The Financial Conduct Authority is no longer investigating second charge mortgage firms over their unaffordable lending practices, according to the Finance & Leasing Association.
In April this year, the FCA revealed in its 2019-20 Business Plan that it was concerned that some second charge and sub-prime lenders were profiting from customers who struggle to repay their loans.
It stated at the time: “In recent years we have introduced measures to help consumers in markets with a high incidence of poor value products, services or treatment of those in financial difficulty.
“We are concerned that the business models of some retail lending products, including some sub-prime credit and second charge mortgage products, are designed to benefit from consumers not repaying their debts.”
It said for example, firms making a profit from consumers who do not or cannot repay in full and on time.
In its annual review it said it would be carrying out work to identify these business models and the consequences for consumers to identify what action it may need to take.
Stephen Sklaroff, the departing director general of the Finance & Leasing Association however, said the regulator has backtracked on this and when it released its ‘Ongoing work in the consumer credit sector’ briefing this July, it removed the reference to second charge mortgage firms after a challenge from the FLA.
He said: “There was a very strange assertion in the FCA’s recent business plan, which we challenged vigorously.
“As a consequence of that the wording they used about potential difficulties in the second charge market was removed from its websites on the grounds that there wasn’t much factual back-up to what they had said.”
Although the wording still exists in the business plan, in its recent ‘ongoing work in the consumer credit sector’ briefing, it has omitted any reference to the second charge market and instead said:
“We are concerned that the business models of some retail lending products, including some sub-prime credit, are designed to benefit from consumers not repaying their debts in full and on time.
“We will carry out diagnostic work, including consumer research, to identify these business models and consider what action we may need to take.”
Sklaroff said: “The FCA’s business plan I think was accidental wording, a sort of typo.
“It mentioned second charges and we said ‘oh really, what concerns do you have about second charge mortgages?’ to which no answer was forthcoming and in the end it removed the wording from its website.”
Sklaroff says sub-prime business only makes up around 15% of the second charge mortgage market.
Speaking about his last 12 years at the FLA, Sklaroff said one of the biggest challenges has been the crossover of regulators from the Office of Fair Trading to the FCA for the second charge market.
“The challenge is not regulation in itself but the pace of change,” he said. “Since 2014 when the consumer credit market came under the FCA, it’s safe to say there has not been a week when there hasn’t been a new proposal of one sort or another from the FCA which has affected one of our markets. It’s that pace of change which is the bigger challenge, rather than regulation itself.”
He added: “We need to look forward to the day when the regulatory system reaches a kind of steady state and the pace of change diminishes somewhat, particularly for smaller and medium sized lenders because they are less set up to deal with the cost of these things.”
He concluded by adding that the trade body’s close relationship with the FCA and other regulators had enabled it to avoid quite a few unintended consequences along the course of regulation.
Overall, he said he feels the second charge market is in a good position and has adapted well to the new regulatory regime.
The FCA has been contacted for comment.