The Financial Conduct Authority published its latest proposals for the regulation of consumer credit at the beginning of October – but anyone hoping to get more clarity about how the new secured loan regime will work has been left disappointed.

The paper – CP13/10 ‘Detailed proposals for the FCA regime for consumer credit’ grabbed the headlines as it also outlines tougher rules for payday loan firms, who are subject to the Consumer Credit Act.

But those in the second charge loan market are still in limbo regarding what the new rules for the sector will look like.

The sector may not yet know what the rules will consist of, but one thing is for certain – they are going to cost.

The paper estimates that the transfer of regulation from the Office of Fair Trading to the FCA in April 2014 will cost the industry a one-off cost of between £1.1m and £3.7m, with lenders paying an additional £1m in costs every year, so isn’t it about time the industry had some detail?

In the dark

Robert Sinclair, chief executive of the Association of Mortgage Intermediaries and the Association of Finance Brokers, says he was not surprised at the lack of information in the document.

“I was hoping there would be more detail but we expect all of the stuff on seconds to come as a separate consultation paper later, once we know how it will tie in with what is happening with the European Mortgage Directive,” he says.

The directive is due to be voted on later this year.

Sinclair hopes to have some detail about the new regime for secured loan firms by the middle of next year and he anticipates it will be in place by the end of 2015.

The consultation paper did however shed some light on what will be expected of firms during the interim regulatory period – which is expected to last for around two years from April 2014.

During this period firms will not be expected to comply with the additional reporting requirements.

The FCA says it is proposing to reduce the reporting requirements on firms providing second charge loans, to ensure budgets are kept to a minimum during the interim period.

In its consultation paper, the FCA, states: “We are proposing that other firms will not have to report data to us regarding their second charge loans (other than in respect of complaints for firms once fully authorised), to minimise burdens on the firms in the interim period until the Mortgage Credit Directive is implemented.”

However it says it may make ad-hoc data requests to second charge firms where it feels it is necessary. It will revisit and consult on the routine reporting requirements for second charge firms as part of the longer-term regime.

The cost

It is perhaps not surprising that the FCA is looking to keep down costs for those in the secured loan sector – as it estimates that one-off costs, excluding  fees, for second charge mortgage lenders are at between 1.4% and 4.9% of turnover and on-going costs at about 1.5% of turnover.

To estimate the costs to the second charge industry it has used the figures form the Finance and Leasing Association, which estimates that there was £326m of new second charge loans granted in the year to December 2012.

In its consultation paper, the FCA states: “Scaling this up, we estimate total new advances in 2013 to be about £383m. Assuming conservatively that 20% of new advances represent industry turnover, we estimate one-off costs (excluding fees) on second charge lenders of between £1.1m and £3.7m and estimate ongoing costs (excluding fees) of about £1.1m per year.”

The FCA however says the cost estimates should be considered slight over-estimates in that it is proposing not to apply the reporting requirements to second charge lenders.

Sinclair disagrees though and thinks to estimate that the one-off cost could be £1.1m is a gross underestimation.

“I think it will be a bit more than that (£1.1m) – the FCA is underestimating. Remember this is the regulator which said Payment Protection Insurance compensation would be around the £6bn mark and we are now at £14bn and counting. The argument that the FCA will have is that that cost will come from implementing the directive, but that is just total fallacy,” he says.

“I think there are significant costs here that both the regulator and lenders will have to think about carefully,” he adds.

Fiona Hoyle, head of consumer finance at the FLA, says the transfer of regulator will inevitably result in higher regulatory costs across the sector.

But she says: “The challenge will be to introduce a proportionate regime which ensures the supply of responsibly provided second charge lending remains.”

Dual regulation

The FCA is expected to release a further consultation paper in the coming months on regulatory fees, including authorisation fees for consumer credit firms and how it proposes to calculate periodic fees.

Sinclair is calling for the removal of the need for mortgage brokers to hold both a Consumer Credit Licence and their mortgage licence.

As it stands, any broker who talks to their client about unsecured debt but does not sell products that fall under the CCA needs to hold a separate authorisation, alongside their mortgage one.

“If everyone is coming under FCA regulation, it seems silly for everyone to hold a licence for unsecured credit when you are not doing unsecured credit, just making a judgement as to whether paying back that unsecured credit is in the customer’s best interests and that’s already covered within Mortgage Conduct of Business rules,” says Sinclair.

The FCA is already proposing that where a broker is an appointed representative of a network, it would be possible for the network to hold a licence and for the broker to exist under a global licence. Sinclair says AMI welcomes this but says it wants the FCA to go one step further and remove the need for there to be two licences altogether.

Richard Adams, managing director of Stonebridge Group, says firms already have to deal with a range of regulatory burdens and responsibilities and there should be a process where the regulator can commit to make the system less cumbersome and more firm-friendly.

“The long and short of it is if the CCL is coming under the remit of the FCA why is a separate license needed at all? The FCA already has a system of authorisation and licensing in place and therefore it should be possible to continue without the need for any kind of ‘dual regulation’” he says.

David Hollingworth, associate director of communications at London & Country Mortgages, says although the cost of the extra licence is not massive, removing the need for it would make life easier.

“It just seem pointless. If the FCA is going to take over the regulation of consumer credit, it just seems pointless to need two licences, it just adds another layer of bureaucracy that hopefully can be cut out,” he says.

Implementation

The industry might have a clear idea of how much regulation will cost them but what will the new financial landscape look like for secured loan market? And do the trade bodies still have any concerns as to how the directive and new rules will be implemented?

Once the directive is voted on later this year, it will be up to the Treasury and the FCA to decide how it will transfer it to the rulebook and whether it is put into MCOB or a separate regime is created for it.

Sinclair says two of his biggest concerns are around affordability and qualifications.

The rules around affordability and stress testing are slightly more flexible at the moment than they might be under the directive and there is no need for those in the secured loan market to have any qualifications.

“If those in the seconds market do have to become the equivalent of CeMAP qualified that is a lot of work that is going to need to be done in a fairly short period of time,” says Sinclair.

“I see little purpose for those involved purely in seconds in doing a CeMAP qualification unless it is tailored more to them – but I think that is probably where we are going to end up,” he adds.

Hoyle would also like to see the FCA and Treasury recognise the first and the seconds markets as two separate entities when implementing the rules.

“The first and second charge mortgage markets are very different and the regulatory framework should reflect this,” she says.

A cloud still looms over the transfer of regulation, but if the FCA’s estimates are anything to go by, it is likely to cost the industry substantially.
The latest figures from the Secured Loan index from Loans Warehouse, show secured lending in September topped £41m, with total lending for 2013 predicted to be the strongest year since 2009.

But if the FCA’s estimates are correct than lenders especially are going to need to put their hands in their pockets, but the sector has proved resilient to change in the past and hopefully the transfer of regulator will prove no different.