Mortgage debt consolidation – what constitutes advice?

Two significant recent changes in regulation mean that many firms involved in debt consolidation now find themselves carrying out activities without the correct permissions.

On 21st March 2016 the regulatory status of mortgages and secured loans became common. Both are now treated the same and subject to the European Mortgage Credit Directive. This is the first time in history that this has been the case and has ramifications in consideration of the type of activity a firm undertakes. In addition the new FCA consumer credit regime means that firms must be authorised to give advice to customers. Previously for a firm to offer debt consolidation advice, including that related to mortgages, they would not typically have needed specific authorisation.

When looking to re-mortgage or change lender consolidating a customer’s unsecured debts can be a beneficial option. However while this can help to overcome short-term affordability difficulties it is not suitable for all customers. Reducing monthly payments may result in paying back more in the long run and as it frees borrowing potential customers can be inclined to take on even more debt. Furthermore borrowing against property value increases LTV and is likely to result in higher repayments when a new mortgage is needed later. Mortgage debt consolidation can become a dangerous trap allowing customers take on more and more debt. Consideration must be made of the total amounts payable, the circumstances that have led to indebtedness and whether there is an underlying issue of financial difficulty.

For most mortgage lenders and brokers it is common to encounter situations where mortgage related debt consolidation is an appropriate and beneficial option for the customer. However advising and facilitating such a course of action is considered to be a credit-related activity and therefore subject to FCA guidance within PERG 2. An example of this is would be a broker recommending that a customer consolidate only certain unsecured debts into a regulated mortgage contract. Even making the customer aware that this option is available to them constitutes giving debt counselling advice for which specific authorisation is required.

Firms should review their permissions to ensure that they are covered for the activities they undertake. These permissions, if not held, can be applied for by through the FCA Online Connect portal.

If you are in anyway uncertain of your current position you can get in touch with CCAS. We can help ensure you have the correct measures in place.

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