Topic 8: Regulation and the buying process Flashcards
When a lender markets their mortgage products they are classed as financial promotions by the FCA
What MCOB contains the rules relating the financial promotions?
What products does MCOB 3A apply to?
MCOB 3A
MCOB 3A apply to financial promotions for qualifying credit (regulated mortgages) or home reversion plans
What does MCOB stand for?
Mortgage conduct of business regulation
What is the definition of financial promotions?
An invitation or inducement to
engage in an investment activity,
which includes mortgages
Financial Promotions are allowed to be carried out by anyone?
True or false
False
Financial promotions are not allowed unless they are carried out by an individual (or firm) authorised by the FCA, or the content has been approved by an individual (or firm) authorised by the FCA.
What are non-real time financial promotions?
Any promotion that does not include interactive dialogue – SMS, email, faxes, letters, adverts,
Ignoring the obvious stuff, what key things must be included in a non real time financial promotion about regulated credit (mortgages) or home reversion plans?
Risk of repossession – a statement about the risk of repossession if the borrower does not keep up mortgage payments
Annual percentage rate of charge (APRC)
An Example to illustrate all the things that are mentioned in the financial promotion
What is the Annual percentage rate of charge (APRC)?
The APRC is designed to show the true cost
of borrowing over the term and is expressed as an average annual interest rate.
It takes into account the interest charged, plus any additional fees
payable. It is better than
Are competitor comparisons allowed in financial promotions?
Competitor comparisons are only permitted on a like‑for‑like basis and must not discredit the competitor
How long must a firm retain records of non real time regulated credit (mortgages) or home reversion plans promotions that they used?
The firm must keep records of all non‑real‑time credit promotions for at least 12 months from the time they were last used
What are real time financial promotions?
Any promotion made through a telephone or face‑to‑face conversation,
or other interactive dialogue
Are unsolicited real time financial promotions allowed for mortgages?
Not really…
Unsolicited calls (‘cold calls’) are only allowed where the recipient has an established existing customer relationship
with the firm and the relationship is one where the customer
can expect to receive such calls. It could be argued that these
are not true cold calls at all.
Tell me some of the rules relating the real time financial promotions
They cannot be made at an unsocial hour unless previously agreed (Sunday, or 9pm - 9am any other day )
Contact cannot be made on an unlisted telephone number unless the customer has previously agreed
The caller must check that the customer agrees to continue with
the conversation
The caller must terminate the conversation if the customer
does not wish to proceed
When a prospective buyer seeks a mortgage, what must the firm arranging the mortgage initially provide, which details info about the firm such as how they will be remunerated, limitations in the products they offer and so on
An initial disclosure document
When a prospective buyer seeks a mortgage, the firm arranging the mortgage must provide the borrower with an initial disclosure document. What must this document include?
The range of
products offered (ie, unlimited, limited range or single lenders)
Products it will
provide information
about
How the firm will
be remunerated
Alternative
finance options if
the customer seeks
to increase the secured
borrowing on a
property, subject to
a regulated
mortgage
This information must be provided before the firm carries out any mortgage arranging or advisory activity
What MCOB outlines requirements for initial disclosure?
MCOB 4 and 4A
A firm arranging a mortgage must provide the prospective buyer with an initial disclosure document before any mortgage arranging or advisory activity can take place. One requirement about the initial disclosure document is that it includes the range of products the firm offers from the type of service it is giving. Explain this
In the initial disclosure, the firm must make it clear to the cust whether they offer an
Unlimited service (Firm selects and recommends from a range of products that represent the
whole market)
Limited range service (Firm selects and recommends from a limited range of products, typically
from a panel of lenders)
Single lender service (Firm selects and recommends only the products of a single lender)
If a firm does not offer an unlimited product range to its customers, it must
list the names of all the lenders whose products it offers
True or false
True
It must also express
any limitations in the product range simply and in clear terms, including
situations where products or information are only available through certain
channels, eg in branch or online.
A firm that only offers products from one part of the relevant market such as bridging finance, cannot describe its service as unlimited.
True or false
True
In relation of to firms remuneration, what details must in include in the initial disclosure document?
any fees the firm will charge them and when said fees are charged
whether the firm will receive commission or a procuration fee from the lender or a third party
The firm must state the amount of commission
( If this is not known at the time of disclosure, they must instead state that the actual amount will be disclosed at a later stage in the European Standardised Information Sheet
(ESIS) that must be provided before an application is made )
If a borrower is looking to raise further funds on a property already subject to a regualted mortgage what must be provided to them ?
