FT Adviser – Changes to Regulation of Second Charge Mortgages

Historically, second charge mortgages were regulated by The Office of Fair Trading, but as of 1 April 2014 regulation passed to the Financial Conduct Authority, which took up the consumer credit element of the now disbanded body.

Matt Tristram, owner and co-founder of Loans Warehouse and Clearly Loans, says the industry is currently in an interim permission period, with full regulation being implemented over the next 18 months.

This will mean that for the first time, both first and second charge mortgages will fall under the same regulator. Mr Tristram claims this will lead to greater awareness, competition and an increase in available products.

Moreover, a consultation paper published in September proposed moving the regulation of second charge loans from the consumer credit regime into the main mortgage regime, as well some changes overall to bring UK rules into line with the European Mortgage Credit Directive.

Steve Walker, managing director of Promise Solutions, says this would require all mortgage brokers to become conversant in offering secured loans.

While it seems they can opt out of secured loans by informing borrowers that “a second charge or unsecured loan may be more appropriate”, he adds that if they choose not to offer these loans they run the risk of losing that client to a rival or an online comparison website.

He says: “Brokers also should adopt a consistent approach to secured loans which means considering a loan every time – not just when it suits them, or when a case has been declined by a first mortgage lender.

“With first and second charge loans regulated in the same way brokers must act in the customer’s best interest and abide by TCF, so it is inevitable that both products must sit side by side in the mortgage broker’s tool kit.”

He adds: “Mortgage networks have integrated secured loans into the remortgage sales process which should encourage directly authorised advisers to follow suit. This approach seems inescapable if brokers are to demonstrate they are adhering to the FCA principles and delivering the best customer outcomes.”

Importantly Mr Walker says brokers should not delay until the new rules come out in 2016.

“Most prudent businesses have been amending their process to ensure they comply by October 2014 and mortgage networks which are offering a secured loan solution to appointed representatives are insisting that each remortgage sale is backed up with evidence that a secured loan has been considered and offered where appropriate.”

He also said the move to the main mortgage regime, which has been toughened in terms of the advice process and affordability tests since the MMR came into effect, will make the process of applying for and securing second charge loans more arduous.

“Something brokers and loans customers will find in common is that the process of getting a loan, especially an initial quote they can rely on, will become much more long winded due to the prescriptive nature of the advised process and the complexity of each lenders affordability calculations.

“What do brokers assess first – lender affordability or lenders risk criteria? It may not have been perfect but with simple multiples or debt to income ratios it was easy to identify possible lenders.

“Now it is very complex if a broker is truly to give best advice. Clients considering a secured loan as an alternative to unsecured borrowing will be in for a shock and may baulk at the number of additional hoops they will be required to jump through to get a secured loan.”

In practice

Mr Walker explains the main things advisers need to know about what the FCA is proposing for second charge mortgages is that they can apply from 1 April 2015 for mortgage permissions.

Firms with an earlier landing slot than this date will need to still apply for Consumer Credit Permission, if they are still going to operate in these markets, such as credit broking for buy-to-let.

He says they may also need to change the application ‘in flight’ for mortgage authorisation. The FCA may provide further information on this issue within the next two months.

He adds the sales process is where we will see changes, but “for most firms with the right advice they should not be over complicated.”
Mr Walker says: “Service disclosure documents [will be required] covering the scope of service and remuneration and that there are a range of alternate borrowings available such as further advance from the existing lenders as well as unsecured borrowing, etc.

“This as a consumer education aide and not something brokers must comment on the appropriateness of. This would have been a massive issue.

“Product disclosure or the new ESIS document, would be similar to how lenders operate in the first charge when producing KFIs. Adequate explanations, could be scripts or in writing.

“The offer would become binding and subject to a ‘consideration period’ of seven days – this ends when the client signs it and sends it back. We are used to this in second charges. First charges will need to get used to this new requirement.”

On affordability, Mr Walker says clients will need to be informed of what is required for the ‘new’ affordability assessments, that now mirror first charges as will ‘stress testing’ that will look at the first and second charge.

He says: “We can only hope lenders have learnt the lessons from when MMR went in, with the amount of concern the FCA has raised with lenders going too far here.
“We are mindful that the FCA are saying that levels of borrowing could be up to 20 per cent down and 17 per cent of clients will no longer be able to get a loan.”

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