Arranging your mortgage is one of the most important financial decisions you make. So it may come as a surprise to learn that mortgage advisers are one of the few groups of industry 'experts' not regulated. This is set to change from 31 October when they will be policed by finance watchdog the Financial Services Authority (FSA) which already oversees pensions and investments. And the Hallowe'en deadline is no trick or treat. Ducking out is not an option as it will be illegal for any firm not authorised by the FSA to offer mortgage advice. In addition, regulated mortgage brokers will face fines if they give poor advice, knowingly allow borrowers to take on too much debt or fail to explain charges.
The FSA's mortgage regime is designed to deliver better protection for borrowers over the entire life of their mortgage. It is based on the principle that firms must treat their customers fairly. Advisers will have to provide clear, comparable information about the service they are providing and the mortgage itself and when giving advice, identify the mortgage which best fits their customers' needs. Crucially, they will have to consider the customer's ability to repay the loan before making a recommendation.
All of which comes not a minute too soon for campaigners at the Consumer Association whose magazine, Which?, has just published the shocking results of an undercover investigation into mortgage advice. Seven researchers posing as first-time buyers visited 39 branches of high-street lenders and estate agents. These were Abbey, Barclays, Bradford & Bingley, Connells, Halifax, HSBC, Lloyds TSB, Mann Countrywide, Nationwide, NatWest, Northern Rock, Sequence, Spicerhaart, Team and Your Move plus seven independents. A mere three out of 39 advisers gave acceptable mortgage advice.
Coded message
Until the rules change in October, mortgage advisers can volunteer to abide by the Mortgage Code, designed to protect consumers from bad mortgage advice. It sets out three categories of advisers and requires them to state which type of advice they are offering and what it means. However, in a flagrant disregard for the code, Which? found that seven advisers didn't mention it and 14 skimmed the details or gave misleading information. In addition, 21 advisers failed to properly explain the ways to repay a mortgage and 23 didn't clarify the different deals available. Some advisers working for high street names, such as Abbey, Halifax, HSBC, Lloyds TSB, NatWest, Nationwide and Northern Rock, didn't make it clear that they could only recommend their own companies' mortgages, although the code says they must disclose this.
While some so-called independent advisers made a big deal out of saying they could 'search the entire market' for mortgages, they were less vocal about being tied to one company for protection insurance. Selling protection insurance (which pays commission) was a bigger priority than giving mortgage advice for some, with one independent adviser incorrectly claiming it was recommended by all lenders. 'Some of the bad advice we received was down to inexperience and poor training,' says Which? editor Malcolm Coles. 'Regulation won't solve these problems, though it should mean advisers become more accountable. Bad mortgage advice can cost you thousands of pounds or - even worse - your home. Consumers deserve better. We'll be keeping an eye on the situation.'
What kind of expert?
More and more borrowers are now logging on to specialist websites and side-stepping the advice process altogether. But buying through an adviser requires just as much homework. It is worth remembering:
• Mortgage advisers can sell the products of just one lender, those of several lenders or be completely independent and shop around the whole market when searching for the best product for you. Some mortgage advisers also give advice about investments - for example, using an endowment policy or an ISA to repay an interest-only mortgage. They must either stick to just one investment provider or be able to look at the whole investment market, regardless of how many lenders they look at for the mortgage part of the deal. Ask to find out which they are.
• Find out whether your adviser charges a fee or earns commission on the mortgage you buy. Brokers who choose to remain fee-free and continue to make their money through commission will be unable to call themselves independent as of October 31.
• Don't feel embarrassed about asking questions until you understand exactly what you are buying and how it will work for you. A professional adviser with nothing to hide will happily answer all your questions.
FSA: What should a mortgage adviser do?
Mortgage advisers and lenders are currently not authorised by the FSA for advising on mortgage loans. Check if they have agreed to follow the rules of the Mortgage Code. You can check if they are registered under the Mortgage Code by calling the Mortgage Code Compliance Board on 01785 218 200 or by emailing enquiries@mortgagecode.org.uk.
If so they should:
Tell you what level of service is available:
• advice and recommendation
• information about the range mortgages of they offer
• information about a single mortgage.
(If you select advice and recommendation), help you to choose a mortgage suitable to your needs and circumstances.
Confirm in writing the level of service given.
Tell you whether they are agents for lender(s) or acting for you.
Tell you how many lenders they normally look at.
Tell you if they'll get commission for arranging your mortgage and, if it will be £250 or more, how much.
Tell you about charges for any other service.
Even if they haven't followed the rules of the Mortgage Code you should still ask for the same treatment and details.
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