How MMR will change adviser-lender relations

While this may seem logical when written down, Martin Reynolds, chief executive of SimplyBiz Mortgages, says it will be a substantial shift compared to the current rules.

He says lenders will have to make changes to a number of their procedures and systems to accommodate the new rules. However, the day-to-day interaction between lenders and advisers will not change too much from the current position, Mr Reynolds adds.

“What has to change is the type of information that lenders need to satisfy themselves of income and affordability.

“The ongoing relationship between lenders and advisers and how they satisfy themselves in relation to know your broker requirements may mean an uplift in initial due diligence of a firm prior to their addition to the lenders panel and additional ongoing monitoring of the quality of business submitted.”

But Laurence Baxter, head of policy and research at the Chartered Insurance Institute, disagrees with Mr Reynolds on the effects for adviser-provider relations, saying the rules will significantly affect the future of mortgage regulation and change how advisers work with lenders.

Mr Baxter says: “The broadening of advised sales to include any customer-seller interaction, combined with the scrapping of the non-advised category, is already resulting in lenders increasing their in-house advice capacity.

“Meanwhile removing the allowance for execution-only for certain higher risk products such as sale and rent back and equity release will result in more specialised brokers forming - and advisers increasing their offerings and expertise in these areas.”

When a sale is advised - and what this means

The biggest change that consumers will see is high street banks and building societies will have to change the way they approach arranging mortgages for their customers post-MMR.

Robert Sinclair, chief executive of the Association of Mortgage Intermediaries and Association of Finance Brokers, says lenders must ensure that there staff are qualified and competent to provide ‘advice’.

David Hollingworth, associate director of London & Country Mortgages, agrees the biggest change coming with MMR is the need for mortgage lenders to give advice as part of the mortgage sales process.

With many only currently offering ‘information’ on their products, Mr Hollingworth says this marks a significant change for lenders and poses a challenge in upskilling existing staff to be able to provide advice.

“It is still possible for there to be execution-only sales but as soon as there is any interaction with the client then it should become an advised sale. In practice that will mean that lenders will in most cases have to provide advice.

“The need to assess the affordability will ultimately be the responsibility of the lender, although the adviser will of course be expected to assess the suitability and plausibility of a case.

Lender criteria have already changed in recent years in anticipation of MMR, according to Mr Hollingworth, so there may not be a radical change in the criteria and process already being employed.

“Mortgage brokers will have already adapted to the requirements of lenders and the packaging requirements. Lenders have worked more closely with a more limited distribution and lenders will continue to put the accent on efficient, high quality distribution.

“The fact that lenders face the challenges of qualifying their staff to provide advice will make intermediaries an important channel for lenders.”

Under the rules the current initial disclosure document will also be replaced by a requirement for firms to disclose key messages to the customer. The trigger points for the presentation of a ‘key facts illustration’ will be changed to reduce customer information overload.

Affordability assessments

When it comes to responsible lending and affordability assessment requirements, Mr Baxter says there is an effective ban on self-certification. Lenders must verify income and be able to demonstrate affordability in terms of borrower’s income and expenditure.

The regulator believes that income could be verified for self employed borrowers through evidence of taxable income, which businesses are required by law to provide to HM Revenue & Customs.

When assessing customers, the lender must also undertake mandatory interest rate stress tests. The lender must take account of the impact on mortgage payments of market expectations of future interest rate increases.

However, lenders will be allowed to waive some of these affordability requirements for existing borrowers for a transitional period.

For interest-only mortgages, lenders must assess affordability on a capital and interest basis. Mr Baxter says lenders must obtain evidence of a repayment strategy before signing off interest-only mortgages, and reasonably check that this strategy would work.

Where the repayment strategy requires the borrower to make regular payments from income, Mr Baxter says lenders must assess affordability taking the cost of the repayment strategy into account.

Non-standard mortgages

While the latest paper relaxed slightly the requirement for advice for post-contractual variations, execution-only is barred for certain types of “vulnerable” borrowers. This includes equity release, sale and rent back and debt consolidation - but not first-time buyers.

The seller - whether it is the lender or the broker - must check that the borrower meets the lender’s eligibility criteria, according to the CII’s Mr Baxter.

For sale and rent back, Mr Baxter says customers must be regarded as vulnerable - they are facing financial difficulties including repossession - so they cannot opt out of receiving advice, and also cannot opt for execution-only if the advice was not to buy a product.

For equity release, the proposal is to create a single equity release market comprised of lifetime mortgages and home reversions as substitutable products.

Therefore under disclosure requirements, Mr Baxter says intermediaries offering just one of these would be classed as “restricted”.

Equity release customers would not be able to opt-out of receiving advice, but unlike sale and rent back customers Mr Baxter says they would not be obliged to take it.

For home purchase plans, Mr Baxter says part of the appropriateness assessment for this type of product should be whether a conventional mortgage should also be considered.

For bridging finance, Mr Baxter says the lender is not required to assess affordability for these products, but must assess whether the consumer has an appropriate repayment strategy, in line with the interest-only policy.

Bridging finance would also have a maximum 12-month term to prevent gaming, he adds.