They must be informed of alternative finance options available to them
Such as:
A further advance, a second charge,
a mortgage with another lender or unsecured borrowing
Similarly, if a customer is considering a retirement interest‑only mortgage, the firm must inform the customer, that a lifetime mortgage may
be available and more appropriate
NOTE: In all the above, the firm does not provide any advise or go in to lots of details. They just have to simply state the customers other potential options beside them
True or false:
A borrower seeking a regulated mortgage may be given qualified advice or proceed on an execution‑only basis
True
When advising on an MCD regulated mortgage, the firm must provide an adequate explanation of the product being recommended
What must this adequate explanation include?
The information included in the ESIS
The key characteristics of the product
The effect the product would have on the customer (including in the event of the customer defaulting on the repayments)
The scope of service, fees payable and remuneration, if the advice is given
by an intermediary
How long do records of advise being given need to be retained?
For a minimum of
three years from the date the advise was given
What is an execution only service?
Where the client knows what they want to do, so the firm gives no advice and the rules on assessing appropriateness do not apply
Under what circumstances in an execution only service allowed for mortgage products?
Execution only is permitted when:
1) There is no interactive dialogue between the firm and the customer during the sale
2) There is interactive dialogue BUT the customer is in one of three categories:
-High net worth
- Professional Customer
-The loan is solely for business purposes
3) There is interactive dialogue BUT the firm’s contribution is limited
4) The customer has rejected advice, identified the product they wish to purchase and has elected to proceed on an execution‑only basis
One of the ways execution only advise can be permitted is where the firm and cust has interactive dialogue BUT the firm’s contribution is limited to certain things
What are these?
Only allowed if the firm’s contribution is limited to:
— factual information about a regulated mortgage or application and
administration processes;
— the provision of an ESIS or a mortgage illustration;
— an explanation that it has not assessed suitability and that the protection
of an advised sale will be lost;
Interactive dialogue between a firm and a cust enables the firm to provide an execution only service
True or false?
False
Execution only service can only be provided under certain circumstances, mostly where there is no interactive dialogue between the cust and the firm
However it can be provided where there is interactive dialogue but only if the firm’s contribution is limited to certain things such as only stating facts about regulated mortgages or only talking about the provisions in the ESIS or the customer is 1 of 3 set categories such as being high net worth or a professional cust
What are the record keeping requirements for a firm that has provided an execution only service?
When a firm accepts an execution‑only sale it must keep a record of the sale, including the information provided, confirmation from the customer, and any
rejected advice offered, for three years from the start of the contract
NOTE: 3 years is the same for a firm that has provided advise too
Who do the FCA class as being a high net worth customer?
Minimum annual net income of £300,000, or minimum net
assets of £3m
Is raising funds through a regulated mortgage to fund the purchase of a buy-to-let property classed by the FCA as being for business purposes or not?
This is NOT classed as being for business purposes
A) Richard, who is an experienced mortgage adviser wishes to
arrange a further advance on his own property.
b) Shannon, who wants to buy her flat under a statutory
right‑to‑buy scheme.
c) Niall, whose wife died last month and is seeking to relocate
closer to his children
Who out of the above is most likely to be able to arrange a mortgage on an execution‑only basis without receiving qualified advice?
A
( get the book to find answers to get exact reasoning )
What are the 3 main suitability requirements? Ie what three things must be satisfied for a mortgage advisor to say a certain product is suitable for a customer?
Affordable
Appropriate to needs and circumstances
Most suitable from the range of products offered
How long must firms keep the records that demonstrate the rationale behind the suitability of the product they recommended after giving advise to the customer?
3 years
What does MCOB 11 & 11A cover?
Responsible lending
Ie, lenders must demonstrate they take affordability seriously when giving out credit, obviously this in this case with MCOB being mortgages
What must firms do under MCOB 11 in relation to interest only mortgages?
MCOB 11 covers responsibility lending
It states that in relation to interest-only mortgages, firms must be able to show the reason that this arrangement was agreed, the customers repayment strategy and the they must review the customers repayment strategy half way through the term of the mortgage. (For example, a unit linked endowment being used? How is the investment preforming)
MCOB 11 covers responsibility lending and basically states lenders must show how they assessed a cust can afford the mortgage they gave them, in order to be responsible lenders
How long do the records that show this need to be kept for?
The entire term of the mortgage
NOTE: this differs to suitability records ( ie the docs showing the rationale behind why that mortgage product was recommended during the advise process) which must be kept for 3 years
In terms of income and expenditure, are mortgage lenders able to just take a customers word?
