FSA Rules and High Net Worth Mortgages

The Financial Services Authority (FSA) last year conducted a review of the current mortgage market. The FSA's Mortgage Market Review (MMR) was published in 2012 and contains many proposals which will alter the way the UK's mortgage market operates in the future.

One key part of the Mortgage Market Review concerns the mortgage and lending rules for high value mortgage clients. The FSA are determined to ensure that high net worth finance clients with large mortgages are treated differently to those with more typical levels of mortgage.

The MMR contains several specific recommendations, such as the fact that high value mortgage clients will be able to opt out of advice as discussed below.

The headline of the FSA's Mortgage Market Review is that the income limit of a 'high net worth' mortgage customer has been cut from £1million to £300,000.

In its consultation paper in 2011, the FSA defined a high net worth mortgage borrower as someone with a minimum annual net income of £1 million and net assets of £3 million. The regulator also proposed that high value mortgage clients could opt out of advice, take out a large mortgage on an interest only basis and it provided for a tailored approach to disclosure.

Furthermore, the FSA's definition of a high net worth mortgage client is also different to the definition that the regulator put forward in its consultation paper on unregulated collective investment schemes in August 2012. In that paper it defined 'high net worth' as anyone with net income of £100,000 and net assets of at least £250,000. The FSA has, however, now chosen to apply a different definition of 'high net worth' in the mortgage market.

In the final rules the review recognises that there is a very small subset of genuinely wealthy customers, whose wealth is significantly above average and that this level of wealth gives these customers specific advantages, in particular, a considerably reduced risk of becoming homeless in the event that they experience financial difficulties. The high net worth definition specifically for mortgages is, therefore, intended to target only the most wealthy minority.

The rules also mean that individuals and entrepreneurs can opt out of advice in favour of an 'execution-only' sale. To qualify for this exemption, clients must confirm in writing that they have been made aware of the consequences of losing the protection afforded by an advised sale and have chosen to proceed on an execution-only basis.

Lenders still have to assess the affordability of high net worth mortgage customers and obtain evidence of income when assessing their affordability criteria and experts still strongly advise everyone to speak to a professional mortgage adviser before taking out a large mortgage. However, mortgage experts are pleased that the FSA understand that high value mortgage clients have different needs and that rules governing typical mortgage lending will not necessarily apply to people with very large mortgages. High net worth clients often have complex income or ownership structures and a 'one size fits all' approach to the mortgage market clearly would not have worked for these clients.

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