providing advice is well defined. They can talk to/email customers with factual information about regulated products not personal to that customer and about the process of applying for a regulated mortgage contract.
Firms can also provide an illustration or a European Standardised Information Sheet (ESIS). Anything further, such as guiding or steering a customer towards a certain product, triggers the requirement for advice.
The proposal to remove this trigger would require each individual firm to make their own judgement about when advice is required for their customers.
According to May’s Mortgage Rule Review paper, the FCA’s rationale for this proposal is that the proportion of borrowers choosing to use a mortgage intermediary is ‘very high’ – so high that they fear the Mortgage Market Review (MMR) ‘policy intention’ that consumers have choice whether to take advice, has not been taken on board by the industry.
But the regulator made its aim clear back in 2012 when the MMR rules were finalised, stating: “We did not intend that every conversation with a customer would be subject to our advice rules. The Regulated Activities Order defines what regulated mortgage advice is, i.e.advice on the merits of the customer entering into (or varying the terms of) a particular regulated mortgage contract or contracts. As a result of this, our view is, and always has been, that where a firm steers a customer towards particular identifiable products that the customer could enter into, that is regulated advice.”
So the scope of mortgage advice has been defined for more than a decade, and with it the conclusion that most people entering or rearranging a regulated mortgage contract need advice. It is unclear what has now changed in order to materially alter that view. Under government pressure, the FCA may be tempted to demand more flexibility of lenders and ask them to give some customers more leeway than others to transact more borrowing activities without advice, in the hope that this may boost activity.
But there is no guarantee that greater access to direct mortgages would increase the size of the mortgage market. Greater access to more mortgages, which could be brought about by increasing the LTI flow limits, is another matter, and one we believe could provide a genuine economic boost to the UK.
The proportion of mortgage borrowers taking the advised route is admittedly very high – approaching 89% this year and likely to breach the 90% mark in 2026, according to IMLA’s own projections. But we would argue that there are sound reasons for the popularity of using an adviser to secure the most appropriate deal – most of them obvious.
Whether you’re an inexperienced first-time buyer bewildered by the array of products on offer, or a seasoned remortgagor, a professional adviser always adds value. By definition, a borrower can’t know what they don’t know and may miss out on better products for their needs if they fail to get advice on what is currently available in the market.
And even the best informed and most financially sophisticated borrower will often choose to have their own product selection ratified – and the legwork of arranging the mortgage carried out – by a qualified professional.
Before the MMR was introduced around a third of all mortgage sales were ‘non-advised’ transactions which largely relied on scripted questioning. The root of the FSA’s concern, which led to the introduction of the MMR, was that with non-advised mortgage sales the customer could take out an inappropriate mortgage ‘without receiving any warning from the seller’. It is scarcely credible that today’s regulator would favour a return to this scenario.
If the FCA insists on going down this route, it must be made absolutely clear that customers who opt not to take financial advice accept full responsibility for their decision. If they later regret it, they cannot claim they were wrongly advised, as they actively chose to proceed without professional guidance.
On balance, taking professional advice before making a decision about your largest financial commitment remains the wise choice – arguably even for the HNWs, the professionals and the businesspeople. The search for economic growth through deregulation is an interesting exercise. But sidestepping mortgage advice is a step too far and in the wrong direction for most.
Kate Davies is executive director at Intermediary Mortgage Lenders Association (IMLA)
