The Financial Services Authority’s (FSA) proposals on how to regulate mortgage sales and advice from 2004 have potential pitfalls for consumers, says the Financial Services Consumer Panel today. In its response to CP146 – The FSA’s Approach to Regulating Mortgage Sales, the Panel gives details of its views.

The Panel argues against the FSA’s proposal for three types of regulated selling process. Instead, the Panel proposes a straight choice between either an advised mortgage purchase, or an “execution only” purchase, where the customer buys a mortgage knowing clearly that they have received no recommendation from the seller.

• The FSA’s proposed middle way – non-advised filtering questions – should not be necessary, and would lead to consumer confusion. Mortgage products have a greater variety of features than investment products and, as a result, even consumers who buy a mortgage “execution only” will inevitably need to answer a number of questions about the product they want. What the FSA must concentrate on is devising an execution-only regime with strengthened disclosure rules to ensure that consumers understand that they are not being given advice.

The Panel also highlights other concerns in its response:

• The FSA’s interpretation of what will be considered as advice which needs to be regulated may well be confusing. The Panel believes that consumers being told “I recommend that you take out a mortgage with ABC building society” will consider that they have been given advice. The FSA is proposing that this on its own, would not be counted as advice.
• The proposal to remove the current practice of sending a “suitability letter” to everyone who has purchased a mortgage, setting out why they have been advised to take that mortgage, has been criticised by the Panel. The Panel believes that this current practice under the Mortgage Code provides useful clarification for consumers.
• The Panel also takes another opportunity to object to the limited scope of mortgage regulation as set by HM Treasury. The Panel says that second charge; buy-to-let; small business; and home reversion scheme mortgages should all be under some form of regulation by the FSA.

Colin Brown, Panel Chairman, said:
"The Panel has always called for the regulation of mortgage sales to come under the remit of the FSA. Now we need to make sure it is a clear and transparent regime, so consumers will know how and when they are being protected. We agree with the FSA that taking out a mortgage is different from buying an investment product and needs a different approach to consumer protection. But the answer is not to invent a confusing new category of sales process. Instead, there should be new rules for execution-only sales to keep consumers safe."

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Notes to editors