MCOB 4.7 Advised sales
Suitability
A firm must take reasonable steps to ensure that it does not make a personal recommendation to a customer to enter into a regulated mortgage contract, or to vary an existing regulated mortgage contract, unless the regulated mortgage contract is, or after the variation will be, suitable for that customer (see MCOB 4.3.4 R (2), MCOB 4.3.5 G and MCOB 4.3.6 G).
In MCOB 4.7, a reference to a recommendation to enter into a regulated mortgage contract is to be read as including a reference to a recommendation to vary an existing regulated mortgage contract if the context so requires.
For the purposes of MCOB 4.7.2 R:
- (1)
a regulated mortgage contract will be suitable if, having regard to the facts disclosed by the customer and other relevant facts about the customer of which the firm is or should reasonably be aware, the firm has reasonable grounds to conclude that:
- (a)
the customer can afford to enter into the regulated mortgage contract;
- (b)
the regulated mortgage contract is appropriate to the needs and circumstances of the customer; and
- (c)
the regulated mortgage contract is the most suitable of those that the firm has available to it within the scope of the service provided to the customer;
- (a)
- (2)
no recommendation must be made if there is no regulated mortgage contract from within the scope of the service provided to the customer which is appropriate to his needs and circumstances; and
- (3)
if a firm is dealing with an existing customer in arrears and has concluded that there is no suitable regulated mortgage contract for the purposes of MCOB 4.7.2 R, the firm must nonetheless have regard to MCOB 13.3.2AR (1), MCOB 13.3.2AR (5) and MCOB 13.3.2AR (6)2 (see also MCOB 13.3.4AR (1)(a) and MCOB 13.3.4AR (1)(b)).2
2
In relation to MCOB 4.7.4 R(1)(a), a firm must explain to the customer that the assessment of whether he can afford to enter into a regulated mortgage contract is based on:
- (1)
current interest rates, which might rise in the future; and
- (2)
the customer's current circumstances, which might change in the future.
In relation to MCOB 4.7.4 R(1)(a) and (b), where a firm makes a personal recommendation to a customer to enter into a regulated mortgage contract where a main purpose is to consolidate existing debts it must also take account of the following, where relevant, in assessing whether the regulated mortgage contract is suitable for the customer:
- (1)
the costs associated with increasing the period over which a debt is to be repaid;
- (2)
whether it is appropriate for the customer to secure a previously unsecured loan; and
- (3)
where the customer is known to have payment difficulties, whether it would be more appropriate for the customer to negotiate an arrangement with his creditors than to take out a regulated mortgage contract.
- (1)
In assessing whether a customer can afford to enter into a particular regulated mortgage contract, a firm should give due regard to the following:
- (a)
information that the customer provides about his income and expenditure, and any other resources that he has available;
- (b)
any likely change to the customer's income, expenditure or resources; and
- (c)
the costs that the customer will be required to meet once any discount period in relation to the regulated mortgage contract comes to an end (on the assumption that interest rates remain unchanged).
- (a)
- (2)
Contravention of MCOB 4.7.7 E(1) may be relied upon as tending to show contravention of MCOB 4.7.4 R(1)(a).
A firm may generally rely on any information provided by the customer for the purposes of MCOB 4.7.4 R(1)(a) unless, taking a common-sense view of this information, it has reason to doubt it.
MCOB 4.7.4 R(3) explains that different considerations apply when making a personal recommendation to a customer in arrears. For example, the circumstances of the customer may mean that, viewed as a new transaction, a customer could not be recommended to enter into a regulated mortgage contract. In such cases, a firm will still be able to make a personal recommendation to that customer where this recommendation is, in the circumstances, a more suitable one than the customer's existing regulated mortgage contract.
In complying with MCOB 4.7.4 R a firm is not required to consider whether it would be preferable for the customer to:
- (1)
purchase a property by using his own resources, rather than by borrowing under a regulated mortgage contract;
- (2)
rent a property, rather than purchase one; or
- (3)
delay entering into a regulated mortgage contract until a later date (on the grounds that property prices would have fallen in the intervening period, or that the interest rate in relation to the regulated mortgage contract would be lower, or both).
