Safer advice for borrowers

Stephen Pritchard looks at the impact of the mortgage advice industry coming under FSA scrutiny

At the end of this month the Financial Services Authority will take over regulation of mortgage advice. The new rules should give stronger protection to home buyers. But over the next few weeks, the changes mean that some borrowers could lose their mortgage offers, and so the property they want to buy.

At the end of this month the Financial Services Authority will take over regulation of mortgage advice. The new rules should give stronger protection to home buyers. But over the next few weeks, the changes mean that some borrowers could lose their mortgage offers, and so the property they want to buy.

Although the Financial Services Authority asked brokers to apply by April, in order to guarantee approval by the deadline for the new rules, as few as a third of mortgage brokers are understood to have applied. If a broker is not approved by 31 October it will be illegal for that broker to give mortgage advice to the public, and lenders will not be able to accept business from them. The financial website Moneynet -- itself an FSA authorised firm -- has removed six of its 15 mortgage brokers from its listings because they have yet to receive FSA approval. "We were not comfortable sending clients to brokers without the appropriate approvals in place," says David Brown, the chief executive.

Brown warns that brokers who do not receive their FSA approval by 31 October will have to cease trading, at least until their registrations come through. This could leave buyers unable to complete purchases. In a worst-case scenario, buyers would need to approach a new broker, or go directly to a lender, and start the mortgage application process again. For buyers who have not yet started their mortgage transaction, the advice is simple: pick a mortgage adviser who has FSA approval, or go direct to the bank or building society. The Council of Mortgage Lenders says that borrowers should check that their broker subscribes to the Mortgage Code Compliance Board now, and will be authorised under the new rules.

Matters are more complex for buyers who are already part of the way through an application. Depending on where they are in the mortgage application process, they could find their finances - and home buying plans - seriously disrupted. "Consumers should be aware of the potential for disruption if their intermediary does not become authorised in time, so that they can take steps to reduce the risk of their mortgage application being delayed," notes Michael Coogan, the director general of the Council of Mortgage Lenders.

Home buyers should ask their broker if they have applied for FSA regulation, and whether they did so by the 30 April deadline. If they have not, buyers might need to make alternative plans.

If the broker is not on track for FSA approval, and a buyer has already submitted forms and information for references, they might be able to go direct to their mortgage lender, suggests Moneynet's David Brown. If the buyer needs no further advice, the lender should be able to continue processing the application.

At the Halifax, the UK's largest mortgage lender, spokesman Paul Fincham says that as much as 60 per cent of the bank's business goes through mortgage intermediaries. But most of these should stay on track. "If a customer is referred to us by an intermediary [broker] and their case is going through, it will be fine unless they need more advice," he says. "If they need to make changes in the application and it is not material we can make those changes. If they need advice, we can offer them access to one of our advisers."

In more complicated cases, buyers might need to turn to another mortgage broker, however, as lenders can only offer advice on their own mortgage products. If this is the case, buyers should make sure they have duplicate copies of any critical information including proof of identity and financial status, as well as documents such as their survey report. If a survey or other work has been arranged through the mortgage broker, buyers will need to ensure they receive a copy.

The FSA believes that the majority of mortgage brokers will be approved by 31 October, so the number of home buyers who encounter serious disruption should be relatively small. If buyers take steps now to check their broker's position, there should be still time to act, as most mortgages can be completed in three to four weeks. And once the new arrangements are in place, buyers should find it easier to shop around for deals. Under FSA rules, lenders will have to produce a Key Facts Illustration for each mortgage quote, including details on interest rates and any fees or penalties. As these illustrations are based around a standard format, home buyers will be able to make like-with-like comparisons.

Brokers will also have to spell out clearly whether they are giving advice, and how borrowers can complain if they are not satisfied. But suggestions that mortgages will take longer to arrange, or will become more expensive are wide of the mark, according to the Halifax. "For us, the mortgage interview process was so extensive that we do not believe it will take any longer, and we dispute it will lead to higher costs," says Fincham. "We have been prepared for regulation for a very long time."