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Status: You are viewing the version of the handbook as on 2005-06-30.

MCOB 8.5 Advised sales

Suitability

MCOB 8.5.1G

Principle 9 requires a firm to take reasonable care to ensure the suitability of its advice. In accordance with that principle, a firm should take reasonable steps to obtain from a customer all information likely to be relevant for the purposes of MCOB 8.5.

MCOB 8.5.2R

A firm must take reasonable steps to ensure that it does not make a personal recommendation to a customer to enter into a regulated lifetime mortgage contract, or to vary an existing regulated lifetime mortgage contract, unless the regulated lifetime 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).

MCOB 8.5.3R

In MCOB 8.5, a reference to a recommendation to enter into a regulated lifetime mortgage contract is to be read as including a reference to a recommendation to vary an existing regulated lifetime mortgage contract if the context so requires.

MCOB 8.5.4R

For the purposes of MCOB 8.5.2 R:

  1. (1)

    a regulated lifetime 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:

    1. (a)

      the benefits to the customer outweigh any adverse effect on:

      1. (i)

        the customer's entitlement (if any) to means-tested benefits; and

      2. (ii)

        the customer's tax position (for example the loss of an Age Allowance);

    2. (b)

      alternative methods of raising the required funds such as, in particular:

      1. (i)

        a home reversion scheme; or

      2. (ii)

        (where relevant) a local authority (or other) grant;

      are less suitable;

    3. (c)

      where the regulated lifetime mortgage contract requires that payments are made to the mortgage lender (for example an interest-only mortgage), the customer can afford to enter into the regulated lifetime mortgage contract;

    4. (d)

      the regulated lifetime mortgage contract is appropriate to the needs, objectives and circumstances of the customer; and

    5. (e)

      the regulated lifetime 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;

  2. (2)

    no recommendation must be made if there is no regulated lifetime mortgage contract from within the scope of the service provided to the customer which is appropriate to his needs and circumstances; and

  3. (3)

    if a firm is dealing with an existing customer in arrears and has concluded that there is no suitable regulated lifetime mortgage contract for the purposes of MCOB 8.5.2 R, the firm must nonetheless have regard to MCOB 13.3.2 E(1)(a), (e) and (f) (see also MCOB 13.3.4 G(1)(a) and (b)).

MCOB 8.5.5R

In determining whether MCOB 8.5.4 R(1)(a) applies, where a firm has insufficient knowledge of means-tested benefits and tax allowances to reach a conclusion, the firm must refer a customer to an appropriate source or sources such as the Pension Service, HM Revenue and Customs 1or Citizens Advice Bureau (or other similar agency) to establish the required information.

1
MCOB 8.5.6E
  1. (1)

    In determining whether MCOB 8.5.4 R(1)(b)(ii) applies a firm should:

    1. (a)

      establish, on the basis of information given by the customer about his needs and objectives, whether these appear to be within the general scope of a local authority (or other) grant (for example where the customer requires funds for essential repairs to his property); and

    2. (b)

      refer a customer to an appropriate source such as his local authority or Citizens Advice Bureau (or other similar agency) to identify whether such a grant is available to him.

  2. (2)

    Compliance with (1) may be relied upon as tending to show compliance with MCOB 8.5.4 R(1)(b)(ii).

MCOB 8.5.7R

If for any reason a customer:

  1. (1)

    declines to seek further information in accordance with MCOB 8.5.5 R or MCOB 8.5.6 E(1); or

  2. (2)

    rejects the conclusion of a firm under MCOB 8.5.4 R(1)(b) that alternative methods of raising the required funds are more suitable;

a firm can make a personal recommendation (in accordance with the remaining requirements of MCOB 8.5) where there isa regulated lifetime mortgage contract (or more than one regulated lifetime mortgage contract) that is appropriate to the needs and circumstances of the customer, but must confirm to the customer, in a durable medium, the basis on which the personal recommendation has been made.

MCOB 8.5.8R

In determining whether MCOB 8.5.4 R(1)(b)(i) applies, and in relation to MCOB 8.5.4 R(1)(d), a firm must consider:

  1. (1)

    whether the customer's requirements meet the eligibility criteria for the regulated lifetime mortgage contract (for example, the amount that the customer wishes to borrow, or the loan-to-value ratio) or a home reversion scheme;

  2. (2)

    the customer's preferences for his estate (for example, whether the customer wishes to be certain of leaving a bequest to his family or others);

  3. (3)

    the customer's health and life expectancy;

  4. (4)

    the customer's future plans and needs (for example, whether the customer is likely to need to raise further funds or is likely to move house);

  5. (5)

    whether the customer has a preference or need for stability in the amount of payments (where payments are required) especially having regard to the impact on the customer of significant interest rate changes in the future; and

  6. (6)

    whether the customer has a preference or need for any other features of a regulated lifetime mortgage contract or a home reversion scheme.

MCOB 8.5.9G

Where a firm sells only regulated lifetime mortgage contracts, MCOB 8.5.8 R does not require the firm to assess the suitability of individual home reversion schemes.

MCOB 8.5.10R

In relation to MCOB 8.5.4 R(1)(c), a firm must explain to the customer that the assessment of whether he can afford to enter into a regulated lifetime mortgage contract is based on:

  1. (1)

    current interest rates, which might rise in the future; and

  2. (2)

    the customer's current circumstances, which might change in the future.

