With the new FSA regime for mortgage marketing looming on 31st October 2004, the FSA and the DMA have commented on whether providers of new business leads and contact centre services to mortgage providers need to be authorised.
Who: Financial Services Authority
When: October 2004
From 31 October 2004 the Financial Services Authority's Mortgage Conduct of Business Rules Sourcebook comes into force. For the first time in the UK the Financial Services Authority will regulate the marketing and selling of most mortgages in the UK, but what activities and what products will the new regime actually regulate?
Some recently published FSA "FAQs" on the topic may shed light. The Direct Marketing Association ("DMA") has also commented on the need for marketing service suppliers to seek authorisation.
The FSA FAQs relate to the section of the FSA Handbook that deals with the need to seek FSA authorisation, called "AUTH" for short.
What mortgages will be regulated?
From 31 October 2004 the FSA will be responsible for regulating all new mortgages where the borrower is an individual or trustee, where the lender takes a first legal charge over property in the UK and the property is at least 40% occupied by the borrower or by a member of his immediate family. In other words second mortgages over land will not be within the FSA remit at all, nor will buy to let mortgages unless the tenant is a member of the borrower's immediate family. Nor will loans to limited companies.
Insofar as the new FSA regime impacts on mortgages themselves, it will apply to all mortgages entered into on or after 31 October 2004, or any amendments on or after 31 October 2004 to a mortgage previously entered into.
Who needs to be authorised?
All those carrying on activities which are regulated by the FSA in the UK in respect of mortgages must be either authorised or be an appointed representative or benefit from some other exemption. Otherwise they will be committing a criminal offence.
Regardless of whether a firm is acting directly or as an intermediary, it will need to be authorised by the FSA if it arranges, advises on, enters into or administers regulated mortgage contracts. There are exceptions as always. For instance those who merely introduce mortgage business to others may in certain circumstances be exempt from authorisation and those who only give "generic advice" may also be outside the regulatory tent. In this latter case, advice generally recommending that a customer should take out a mortgage (without mentioning a specific lender) would not fall within the definition of advice.
Article 33A of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 explains what type of mortgage "introducing" will be outside the FSA regime. This makes it clear that the introduction in question must be made to a firm which will provide independent advice on the choice of regulated mortgage contract for the consumer. In other words if business is being passed directly to one particular lender, the exclusion will not apply.
If the introduction is to a broker who gives independent advice on the right choice of mortgage for that particular person, then the introducer will be outside the FSA remit if a number of other requirements are satisfied. First of all the firm to which the introducer passes the consumer must be either an authorised firm, an exempt firm or an overseas firm.
Next, the introducer must not receive any money in connection with the transaction the consumer will enter into with a lender as a result of the introduction. If the introducer does receive payment from the consumer or holds client money he will not be able to use the exclusion.
The next requirement is that certain disclosures are made to the consumer before the introduction is made. For instance, where applicable the introducer must disclose if it is part of the same group as the person to whom the consumer is going to be introduced. The introducer must also disclose details of any payment it will receive from the person to whom the introductions are made by way of a fee or commission for the introduction. This does not have to be disclosed as an exact sum; if this cannot be determined it will be sufficient to disclose the method of calculating it. Also, the introducer must disclose any other reward or advantage which it receives as a result of making the introduction.
Finally, introducers are advised strongly to keep a written record of all disclosures made since, apart from anything else, lenders will probably expect documentary evidence of the introducers' compliance with these conditions because of their duty to accept business only from a legitimate source.
Advertising introducers' services
The FSA FAQs point out that introducers should take care when communicating financial promotions concerning any secured lending. They suggest that the default position should be to assume that any marketing communication relating to introducer services will be caught by the FSA regulatory regime. The FSA also indicates that "introduction" as an activity will be construed very narrowly. In other words if the introducer does more than what is strictly necessary to make an introduction, such as completing customer fact finds or acting as a conduit between the customer and the person to whom the introduction is made, the exclusion will not be available and authorisation will be needed.
Authorisation of outsourced service suppliers?
In a recent communication the Direct Marketing Association has focused on the question of outsourcing services relating to the marketing, selling or administration of mortgages, for instance contact centre services. An area of concern amongst DMA members has been whether such firms need to seek full authorisation or whether it will be sufficient for them to become an Appointed Representative ("AR").
An AR is allowed to carry on certain regulated activities on behalf of an authorised firm under a contract.
In this scenario the authorised firm must accept responsibility for the AR's compliance and the AR will not then need to be authorised by the FSA itself. It will still need to comply with the FSA rules however.
On the question of whether an authorisation is in fact required in any particular case or whether AR status is acceptable, the DMA defers to the FSA. Alternatively specialist advisers will be able to help.
Why this matters:
With all those operating in the mortgage industry struggling under a welter of new regulations, they need all the help they can get from guidance issued by the FSA or the DMA or even marketinglaw.co.uk!