FSAs new mortgage proposals to help consumers

This means that from around mid 2004 firms that sell many types of mortgages will need to be authorised by the FSA.

Sarah Wilson, Director of High Street Firms Division, said:

"For many consumers, taking out a mortgage is one of the most significant financial commitments they will make in their lifetime."

"We want to make sure that consumers get clear comparable information on mortgages and that where they get advice they are recommended a suitable mortgage."

"We aim to introduce a regime that achieves this goal in a proportionate, cost-effective fashion."

What Mortgages Are Covered?

The mortgage must be:

• taken out by an individual or trustee; and

• a first legal charge on the borrowers property - this must be located in the UK and must be at least 40% occupied by the borrower or immediate family.

As well as mortgages for property purchase, the regime will cover other products where the security is a first charge over the borrowers residential property, including home improvement loans, debt consolidation loans, lifetime mortgages, secured credit cards etc.

Whats not covered?

Our regime wont cover second charge loans, most buy to let arrangements and loans to companies.

What are the key areas covered?

• Requirements on firms relating to the sales process whether they give advice or information - for example:

  • where they give advice, they would need to consider affordability and which mortgage(s) best meets the consumer's needs and circumstances; and

  • where they give information and use filtering questions that narrow down the selection of mortgages, they would need to script the questions and make sure sales staff don't stray over the boundary and give advice.

• Clear information about the mortgage itself in a prescribed order and layout so that consumers understand the terms of the mortgage and can compare it with others. This builds on proposals issued last year.

• Proposals on fair treatment of consumers covering, for example, unfair sales practices and excessive charges;

• Requirements relating to mortgage advertising and marketing material;

• Information that firms must disclose about themselves so that the consumer knows what service they will get and what fees if any the firm will charge.

Notes for editors

1. This consultation is the first in a series that will cover mortgages and general insurance, following the Governments decision in December 2001 to extend the FSAs responsibilities to include mortgage advice and arranging and the sale of general insurance.

2. The FSA previously consulted on its approach to the regulation of mortgages in CP98: The draft Mortgage sourcebook, including policy statement on CP70 in June 2001, which covered the proposed regime for the statutory regulation for mortgage lending and administering.

3. The new regime is expected to come into force at around mid 2004. The Government intends that it will coincide with the introduction of general insurance regulation.

4. The proposals on advising and arranging mortgages are contained in CP146: The FSAs approach to regulating mortgage sales. Responses to this Consultation Paper should be received by 11 November 2002.

5. The FSA is also publishing its Feedback Statement on CP98 (which contains near-final rules on some post-sale issues) and a Consumer Research Report on Mortgages.

6. What is covered by the new regime?
   

   The following activities will be regulated:
   
   

   • Mortgage lending;
     

   • Mortgage administration;
     

   • Advising on a regulated mortgage contract; and
     

   • Arranging a regulated mortgage contract.
     
     

   Firms that will need authorisation include banks, building societies, specialist lenders and mortgage intermediaries.
   

7. A first legal charge is the legal means by which lenders register their rights in relation to the property, which means that, should the borrower default on the mortgage, then the lender will be able to take possession of the property.

8. The consultation proposes extra protection for consumers buying higher risk mortgages, such as equity release mortgages for older consumers (which the FSA has termed lifetime mortgages). It also proposes different requirements for certain types of loan that pose lower risks, such as those for relatively small amounts or having a short term.

9. The FSA regulates the financial services industry and has four objectives under the Financial Services and Markets Act 2000: maintaining market confidence; promoting public understanding of the financial system; securing the appropriate degree of protection of consumers; and fighting financial crime.

10. The FSA aims to maintain efficient, orderly and clean financial markets and help retail consumers achieve a fair deal.