There have been numerous warnings of late from the industry’s new regulator – the Financial Conduct Authority – concerning firms operating in the consumer credit sector and loan market without authorisation.
But is there really a problem in the second charge market with firms operating without interim permission, or could there be another explanation as to why so many firms appear to be unauthorised?
In April 2014 the FCA wrote to approximately 17,705 consumer credit firms who had previously held an Office for Fair Trading licence but had not applied for an FCA interim licence for consumer credit activities.
This included 2,356 firms that had told it they intended to seek interim permission but had not done so, and 15,349 firms that didn’t respond and subsequently did not apply for it.
The FCA wrote to the firms to tell them to stop carrying out any consumer credit activities.
The figures may sound startling but a spokeswoman for the FCA says approximately 49,500 firms currently hold interim permission and it calculates that only around 51,500 need an interim permission – representing a shortfall of around only 2,000.
The rest will have either left the industry or decided to stop offering consumer credit services.
So who are the 2,000 firms not operating without a licence and is it anything the second-charge industry should be worried about?
The FCA does not break the figures down in terms of how many firms are carrying out second charge lending activities, but a substantial number of the firms on the FCA’s unauthorised firms list have company names that suggest they are offering some kind of loan products.
Robert Sinclair, chief executive of the Association of Finance Brokers, says: “Any business that is foolish enough to operate without the correct authorisation is running a significant risk.
“But I doubt many firms are, because lenders will not want to be doing business with people who do not have their permissions in place.”
The structure of the second charge market would make it very hard for an unauthorised broker to slip through a lender’s net, as most lenders only operate through a specific panel of brokers who are pre-vetted.
Barney Drake, group operation director at Y3S, says he has not come across any unauthorised businesses.
“I don’t have any knowledge of illegally trading businesses but it is comforting to see that the FCA has measures in place to monitor this and can effectively publicise its zero-tolerance attitude,” he says.
Is it a Problem?
So what could be behind the high number of firms who have not renewed their OFT licence?
Steve Walker, managing director of Promise Solutions, says there are definitely mortgage brokers out there who have not renewed their licence, but this is through a misunderstanding of the rules instead of a deliberate attempt to breach them.
He says: “Certainly there are brokers that we are talking to that haven’t applied for their interim licences and are now realising the impact that has had. A lot of them thought they could still introduce second charge business to us but they can’t.
“Some brokers were relying on their networks to sort it out for them and that hasn’t happened for whatever reason so they are effectively out of the market.”
Bradley Moore, director and head of second charge loans at Brightstar Financial, also believes it is a case of some brokers having been caught out.
“Some firms have unfortunately not understood the process,” he says.
“It may well be the case that they have worked with a master broker and wish to continue to do so. I’m sure some master brokers will be finding it difficult to turn the business away but it is short sighted not to do so and that kind of practice is simply asking for trouble.”
However he says most lenders seek a copy of the sub-brokers permissions which helps to flag up and remove any unauthorised activity.
Drop in Business
The lack of authorisation among some firms in the second charge market could also explain a drop in lending that the industry experienced in April – its first month under the new regulator.
According to figures from Loans Warehouse, second-charge lending in April saw a decrease of 12.15% compared to March, with gross lending of £49,531,281.
Moore believes the lack of authorisations could go some way in explaining the slight dip.
He says: “I know the published statistics showed a dip in activity but I certainly didn’t see it within Brightstar’s second charge division. My gut feeling is any dip in April that others felt could be attributed to a significant proportion of brokers not taking up interim permissions.
“Many were of the belief that this would be covered under their networks but this was not the case, although it is likely to be once they have their full authorisation.
“Some however will have taken the decision that this is a space that they do not want to involve themselves in any longer and that in my opinion is a very dangerous game to play for obvious reasons.
“For those who do have permissions however and understand when a second charge is a viable option, there is an opportunity to take up the slack left by others.”
There will always be firms in any sector that attempt to operate illegally and not abide by the book. The warnings from the FCA may appear to suggest there is a problem with firms operating without authorisation in the loan sector but a more rational explanation could be that a large number of firms have either left the industry or have intentionally or mistakenly not renewed their licence.
Now the process is underway for firms to apply for full authorisation, those that missed the boat the first time round have the chance to re-apply.
If second charge firms know of brokers who fall into this category it would be worthwhile to hammer home to them the merits of a consumer credit licence and why it’s advisable for mortgage brokers to hold one as part of their duty to treat customers fairly and recommend the most suitable product.