No MCOB 11 and 11A state they must gather evidence to back up the income/expenditure claimes
What is the word used where a mortgage is transferred from one property to another?
Ported
“The mortgage has been ported to this property”
What does ESIS stand for?
The European Standardised Information Sheet
A document produced by mortgage lenders in which the key features and risks of the mortgage contract are disclosed to the customer. It is presented in a standard way, so you can check the cost and terms of the mortgage and compare it with other similar mortgages from the same lender or other lenders
If a recommendation is made over the telephone, how long after must the ESIS be sent to the customer?
5 working days
What is ‘pre application disclosure’ under MCOB
It is the info the cust must he provided with before the cust completes an application for a regulated mortgage contract’
Ie they must be given sufficient info such that they can make an informed choice
This is done by giving the cust an EISI which illustrates the mortgage they are looking at
When a cust with a regulated mortgage contract wishes to vary the terms of their mortgage or arrange a further advance, what must the firm provide them with?
A key features illustration, that reflects all the changes made ( it’s basically the same as an ESIS minus a few things )
How long must firms keep the records of the European Standardised Information Sheet (ESIS)
How long must firms keep records of the Key Features Illustration (KFI)
Records for both must be kept for 1 year after being issued
What is the difference between Regulated Mortgages and MCD Regulated Mortgages?
Tell me about the lenders final mortgage offer?
How long must be given to the borrower to think about this offer before they accept, what is the period of time called and what is the reason behind giving borrowers this time to think?
The lender’s final mortgage offer is binding to the lender
Once a lender has issued their final offer the borrower must be given 7 days to think about the offer
This is known as a ‘reflection period’ and is a regulatory requirement
The reason borrowers are given this time period is so they compare to other offers, consider any implications and so on. Basically so they can be given a fully informed choice before accepting any offer
NOTE: The borrower can accept the offer before 7 days are up if they wish
Once the borrower has accepted the final mortgage offer do they have a right to withdraw?
No
What does MCOB 7 cover?
The disclosure requirements once the mortgage contract has started
The lender must provide the borrower with certain info such as what the cust should do if they fall into arrears, how and when payments will be made to the mortgage and if their contract allow overpayments/underpayments
What does MCOB 12 cover?
This covers mortgage charges in general, and clarifies the requirements for disclosure of early repayment charges (ERC)
1) When ERC’s are payable
2) How the ERC figure is calculated
3) The max ERC payable
How long do records of the offer document need to be kept?
1 year from the date the offer was issued to the cust
When a firm shows the annual percentage rate of charge (APRC) in a representative example for a non-real-time financial promotion, the firm must reasonably expect the APRC to apply to:
at least 51% of those who respond to the advert and take out a contract.
all those with a satisfactory credit record who respond to the advert and take out a contract.
all those who respond to the advert and take out a contract
At least 51% of those who respond to the advert and take out a contract.
The lender must reasonably expect the APRC to apply to at least 51% of those who respond to the advert and take out a contract.
Which of the following are requirements for initial disclosure information on a new mortgage? Select all that apply.
A list of all lenders whose products the firm offers if it does not offer an unlimited service.
The exact fee the firm will charge and when it will be payable.
Details of appropriate mortgage products.
An assessment of the appropriateness of alternative finance options.
The exact amount of any commission the firm will be paid by the lender.
A list of all lenders whose products the firm offers if it does not offer an unlimited service
The exact amount of any commission the firm will be paid by the lender (if known)
Reason for answer:
The firm must state the exact fee if it known, but can provide an indication of how the fees would work if an exact figure is not yet known.
There is no requirement to provide any product details at this stage, because no advice has been given.
The client must be made aware of potential alternative options but there is no requirement to assess their appropriateness
Which of the following statements are true of execution-only? Select all that apply.
A firm can offer execution-only as a standard service.
Execution-only may be provided at the customer’s request.
Records of execution-only sales must be kept for 12 months from the start of the contract.
Execution-only is permitted when there is no interactive dialogue between the firm and the customer during the sale.
Those not permitted to proceed on an execution-only basis may reject the advice given and opt for another product.
Execution-only may be provided at the customer’s request
Execution-only is permitted when there is no interactive dialogue between the firm and the customer during the sale
Those not permitted to proceed on an execution-only basis may reject the advice given and opt for another product.
