The Office of Fair Trading will close its doors come March 31 and from April 1, the second charge mortgage market will be regulated by a larger more rigorous organisation, in the shape of the Financial Conduct Authority.
The transition from the OFT to the FCA is just the first step that the second charge mortgage market will take on the road to its new regulatory world. The main event will happen in 2016 when the European Mortgage Directive is implemented and the final rule book for the sector is confirmed.
This however doesn’t mean that the sector can sit back and relax as April 1 approaches, because the FCA will place a lot more demands on brokers and lenders. Loan Introducer has spoken to several firms to find out what changes they have made in order to prepare for the FCA.
Firstly, Robert Sinclair, chief executive of the Association of the Finance Brokers, offers his advice to firms:
“The move to the FCA introduces consumer credit firms to the 11 core principles that under-pin all the supervisory work that is undertaken. All firms should be reviewing their business models, practices and procedures to ensure they comply with these principles.
For most firms this is no different to the rules that were in the Consumer Credit Act, however the focus on what is in the best interest of customers is escalated and with increased supervisory capacity, firms will need to adhere to these principles.
The other main change will be having management information that is reviewed to ensure that firms are treating customers fairly. AFB has issued fact-sheets to its members to assist in this, and these are probably worth the first year’s membership fees on their own.”
Steve Walker, managing director, Promise Solutions:
“We have been expecting FCA regulation for some time, so it is more a case of fine tuning our business than making any big changes.
Since 2005 we have been developing our technology and systems to enable us to sell secured loans in a more transparent and fair way, and to give customers all of the information they need at point of sale in order to make the right choices.
A lot of what the FCA requires us to do around disclosure, transparency and TCF we already do. It should be embedded into all brokers’ businesses, but now it is about making sure it’s more visible. We have made a number of changes to our sourcing system which will make it easier for us to evidence this.
For example, we can now source not just which lender has the cheapest rate but how this compares to other lenders when costs such as lender fees are taken into account over the life of the loan. We are now licencing this system out to other loan packagers. Introducers can use the system free of charge.
We have also recently built in compliance triggers, so advisers can tick a box as they go along to show they have raised certain issues with the client, such as lending into retirement.
Matt Tristram, co-founder and director, Loans Warehouse:
“Having been trading for nearly eight years, Loans Warehouse was originally directly authorised by the Financial Services Authority for both general insurance and mortgages and we therefore have always had the mind-set of a regulated company, even after we de-authorised ourselves.
The main changes we have made have been to ensure that our recording systems and procedures are robust enough for a more hands-on regulator.
It’s been refreshing to have taken a step back to review how we work as a business and how we will work under the FCA. It’s an on-going process which will undoubtedly continue to evolve over the coming months and years as the regulator finalises the rules and regulations that are going to be applied to the secured loan industry. So watch this space.
Additionally, as a lot of our business is introduced, it’s been key to ensure that the wider financial community, of which our introducers are part of, have been aware of the requirement to replace their OFT Consumer Credit Licence with the relevant interim permissions by March 31 2014. A lot of our partners already operate in the regulated arena, so secured loans becoming FCA regulated will actually make them a more natural fit.
Sam Busfield, co-founder and director, Clearly Loans:
“Being such a new entrant to the secured loan market, Clearly Loans was set up to operate under FCA regulation.
The policies and procedures were already in place at launch so the only major changes are to the administration side of things, including updating stationery to ensure compliance under the new regime.”
Tim Wheeldon, managing director, Fluent Money:
“A lot of the requirements of the FCA we cover already. As a firm we have always treated customers fairly so the FCA principles have been more of an affirmation that we do.
It’s about going back over the business and looking at when we did something, which principles we were applying without realising it – so more a positioning of ourselves back into the principle.”
Robert Owen, chief executive, Central Trust:
“The FCA has taken a great deal of time and effort to understand the industry and in CONC (the consumer credit sourcebook) it has come up with a sensible solution until a different regulatory regime is implemented with the Mortgage Credit Directive in 2016. Therefore, any changes required on April 1 2014 are limited in nature for any business that has experience of working in an FCA regulatory environment. For Central Trust the main change is likely to be in the area of regulatory reporting. We already have experience of operating under PRIN, SYSC and GEN and always took the OFT Guidelines in the spirit that they were intended.”
Barney Drake, director, Y3S Group:
“FCA regulation is all about putting the consumer at the heart of your business from the start to the finish of every sales process and that is something that all of the credit brokers in the market do already. We are an industry that offers good advice and service but as we move into FCA regulation this will need to be evidenced.
We have call recording in place so that helps us hugely because we can historically monitor calls when quoting customers and giving advice. It also allows our compliance team to go back through historic cases and assess people and identify training needs.
The big issue for the industry at the moment though is that come April 1 firms need categories C, D and E of the FCA’s consumer credit licence categories. Around two in three second charge brokers do not have D and E, and if you don’t have these you can’t provide debt counselling advice.
This means that if a customer comes to you and says ‘I want to borrow money for home improvement’ and you do a credit search and discover unsecured debt, firms without D and E won’t be able to advise customers to take out a loan to consolidate the debt and save themselves some money, which is something the industry does on a daily basis. The lack of these categories is a real issue at the moment and we are speaking to competitors we believe don’t know about this.”
Paul Brett, sales director, secured loans, Masthaven Secured Loans:
“Masthaven Secured Loans is one of the few lenders in the secured loan market which is already FCA regulated. Therefore as a regulated lender we have been complying with the FCA regime together with CCA regulation on a day to day basis anyway. Because of this we are in the fortunate position not to have to make many fundamental changes in how we operate. The main logistical change for us is amending our documentation to reflect the new regulation.”