The requirement for brokers to disclose whether they will or will not give advice on direct-only deals, as set out in the latest MMR paper, is a welcome development.
The FSA has now said if a broker wants to recommend a specific direct-only deal, they no longer have to give out a key features illustration.
We are not prepared to use KFIs produced by any of the sourcing systems because none of the sourcing systems will guarantee them. If the sourcing system is not prepared to guarantee them, why should we trust them? I accept that in most cases it will be right but the odd case where it is wrong can cost you a lot of money.
As you cannot get a KFI from a direct lender that will include the broker fee because by definition they are not geared up to doing that, it has been impossible under those circumstances to compliantly recommend a specific directonly deal in the past. You could obviously say “go and talk to HSBC” but you could not go down the route of specific recommendation. This rule change will allow brokers to do that so I think it is very healthy.
We know the EU is going to come out with a draft mortgage directive early next year and it will no doubt include something in terms of what information you have to give clients up front.
I would have thought most brokers and indeed most lenders will not want to change their systems, knowing they will have to make another enforced change at a later stage. I suspect in practice most people will continue to use the IDD.
When it comes to the KFI, the argument about having to give clients two KFIs if you are recommending a roll-up of the arrangement fee is, frankly, unhelpful.
The FSA recognises now that what it told most of the industry before it introduced the rules in 2004 was that most clients will not read the KFI in full but you do still need the details in writing because there will always be some clients who do want to read it in full and even clients who don’t want to read it in full sometimes want to go back and look up details they have forgotten.
As a result, there will probably be a move towards recording calls so you have a record of what you did and didn’t say. That clearly will put up costs.
If the FSA feels it is important to have a comparison between if you do and do not have the arrangement fee included in the loan, I think it would be more sensible to duplicate the two or three sections of the KFI that would be affected.
I do not think that would be any more confusing than having two KFIs and would frankly save a lot of paperwork.
Ray Boulger is senior technical manager at John Charcol