Ever since the first charge mortgage market became regulated by the Financial Services Authority in 2004 there have been calls for the second charge industry to undergo the same fate.
Almost a decade later, those calls have been answered and the seconds market, along with the rest of the consumer credit industry, will face its own regulation D-Day on 1 April 2014 when regulation of second charge mortgages transfers from the Office of Fair Trading to the Financial Conduct Authority.
Unlike the mortgage industry back in 2004 though, there does not seem to be the same air of trepidation among those in the seconds market – is this because the sector is wholly prepared for the FCA or is it unaware of what awaits it?
Robert Sinclair, chief executive of the Association of Mortgage Intermediaries and the Association of Finance Brokers, said: “All of the people in the second charge market that think they understand regulation are going to be confronted by the new regulator – the FCA, which is much more draconian than the FSA was back in 2004.
“Some will be ready for it, for example, the larger lenders that have got first businesses alongside their second, and some of the bigger broker firms get it, but some of the smaller ones – the one man bands – they are going to be in a very different place.”
One of the reasons some in the industry may not be as concerned about regulation as they should be is the uncertainty that still surrounds it.
D-day may be less than nine months away but the FCA has yet to consult on its conduct rules for the sector.
Andrea Kinnear, head of communications at the Finance and Leasing Association, said: “The main challenge remains the scale of the change and the breakneck speed of the timetable.
“This is as much an issue for the new regulator as it is for the industry. The FCA will need to deal with nearly 40,000 new regulated companies from April 2014 and process around 100,000 new approved persons applications.”
The FCA recently wrote to firms in the consumer credit industry informing them that they need to register with the FCA for an ‘interim permission’ by September 2013 in order to carry on regulated activates from April 1 2014.
Firms will have until 2016 to comply with all of the rules and seek full authorisation, but the FCA has yet to issue any conduct rules or expand further on what firms will be required to do during the interim period.
Sinclair said: “Many people in the seconds market think regulation will not be a major issue because nothing has happened yet and they are of the mind-frame of ‘we will worry about it tomorrow.’”
In the FCA’s defence, its hands are almost tied in respect of what it can plan for the seconds market while the European mortgage directive is still being finalised.
Sinclair said: “If you were going to do this (transfer of regulation), you wouldn’t do it now.”
Not only will regulation of the Consumer Credit Act pass from the OFT to the FCA on 1 April 2014 but the Mortgage Market Review will also come into play on 26 April 2014.
Overshadowing both of these two events however is the European Mortgage Directive, which lenders and brokers will have until 2015 to implement after the final rules have been voted on this September.
Sinclair said: “It would have been easy for FCA to bring seconds under its banner and give it its own section of the rule book, as it has done with equity release.
“But because of what is happening with the directive, which effectively says that first and seconds should be treated the same, it cannot.”
Better the devil you know
So would it be such a bad thing for the industry if the directive were implemented into the seconds market as it stands? The devil appears to be in the detail.
Sinclair said: “Under the rules, brokers might have trouble offering secured loans on their own as they may always have to consider a first or a further advance before they recommend a second mortgage as part of the affordability rules, which could prove problematic for brokers that purely deal with seconds.”
Those working in the seconds market would also have to adopt the European Standardised Information Sheet, which is replacing the Key Facts Illustration in the mortgage market.
This will be much more detailed than the current Consumer Credit Licence agreement currently used.
Kinnear said that the FLA’s concern back in March 2011 was that second charge lenders would have to introduce two sets of information requirements in quick succession, i.e. the KFI followed by the ESIS.
But its concerns have been slightly mitigated with the EU backing down and giving firms until 2020 to introduce the ESIS.
The directive is set to be agreed by the EU in September but Sinclair believes there is no chance that Europe will see the UK seconds industry as a separate entity, so it is up to the AFB and the FLA to persuade the FCA to interpret the EU rules ‘more liberally’ than they were perhaps planning to.