- (1)
In assessing whether the regulated mortgage contract is appropriate to the needs and circumstances of the customer for the purposes of MCOB 4.7.4 R(1)(b), a firm should give due regard to the following:
- (a)
whether the customer's requirements meet the eligibility criteria for the regulated mortgage contract (for example, the amount that the customer wishes to borrow, or the loan-to-value ratio);
- (b)
whether the customer should have an interest-only mortgage, a repayment mortgage, or a combination of the two;
- (c)
whether the customer has a preference for a particular term;
- (d)
whether the customer has a preference or need for stability in the amount of required payments, especially having regard to the impact on the customer of significant interest rate changes in the future;
- (e)
whether the customer has a preference or need for payments to be reduced at the outset (for example, a loan with an initial discount rate period);
- (f)
whether the customer intends to make early repayments; and
- (g)
whether the customer has a preference or need for any other features of a regulated mortgage contract (for example, payment holidays).
- (a)
- (2)
Compliance with (1) may be relied upon as tending to show compliance with MCOB 4.7.4 R(1)(b).
- (1)
MCOB 4.7.11 E(1)(b) does not require a firm to provide advice on investments. Whether such advice should be given will depend upon the individual needs and circumstances of the customer. Where considered relevant, MCOB 4 does not restrict the ability of an adviser to refer the customer to another source of investment advice (for example, where the adviser is not qualified to provide advice on investments).
- (2)
Where the scope of the advice provided is based on a selection of regulated mortgage contracts from a single or limited number of lenders,1 the assessment of suitability should not be limited to the types of regulated mortgage contracts which the firm offers. A firm cannot recommend1 the 'least worst' regulated mortgage contract where the firm does not have access to products appropriate to the customer's needs and circumstances. This1 means, for example, that a firm dealing solely in the sub-prime market should not recommend one of these regulated mortgage contracts if approached for advice by a customer with an unblemished credit record.
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- (1)
A firm should, out of all the regulated mortgage contracts identified as being appropriate for that customer, recommend the one that is the least expensive for that customer taking into account those pricing elements identified by the customer as being most important to him.
- (2)
Compliance with (1) may be relied upon as tending to show compliance with MCOB 4.7.4 R(1)(c).
- (1)
With regard to MCOB 4.7.13 E(1) different customers are likely to identify different pricing elements as being of most importance. For example, it may be the overall cost, the cost over the first five years, or the absence of early repayment charges that a customer considers most important.
- (2)
MCOB 4.7.13 E(1) does not prevent a firm from making a recommendation on other grounds. For example, it would be open to a firm to have regard to the speed or quality of service of different mortgage lenders, the policies of mortgage lenders on further lending or capital repayments, the underwriting stance of mortgage lenders or the customer's wish for a regulated mortgage contract that is compliant with Islamic1 law. The obligation to satisfy MCOB 4.7.4 R(1)(c) remains the same in such cases.
1 - (3)
If circumstances arise in which a firm has reasonable grounds to conclude that there are several regulated mortgage contracts that would satisfy the suitability requirement in MCOB 4.7.4 R, the firm will act in conformity with that rule if it recommends only one of those regulated mortgage contracts.
- (4)
If for any reason a customer rejects a recommendation made by a firm (for example, on the grounds that the mortgage lender selected is unknown to him), the firm can make a further recommendation (in accordance with the requirements of MCOB 4.7) where there remains a regulated mortgage contract that is appropriate to the needs and circumstances of the customer.
Rejected recommendations
- (1)
If a customer has:
- (a)
rejected all of the personal recommendations made by a firm and requested information instead on a regulated mortgage contract that the firm does not consider suitable (and therefore could not recommend to the customer in accordance with MCOB 4.7.2 R); and
- (b)
been issued with a new initial disclosure document in accordance with MCOB 4.4.1 R or MCOB 4.4.7 R;
the firm may be able to provide information on that regulated mortgage contract in the light of the information on which the personal recommendations in (1) were made.
- (a)
- (2)
If the firm needs to ask further questions regarding the needs and circumstances of the customer to be able to provide information on that regulated mortgage contract, the firm must obtain that information by asking scripted questions (in accordance with MCOB 4.8.1 R).
A firm may consider it prudent to record any cases where, after all personal recommendations it has made to a customer have been rejected, it changes the nature of the service it provides (as in MCOB 4.7.15 R) and provides the customer with information about a regulated mortgage contract.
Record keeping
- (1)
A firm must make and retain a record:
- (a)
of the customer information, including that relating to the customer's needs and circumstances, that it has obtained for the purposes of MCOB 4.7; and
- (b)
that explains why the firm has concluded that any personal recommendation given in accordance with MCOB 4.7.2 R satisfies the suitability requirements in MCOB 4.7.4 R(1). This explanation must include, where this is the case, the reasons why a personal recommendation has been made on a basis other than that described in MCOB 4.7.13 E(1).
- (a)
- (2)
The record in (1) must be retained for a minimum of three years from the date on which the personal recommendation was made.