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How mortgages are regulated by the Financial Services Authority. Which mortgages are not regulated by the FSA. How you can complain about your mortgage lender or mortgage adviser and what they are obliged to tell you about their charges.
- Voluntary regulation replaced
- Is my mortgage "suitable"?
- What mortgages aren't covered by the FSA?
- What are lifetime mortgages and home reversion schemes?
- Who do I talk to if I have a complaint?
- What does my mortgage adviser have to tell me about his/her charges?
Voluntary regulation replaced
The Mortgage Code, established in 1997, was a voluntary code, although more than 150 lenders and 13,000 intermediary firms, covering virtually the entire market, were registered under it. However, consumer protection stepped up a gear in October 2004. The regulation of most mortgage sales is now overseen by the Financial Services Authority (FSA).
The FSA's Mortgage Code of Business rules are based on the principle that firms must treat their customers fairly. Measures firms have to take to comply include:
- providing you with clear, comparable information about the service you are receiving and the mortgage itself. This standardised product information - the Key Facts Illustration (KFI) - allows comparison of different mortgages costs and features making it easier for you to shop around and make an informed decision;
- when giving advice, identifying the mortgage which best fits your needs;
- considering your ability to repay a loan before entering into a contract;
- meeting standards for dealing with borrowers who are in arrears or facing repossession. This includes sending these consumers a new FSA information sheet explaining what their options are if they can't meet their mortgage payment; and
- meeting additional requirements where they are giving advice on lifetime mortgages, which the FSA considers to be higher risk. This includes providing you with tailored information about the costs and risks involved in taking out a lifetime mortgage
Is my mortgage "suitable"?
The FSA rules cover the whole mortgage selling process and consumers will have the benefit of several protections even if they do not receive advice. The watchdog requires that any mortgage that an adviser recommends to a consumer must be "suitable" for him or her.
In assessing whether a mortgage is suitable, your mortgage provider must also consider whether you can afford to borrow the amount you are asking for. For all sales, lenders have to meet "responsible lending" rules, meaning that they must consider the consumer's ability to repay the loan before agreeing to lend. In advised sales, advisers will also have to consider the affordability of the loan. If the details of a loan change after the consumer receives advice, the lender will have to check that they are still lending responsibly.
Lenders must also assess what type or types of mortgage are suitable (for example, looking at which types of interest rate, or additional features, are suitable); and, finally, review which mortgage (or mortgages) and which provider (or providers) best meet your needs and circumstances (for example, finding the better value mortgage based on pricing elements most important to you as the consumer).
It is important to remember that your home may be repossessed if you do not keep up repayments on your mortgage.
What mortgages aren't covered by the FSA?
The Financial Services Authority (FSA) has a strict definition of what it calls a regulated mortgage contract. To qualify as a regulated mortgage contract the borrower must be an individual or trustee and the property must be at least 40% occupied by the borrower or a member of his/her immediate family. In April 2007, the regulations were extended to include home reversion plans.
The definition of mortgage does not cover the following:
- buy-to-let mortgages, (unless the tenant is a member of the borrowers immediate family, or the borrower intends to occupy the property at some stage);
- second charge loans; and
- loans to companies (except in the case of trustees).
On the other hand, as well as loans for house purchase, where the security is a first charge over the borrower's residential property, the following loans potentially fall within the definition of a 'regulated mortgage contract' and FSA regulation:
- lending for home improvements (including, for example, some in-store credit);
- lending for debt consolidation;
- business lending to sole traders and to partnerships in England and Wales;
- secured overdrafts and secured credit cards; and
- bridging loans.
What are lifetime mortgages and home reversion schemes?
A lifetime mortgage is a mortgage aimed at those who have assets but not income - typically older consumers - and is designed to release equity from the home. Repayment of the capital (and sometimes the interest) only happens on sale of the property, usually on the death of the borrower.
A home reversion scheme involves the consumer selling some or all of their property to a reversion company at a discount. In return, the consumer gets a lump sum or a regular income (or both) and the right to remain in the property. Home reversion schemes are outside the scope of FSA regulation. However, the government is consulting on whether home reversion schemes should be regulated.
Lifetime mortgages - providing they meet the regulated mortgage definition - were covered by the Financial Services Authority from October 2004. Home reversion schemes fell outside the scope of FSA regulation until April 2007.
Both lifetime mortages and home reversion schemes are sophisticated products and anyone interested in them should ask for a personalised illustration from the provider and ensure they understand the features and risks involved.
Who do I talk to if I have a complaint?
If you have a complaint about your mortgage or about your mortgage adviser or arranger, you should take it up with them in the first instance. If they are unable to resolve the matter you will be able to take your complaint to the Financial Ombudsman Service. Mortgage advising and arranging is now covered by the Financial Services Compensation Scheme (FSCS), with maximum compensation payable of £48,000.
Mortgage lenders and advisers cannot "cold call", that is to say they may not contact you by personal visit, telephone or in any other interactive way to promote their mortgage services or products, unless you have already been in contact with them.
The Financial Services Authority believes that cold-calling can expose consumers to high pressure sales tactics which mean that they end up with an inappropriate or over-expensive product (or service).
What does my mortgage adviser have to tell me about his/her charges?
For a mortgage adviser to describe itself as independent it has to offer a whole of market service (i.e. to give advice or information on a range of mortgages that are representative of the whole market); and give you the opportunity of paying a fee for this service.
As part of the mortgage process you will be given a Key Facts Illustration (KFI), this will include details about the total amount payable by the lender to the mortgage intermediary, and any third parties. This includes fees paid, directly or indirectly, to appointed representatives of a principal acting as intermediary, unregulated firms, networks, mortgage clubs and similar.
If the total amount is no more than £250, a firm can simply disclose this. They need not disclose the actual amount payable (unless you ask for this information).
29 August 2007 © Moneyextra.com
Our senior editor Robin Amlôt recommends you should consider taking independent financial advice before acting on any article. Please contact us for help with your individual circumstances if any assistance is required.