Sinclair said: “The FLA and ourselves are agreed that it is required, whether we can achieve it or not is something slightly different.”
Time for change
Once the directive has been voted on in September, the FCA should let the industry know details of how they can apply for full authorisation, which will involve individuals applying to become approved persons.
As part of this, individuals will have to pass the FCA’s fitness test which is much more demanding than the CCA’s, as the FCA will delve into the firms and individuals history.
Firms will also have to obtain pre-approval by the FCA for those in key roles within the firm.
The new regulator will also have product intervention powers, which means it can place restrictions on product features, selling practices or even ban products, as well as cap the cost of credit and restrict duration of credit agreements.
It is still not clear which FCA rules firms will need to adhere to come April 2014 while they are only regulated on an interim basis but it is likely they will have to report more information to the FCA than was necessary under the OFT.
Sinclair said: “Things such as having to deal with the returns on a half-yearly basis – that is not something the secured loan industry has ever had to deal with before – if you miss your deadlines you get struck off.
“AMI was created because a whole lot of people who thought they understood regulation found themselves in a position where they did not understand what was coming at them and firms needed help. We are about to go through the same thing again.”
Sinclair said one of the biggest changes for second mortgage brokers will be the need to document everything they are doing, keep proper minutes at meetings and evidence why they chose one product over another.
He said although many brokers might think they do this already, in reality they don’t.
For many brokers this will perhaps not be a problem if they are used to doing it for first mortgages.
Julie Gregory, group production and compliance manager at Norton Finance Group, said: “Being regulated by the FCA will not change the day to day running of our business greatly as we are already regulated by the FCA so have systems and controls in place that are compliant with how they expect firms to operate.”
Another grey area that the AFB has concerns about is the fee structure – it is expecting to see an increase in fees as they move from a one off licence fee charge to a fee charged annually based on the firm’s income.
The FCA has already angered a number of advisers after it informed them they would need to pay a fee for their interim permission – £150 for sole traders and £350 for most other firms.
A number of firms however had already paid a one off fee to the OFT for their licence a number of years ago, under the assumption this would not need to be renewed for several years.
Better for the industry
So will it all be worth it? The latest figures from the FLA show new business in the second charge market increased 43% in value and 23% in volume over the last twelve months to May and many believe that FCA will enhance business volumes further still.
Sam Busfield, director, of Loans Warehouse, said: “FCA regulation has been on the horizon for some time and whilst we are not there yet, I believe that it will be positive news for our industry.
“Communication is key from both sides to ensure the transition from CCA to FCA regulation is as smooth and robust as possible but once we are under the same regulatory body as the first charge market hopefully secured loans will become much more recognised and part of the mainstream.”
Gregory is also confident that FCA regulation of the sector will enhance its reputation.
She said: “We believe regulation under the FCA will improve consumer confidence and hopefully remove brokers from the market who do not act in the best interests of the consumers.”
Along with growing business volumes, there are also rumours of new entrants looking at launching into the sector. While FCA regulation is likely to make new entrants view the sector in a better light, Sinclair is concerned that until the new rules under the FCA and directive are finalised, lenders could put their plans on hold.
Sinclair said: “The last thing lenders will want is uncertainty because they will want clarity about if they have to change systems and how they only want to change them once not twice, and also the risk around new entrants – because of the uncertainty it will make new entrants less likely.”
FSA regulation of the mortgage market almost ten years ago was not without its challenges but brokers in that market would argue that the process did more good than harm to the sector.
Although there is still much uncertainty surrounding how the various directives will all slot into place, those that embrace the changes will hopefully reap the benefits.
Busfield, said: “Changing certain practices will always carry an element of pressure but that does not need to be viewed as a negative.
“There are numerous companies in our sector that hold dual FCA and CCA regulatory status. Being regulated should in theory improve businesses so, if there is added pressure, it shouldn’t be to the detriment of the business or consumer.”