MCOB 8.5.11R

In relation to MCOB 8.5.4 R(1)(c) and (d), where a firm makes a personal recommendation to a customer to enter intoa regulated lifetime 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 lifetime mortgage contract is suitable for the customer:

  1. (1)

    the costs associated with increasing the period over which a debt is to be repaid;

  2. (2)

    whether it is appropriate for the customer to secure a previously unsecured loan; and

  3. (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 lifetime mortgage contract.

MCOB 8.5.12E
  1. (1)

    In assessing whether a customer can afford to enter into a particular regulated lifetime mortgage contract, a firm should give due regard to the following:

    1. (a)

      information that the customer provides about his income and expenditure, and any other resources that he has available;

    2. (b)

      any likely change to the customer's income, expenditure or resources; and

    3. (c)

      the costs that the customer will be required to meet once any discount period in relation to the regulated lifetime mortgage contract comes to an end (on the assumption that interest rates remain unchanged).

  2. (2)

    Contravention of MCOB 8.5.12 E(1) may be relied upon as tending to show contravention of MCOB 8.5.4 R(1)(c).

MCOB 8.5.13G

A firm may generally rely on any information provided by the customer for the purposes of MCOB 8.5.4 R(1)(c) and (d) and MCOB 8.5.8 R(2) to MCOB 8.5.8 R(6) unless, taking a common-sense view of this information, it has reason to doubt it.

MCOB 8.5.14G

MCOB 8.5.4 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 intoa regulated lifetime 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 lifetime mortgage contract.

MCOB 8.5.15G

In complying with MCOB 8.5.4 R a firm is not required to consider whether it would be preferable for the customer to:

  1. (1)

    trade down (that is release funds by selling his existing property and purchasing a less expensive property) rather than enter into a regulated lifetime mortgage contract;

  2. (2)

    rent a property, rather than purchase one or enter into a regulated lifetime mortgage contract on his existing property; or

  3. (3)

    delay entering intoa regulated lifetime mortgage contract until a later date on the grounds that property prices would have changed in the intervening period, or that the interest rate in relation to the regulated lifetime mortgage contract would be lower, or both.

MCOB 8.5.16G
  1. (1)

    MCOB 8.5.4 R(1)(d) 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 8 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. (2)

    Where the scope of the advice provided is restricted (within the meaning of MCOB 4.3.1 R(1)(b) or (c)), MCOB 8.5.4 R(2) means that the assessment of suitability should not be limited to the types of regulated lifetime mortgage contracts which the firm offers.MCOB 8.5.4 R(2) prevents a firm recommending the 'least worst' regulated lifetime mortgage contract where the firm does not have access to products appropriate to the customer's needs and circumstances. It means, for example, that a firm dealing solely in the sub-prime market should not recommend one of these regulated lifetime mortgage contracts if approached for advice by a customer with an unblemished credit record.

MCOB 8.5.17E
  1. (1)

    A firm should, out of all the regulated lifetime 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. (2)

    Compliance with (1) may be relied upon as tending to show compliance with MCOB 8.5.4 R(1)(e).

MCOB 8.5.18G
  1. (1)

    With regard to MCOB 8.5.17 E(1) different customers are likely to identify different pricing elements as being of most importance. For example, it may be the overall cost, a fixed or capped rate of interest, the inclusion of a 'no negative equity' guarantee, or the absence of early repayment charges that a customer considers most important.

  2. (2)

    MCOB 8.5.17 E(1) does not prevent a firm from making a recommendation on grounds other than price. 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 lifetime mortgage contract that is compliant with Sharia law. The obligation to satisfy MCOB 8.5.4 R(1)(e) remains the same in such cases.

MCOB 8.5.19G
  1. (1)

    If circumstances arise in which a firm has reasonable grounds to conclude that there are several regulated lifetime mortgage contracts that would satisfy the suitability requirement in MCOB 8.5.4 R, the firm will act in conformity with that rule if it recommends only one of those regulated lifetime mortgage contracts.

  2. (2)

    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 8.5) where there remains a regulated lifetime mortgage contract that is appropriate to the needs and circumstances of the customer.

Rejected recommendations

MCOB 8.5.20R
  1. (1)

    If a customer has:

    1. (a)

      rejected all of the personal recommendations made by a firm and requested information instead on a regulated lifetime mortgage contract that the firm does not consider suitable (and therefore could not recommend to the customer in accordance with MCOB 8.5.2 R); and

    2. (b)

      been issued with a new initial disclosure document in accordance with MCOB 4.4.1 R or MCOB 4.4.7 R (as modified by MCOB 8);

    the firm may be able to provide information on that regulated lifetime mortgage contract in the light of the information on which the personal recommendations in (1) were made.

  2. (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 lifetime mortgage contract, the firm must obtain that information by asking scripted questions (in accordance with MCOB 4.8.1 R and MCOB 8.6).

MCOB 8.5.21G

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 8.5.20 R) and provides the customer with information about a regulated lifetime mortgage contract.

Record keeping

MCOB 8.5.22R
  1. (1)

    A firm must make and retain a record:

    1. (a)

      of the customer information, including that relating to the customer's needs and circumstances, that it has obtained for the purposes of MCOB 8.5; and

    2. (b)

      that explains why the firm has concluded that any personal recommendation given in accordance with MCOB 8.5.2 R satisfies the suitability requirements in MCOB 8.5.4 R(1). This explanation must include, where this is the case, the reasons why a personal recommendation has been on a basis other than that described in MCOB 8.5.17 E(1).

  2. (2)

    The record in (1) must be retained for a minimum of three years from the date on which the personal recommendation was made.