The brother in the flat: regulated or not?
Dan and Priya, a married couple, apply through a two-adviser firm for a £310,000 first-charge loan on a two-bedroom flat in Leeds. They will keep living in the house they own in York. Dan's brother, aged 24, will move into the flat at completion and pay £1,250 a month in rent, which covers the proposed mortgage payment. The purchase price is £400,000 and the couple's combined salary is £72,000. The firm's compliance officer has logged the case as buy-to-let and plans to process it as an execution-only sale with no affordability assessment, on the basis that the borrowers will not live in the property and the rent covers the payment. Dan and Priya have said they do not want advice, only 'the cheapest five-year fix'.
1. Is this a regulated mortgage contract? Set out the test and what follows for the way the firm must handle the case.
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The test. A regulated mortgage contract requires (i) credit to an individual, (ii) a first legal charge on land in the UK, and (iii) at least 40% of that land used, or intended to be used, in connection with a dwelling by the borrower or a member of the borrower's family. A brother falls within the family definition used for this purpose.
Application. The flat is 100% residential and will be occupied by Dan's brother from completion, so the 40% limb is satisfied. The loan is therefore regulated, notwithstanding that this is economically a 'let'. The compliance officer's classification is wrong.
Consequences.
- MCOB applies in full: initial disclosure, an ESIS, and an assessment of affordability under the MCOB 11 lending rules, taking account of the borrowers' commitment to their York home, the mortgage on it and the risk that the rent stops.
- The buy-to-let execution-only route does not exist here. Execution-only sales of regulated mortgages are confined to narrow circumstances; 'it is let out' is not one of them.
- The lender, not the broker, bears the affordability obligation, but the adviser must still gather and accurately submit the income and expenditure information and must not present the case as an unregulated BTL.
2. Dan and Priya have asked for no advice. Can the firm rely on that and proceed execution-only?
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No. A customer's request for 'no advice' does not create an execution-only permission.
- Execution-only is available only in the specific situations the rules allow. Letting to a family member does not fall within any of them; the closest, the buy-to-let exclusion, presupposes an unregulated contract, which this is not.
- The practical answer is to give advice or a recommendation, having established the couple's needs and objectives (including what happens if the brother stops paying, and their exposure to two properties), or to decline to act.
- If the customers refuse to provide the information needed to assess suitability, the firm should document the refusal and consider whether it can act at all. A file note recording an insistence on execution-only is evidence of a breach, not a defence.
- Record keeping matters: the FCA will look at the reason why the sale was not advised and at whether the customer understood the risk being taken on.
3. The firm wants to charge a £475 fee on application. What must be disclosed, when, and does regulated status change the position?
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Timing. Disclosure must come at the earliest opportunity, and in any event before the firm provides the service and before the customer is committed to paying. A fee cannot be taken first and explained afterwards.
Content. The initial disclosure must state the amount, when it becomes payable (application or completion), whether it is refundable, how it is paid, and that it is a fee for the firm's services rather than the lender's. The figure must also appear in the ESIS tariff so the customer sees total cost, including any lender product fee and valuation fee, in one place.
Effect of regulated status. Because this is a regulated contract, the full MCOB disclosure set applies: initial disclosure, an ESIS before the customer is bound, and a clear explanation of whether the firm is offering a single-tied, multi-tied or whole-of-market service. On an unregulated BTL the disclosure burden would be lighter but the fee would still have to be agreed in advance. Charging a fee and then giving no advice would compound the earlier problem: the customer is paying for a service they are not receiving.