Christine Toner takes a closer look at how the networks are preparing for the challenge of the MCD
As the deadline for full regulation of secured loans approaches, from which point mortgage brokers will have to view and, indeed, sell second charges in the same was as mortgages, it’s not surprising that the intermediary sector will be looking to the wider market for support.
For those brokers with appointed representative status it is customary to turn to the principle network for help. But with secured loans in an advised capacity new territory for everyone involved just how helpful can networks be?
“First of all, all networks have got to understand what the new regulation means in general, then they need to decide how they are going to change their practices to cope with it,” says David Copland, director of TMA and director of Mortgage Services for LSL.
“This sounds logical, but each network will have to decide if second charge loans are going to be in their scope of service and if they are going to allow brokers to advise on both first and second charges.
“At the moment, the process for advising on a second charge loan, compared to a first charge mortgage is still different enough, that to think that a broker can advise on both straight away is a challenge that most networks will fight shy of day one.”
Over time the products and the advice process are likely to become more similar and then more brokers will want to include them within their scope of service. When this happens Copland says LSL will look at providing those advisers who choose to advise on second charges with the skills and knowledge to do so.
“This is likely to involve a training and accreditation process,” he says. “We can then change their IDD. For this we will also need to put different compliance processes in place as the network becomes responsible for the advice as soon as one of our brokers chooses to go down this route”.
Of course, not all networks will be open to the idea of advising on secured loans. If a network decides that they will not advise on second charges, then this needs to be made clear at the outset by the broker to their client.
“This will form part of their initial declaration to the client, stating that second charges are not within scope of their service,” says Copland.
“Some networks might just leave it at that, however, they can still opt to refer this business onto a third party who does include seconds in their scope of service, especially if it becomes apparent during the fact find process that a second charge might be a suitable option for the client to explore. This third party is likely to be one of the existing master brokers that specialise in second charge business”.
Copland says customer clarity is key and for LSL the biggest focus at the moment is ensuring that the customer is not confused, if they are receiving advice from one person and are then passed onto a master broker.
One could say that the change in secured loans regulation and the pressure that puts on networks to revise their models is the last thing the sector needs at the moment. Indeed, the network model has come under fire lately following the FCAs report into advice. The review stated “networks’ lack of structure increased the risk of providing unsuitable advice”
Networks naturally rebuked the criticisms with most claiming any issues surrounding structure, or lack thereof, had long been addressed.
“We recognised some of the themes the FCA highlighted a couple of years ago and took steps to ensure a more consistent, structured and high quality advice process,” says David Carrington, sales and marketing director at Personal Touch.
“A good example of our action was to introduce a new universal fact find across the network that enables us to deliver consistently high quality outcomes. The MCD changes will further help the structure and consistency of advice by ensuring that more options are considered in each client situation.”
According to Copland, in the case of secured loans it is not a lack of structure and guidance within networks that could cause issues but rather, a broker choosing to ignore it.
“Other than a network not articulating their process adequately, the biggest risks will come if the AR chooses not to follow the network’s process but instead does their own thing and either moves into the advice arena or passes their second charge cases on to master brokers that the network doesn’t have relationship with, potentially leading to the broker being swayed by a commission payment and leading to the borrower not getting the standard of advice they deserve,” he says.
Of course, those brokers who like to ‘go it alone’ but want some support in offering second charges do have other options. Indeed, mortgage clubs are increasingly offering support and advice to brokers who want to maintain their independent status but need assistance in terms of compliance and technology.
“Our Vision for Mortgages website will now contain a dedicated MCD area which provides all the documentation our members require to ensure they have fully compliant business processes around the new legislation, operating effectively and efficiently,” says Martin Reynolds, chief executive, Simply Biz. “Our policy team also regularly review all guidance regarding MCD and issue update bulletins to ensure our members are completely prepared in good time.
“There will be a MCD focused training session at our up and coming mortgage events, spaces for which are going very quickly. There will be a key focus throughout the day on MCD and we also have one of our secured loan partners at every event to answer any questions our members may have.”
According to Phil Whitehouse, managing director of MCI Mortgage Club, mortgage clubs have traditionally embraced secured loans more than networks.
“In my industry experience networks have rarely embraced secured loans for their members and before regulation by the FCA (when with OFT) they seemed to mainly ignore secured loans and let members do what they wish because then such loans were not a regulated product,” he explains.
“Clubs however did generally embrace the secured loan market due to competition and also wanting to offer their members as wide a range of products and services as they could that fit in with the mortgage transaction.”
Many clubs, and indeed, networks, are taking their lead from master brokers. A lot of these providers have years of experience operating within the second charge sector – albeit on a non-advised basis – and are therefore best placed to offer guidance on how best to assist mortgage brokers.
Steve Harness, commercial director at master broker The Loans Engine says he is certainly seeing lenders taking “a long hard look at second charge and unsecured loans”.
“There was historically a sense that loans were something of a ‘last resort’ funding vehicle when all else had failed,” he says. “Not anymore.”
For DA brokers who are mortgage club members Harness says The Loans Engine is encouraging them to look to these clubs to see how they are tackling MCD and the wider armoury of products that brokers may need to serve their customers well, post-2016.
“These mortgage clubs will have the resource to carry out detailed due diligence and create a panel of approved loan master brokers who have the right skills and credentials,” he says. “DA brokers could do worse than transact via these partnerships, rather than taking any chances, and going it alone. At the end of the day, if it’s your name above the door, you need to be able to sleep happily.”