NOTE: A firm cannot offer execution-only as a standard service, but it may do so at the customer’s request if the customer is not in a category prohibited from making that choice. Records of execution-only sales must be kept for 36 months
When advising on an MCD regulated mortgage, the lender or intermediary must provide the customer with:
a suitability report outlining the product details and reasons for the recommendation.
an adequate explanation of the recommended product.
a key features illustration (KFI) explaining how the product works
An adequate explanation of the recommended product
REASON
Suitability reports do not apply to mortgages. KFIs are given as part of the pre-application requirements for regulated (non-MCD) mortgages.
When assessing an applicant’s income, a lender:
must obtain evidence of income from an independent source.
can allow the applicant to certify their income as correct.
can rely on evidence of income from the customer.
must obtain evidence of income from an independent source.
Reason: Self-certification is no longer allowed. The lender cannot accept evidence of income from the applicant
Karen is about to complete an application for a £100,000 MCD regulated mortgage recommended by Jeremy, a mortgage intermediary. Jeremy will receive a procuration fee of 0.5% from the lender. With regard to the fee, Jeremy must provide Karen with a:
key features illustration that shows the exact amount of the fee.
European Standardised Information Sheet that shows the exact amount of the fee.
European Standardised Information Sheet that states the fee will be more than £250
European Standardised Information Sheet that shows the exact amount of the fee
Reason: Jeremy must provide disclosure information using a European Standardised Information Sheet because the mortgage is an MCD regulated mortgage (MCOB 5A). Key features illustrations are for regulated mortgages. The exact fee must be disclosed.
MCD regulated mortgages do not allow KFI
Argos Mortgages Ltd offers MCD regulated mortgages, but wishes to use key features illustrations (KFIs) rather than the European Standardised Information Sheet (ESIS). It is true to say that Argos Mortgages Ltd:
can continue to issue the standard KFI.
cannot use a KFI for MCD regulated mortgages.
must provide an ESIS top-up if it issues a KFI
Cannot use a KFI for MCD regulated mortgages
The information provided for an MCD regulated mortgage must follow a prescribed format through an ESIS.
For how long from the date of a customer’s mortgage application must a firm keep a record of a key features illustration or a European Standardised Information Sheet?
1 YEAR
MCOB 7 covers the disclosure requirements at the start of a new mortgage contract. At what point must the required information be provided to the borrower?
Before the first mortgage payment is made
Can unsolicited real‑time financial promotions be made to new customers?
No, they can only be made to existing customers
Alex is his firm’s marketing manager and he has just withdrawn a marketing mailshot, which will not be used again. For how long must his firm keep a copy of the mailshot?
12 months
For how long must a firm keep a record of an execution‑only sale?
3 years
An HNW customer can proceed on an execution‑only basis if the firm has evidence that the customer meets the criteria, and has selected the product they require or has rejected advice given. True or false?
True
If there is no suitable product for a customer from within the range available, the adviser can recommend the closest fit from those available. True or false?
False, The adviser must not recommend any product if there are none in the range offered that meet the client’s needs and circumstances.
Examples of the APRC shown in a financial promotion must be ‘representative’. This means that a specified percentage of those who respond to the promotion and those who enter into the contract advertised would be charged the quoted APRC. What is the percentage?
51%
If a recommendation is made over the telephone, an illustration must be sent to the customer within:
Five working days
Lenders cannot make provisional offers to borrowers in relation to MCD regulated mortgages. True or false?
False
An offer of advance can be provisional, but once all due diligence has been completed the final offer for an MCD regulated mortgage is binding
Chen is looking to vary the terms of his MCD regulated mortgage. Should Chen be given a relfection period like he would if he was applying for a new MCD mortgage?
No time
MCOB 6A requires a seven‑day reflection period once a binding offer is made for an MCD regulated mortgage
However, since Chen is applying to vary the terms of an existing MCD regulated mortgage, neither a requirement for a binding offer or the seven‑day reflection period apply
The offer document must include details of the amount and dates of the initial and subsequent repayments due. True or false?
False. This information must be provided before the first payment is made on a new mortgage, a further advance or a variation to the terms of a mortgage
What is a Key features illustration (KFI)?
What is a European Standardised Information Sheet (ESIS)
KFI = Document containing information that must be provided to a customer as part of the pre-application requirements for a regulated mortgage. The information must follow a prescribed format.
ESIS = Document containing information that must be provided to a customer as part of the pre-application requirements for an MCD regulated mortgage. The information must follow a prescribed format.
ESIS = for MCD REGULATED MORTGAGE
KFI = for REGULATED MORTGAGES
READ JARGON BUSTER FOR TOPIC 8. IT IS GOOD
