It might well be a worthwhile exercise for the lending industry to publish a clear timetable of when they intend to make their changes and the route they will take
Rob Clifford is chief executive at CENTURY 21 UK and a director at Moneyquest
The advice file or audit trail is such an important, and intrinsic, part of an advisers’ work that you might think there is simply no excuse for not delivering it compliantly and successfully. I’m sure most brokers would feel the same; after almost 11 years of statutory regulation we should all have the paperwork process nailed down.
However, judging from the response to the FSA’s recent presentation at the Financial Services Expo (FSE) Manchester regarding the introduction of the EU Mortgage Credit Directive (MCD) rules next year, many advisers appear to have been surprised at the potential level of disruption that could be inflicted on the industry. Particularly when it comes to the delivery of the paper trail and the additional responsibilities that advisers and firms will need to get to grips with, especially as there will be different approaches depending on the product sold and the lender concerned.
The mood music up until now from the regulator with regards to the MCD has been along the lines of, ‘Pretty much business as usual’. However, and this may have been missed when the new rules were published in March, there is real potential for a greater degree of change required than many were anticipating. Given that we are just one year on from the MMR, and it was believed that much of the MCD requirements had already been anticipated and accommodated within the MMR rules, it does seem like the sector is facing another bump in the road if it doesn’t act in advance.
For instance, at last month’s Financial Services Expo (FSE) in Manchester, there was an expression of collective surprise amongst advisers at the fresh requirements that will have to be accommodated when the KFI is superseded by the ESIS (the European Standard Information Sheet).
To completely grasp this you have to be aware of the staging dates for the MCD’s introduction. The new rules come into force on the 31st March 2016, however firms can continue to use the KFI until the 31st March 2019 as long as they provide a top-up document, which has been referred to as the ‘KFI-plus’. After the 31st March 2019 everyone will have to use the ESIS, but let’s also not forget that the FCA is permitting firms to adopt the rules early, from 31 September 2015, but this is not a requirement, but a choice. Crystal clear? Well, wait for this.
With second-charge loans coming under the FCA’s jurisdiction as part of the MCD, it could mean that advisers have to deal with four different sets of KFI-type documentation over the next four and a half years. Let’s examine this:
- Up until 31 March next year, second- charge loans can be sold with the old CCA documentation, however firms have to use an ESIS from 2016.
- Up until the 31 March, mortgage clients will be able to use an old-style KFI, however lenders might change their approach from the 31st September and therefore depending on which lender you recommend, you might need to issue either an ESIS or a KFI-plus.
- From the 31 March 2016 the old style KFI will not be acceptable, unless it comes with the KFI-plus add-ons – this will be acceptable up until the 31st March 2019 from which time everyone will have to issue an ESIS.
Rob Sinclair of AMI suggested at the FSE that most larger lenders will line up with KFI-plus from day one, however there is one major lender who will apparently go with ESIS. So, at the moment it will be a case of horses for courses and advisers will need to be fully aware of which documentation is correct for each lender/product.
It is perhaps no wonder that Keith Hale described the next few years for advisers as “a three-year period of flux”. And that’s just the KFI issue, we also have paperwork issues related to the IDD with the service and scope disclosure, remuneration disclosure, commission disclosure documentation – you will need to inform the client that they can ask for a document which shows the commission you would have received should you have opted for any of the other products which were available to the customer, plus there are issues around binding offers and how long they are valid for and when they will need to be reissued.
All in all, it seems that the expectation and hope for minimal procedural change might not have been correct. I am certainly not scaremongering or suggesting that the industry won’t be able to find sensible solutions for all of the above but if advisers thought it would be a case of ‘business as usual’ then they’re probably in for a surprise. I would therefore suggest that the work, in terms of MCD compliance, begins very soon and firms start to introduce and embed some of the processes they will need post-implementation of the Directive. It might well be a worthwhile exercise for the lending industry to publish a clear timetable of when they intend to make their changes and the route they will take. This will certainly make life easier for advisers and will go a long way to ensuring a much smoother transition for all concerned.
