April 1 – the date the Financial Conduct Authority took over the regulation of the second charge mortgage market – was a day the industry had been anticipating since 2010.
It marked the start of a new era of significant change for the seconds market.
Despite the long run-up to the transition, confusion over which interim category of consumer credit licence brokers needed to obtain resulted in a last minute scramble by some to obtain what has become the notorious Category E – the debt counselling licence.
Some firms, which were unaware of the need for the licence quickly submitted their applications to the FCA as the industry rallied around to ensure their colleagues had the necessary licences in place.
Now that the dust has settled, the industry is faced with a white elephant in the room – what about those firms that didn’t apply for Category E?
What is Debt Counselling?
A search carried out on the FCA’s Interim Permission Consumer Credit Register reveals a number of master brokers in the market do not possess Category E.
This creates a potential problem as a common part of advising on second charges involves speaking to customers about their existing debts and potentially consolidating some of these into a secured loan.
The OFT’s guidance on what licence a firm should have – which the FCA says firms should use as a guide – stipulates that: “It would be unusual for any business to adjust a client’s debts without having counselled or advised them about it first. It is expected that both are applied for together in such circumstances.
“However it is possible to engage in debt counselling without engaging in debt adjusting.”
So what is classed as debt counselling? In the FCA’s handbook, it details scenarios where a licence would need to be held.
It gives the example of a mortgage adviser saying to the client: “I advise you to consolidate your unsecured consumer credit debts into this regulated mortgage contract.”
This advice the FCA says would not be classed as debt counselling because the adviser is proposing to consolidate the debts into a regulated mortgage contract.
However, if the advice is not in relation to a regulated mortgage contract then the equivalent advice would fall under debt counselling.
The problem is, until the EU Mortgage Directive is finalised and the rules for the second market are set, a secured loan is not classed as a ‘regulated mortgage contract’, meaning that if the example statement was modified to end “… into a secured loan.” then the loan broker would be giving debt counselling advice and therefore need Category E.
In March this year, the Association of Mortgage Intermediaries secured a victory for mortgage brokers when it got the FCA to confirm that where a mortgage broker advises the consumer to consolidate any unsecured consumer credit debts into a regulated mortgage contract it will not, under FCA’s regime, be considered as debt counselling.
AMI stipulated at the time that this exemption did not apply to the second charge market. Once the interim period comes to an end, a secured loan is likely to be classed as a regulated mortgage contract and thus loan brokers should not need the Category E licence.
What the FCA Says
But where does this leave firms who don’t possess the licence during the interim period? Firms cannot adjust their permission until the FCA gives them the green light to apply for full authorisation, something which may not happen for several months.
A spokesperson for the FCA tells Loan Introducer: “The OFT issued guidance on the CCL regime setting out the different licence categories. It was for firms and individuals to decide, based on this guidance and taking legal advice as necessary, which categories to apply for, including whether they needed to apply for multiple categories.
“If individuals or firms are carrying out debt counselling or adjusting but do not have the relevant permissions, they should stop these activities and apply for authorisation.
“For further information brokers should contact the FCA or their trade association.”
The FCA’s advice seems clear – those that don’t possess the relevant category should not be advising on debt counselling during the interim period.
In defence of the firms which are missing Category E, the issue should have been rectified and clarified under the OFT regime, because it wasn’t, the result is that post transfer to the FCA some firms may unknowingly be operating without the correct permissions in place.
Those that do not possess the correct licences are taking a risk by not seeking legal advice or suspending certain aspects of their business until they obtain full authorisation.
The FCA is a different beast from the OFT and it is safe to assume the regulator is currently swotting up on the ins and outs of the market situation.
At the beginning of April it wrote to 17,705 firms whose consumer licences had expired but had not registered for interim permission by 31 March 2014 or informed the regulator of their plans to cease consumer credit activities.
The FCA says if you have received this letter you should check the OFT licence number that the letter refers to, as it is receiving a high volume of calls from firms that had multiple OFT consumer credit licences but decided not to register all for interim permission.
Although these letters relate to the wider CC market, it shows the FCA is not going to be passive in its regulation of the sector.
On April 15 – just two weeks after taking over regulation of the sector, the FCA showed its teeth again and put out a warning to consumers about using a firm called Frenson Capital Limited, trading as Light Loans, because it was not authorised.
Yet with the hefty workload the FCA has on its hands, it may not deem the Category E issue a priority.
Robert Sinclair, chief executive of the Association of Finance Brokers, says the regulator is in a difficult position.
“The FCA clearly has to follow the rules, those being that certain firms should hold the relevant licences. But given the political pressures facing the FCA, do I think this is anything it is worried about today – no,” he says.
“Do I think this is a major problem for our industry – yes, but I don’t think the FCA is necessarily going to shut firms down tomorrow.”
Sinclair does fire a warning shot though to firms and says if they are missing the relevant permissions it may come back to haunt them.
“If a firm does something stupid, a lack of correct permissions is going to be a very easy way for the regulator to get at them,” he says.
The AFB also believes there is a case to be made for brokers not only holding licences C (credit broking) and E (debt counselling) but also D (debt adjusting) and H (credit information services).
Sinclair says: “We have been consistent in our advice throughout, brokers should hold C, D, E and H. We could not have been clearer about this – we told firms in 2009.
“It is wrong that some brokers have direct access to Experian and don’t hold category H.”
The AFB is having ongoing discussions with lenders and trying to form an alignment so the market agrees as to what is and isn’t required. He says he is debating with firms in the industry as to who needs to hold licences H, D and E and he is getting to a point of agreement on this.
Operating without Category E
Under the OFT, lenders arguably took on more responsibility for their brokers, many of whom looked to lenders for guidance. Under the new regulator though, responsibility for such matters lays solely with the broker.
Steve Walker, managing director of Promise Solutions, says: “Every packager should have Category E, it goes without saying. A broker can’t effectively do their job and discuss consolidation without it, and given that debt consolidation is part of the loan process you need to have that conversation with a borrower.
“I don’t really know how any loan packager can operate properly without it, how can they do the best job for their customer without having that conversation?”
Barney Drake, director at Y3S Group, says the industry needs to work together to try and overcome the problem so it does not cause detriment to the market.
He says: “Lenders are taking a different viewpoint as to whether they should accept business from a broker without Category E.
“Some lenders are being vocal about what categories brokers must have and specifying that evidence should be in place to show the deal was not on an advised basis if there is no Category E. Others are still accepting the business, while others are saying it is the broker’s responsibility to ensure they have the correct permissions.”
Philip George, managing director of secured lending at Shawbrook Bank, says it is for brokers to take their own advice on licensing and relevant categories.
He says: “Shawbrook has and will continue do all it can to help all our intermediaries and each situation may be quite different. Therefore we would not wish to give any global stance or comment on individual situations.”
While Simon Stern, director at Prestige Finance, says: “Brokers have always been responsible for ensuring they have the correct categories and if they are now unsure then they should seek their own advice.
“If a broker believes that they provide advice on debt consolidation and do not have D and E then they should consider adapting their practices to ensure they are compliant. We will not be advising brokers what they should and should not have in terms of categories.”
Firms which do not hold the relevant categories are sitting ducks as they cannot adjust or vary their interim permission until the full authorisation process starts.
The second charge industry is a close-knit community and the players in it not only want to see their own business do well, but to some extent their fellow loan packagers’ as well. As a consequence many would rather not highlight the lack of Category E permissions in the sector and potentially other categories.
Yet as it appears, the FCA’s guidance implies that those without the correct licence are putting themselves in jeopardy. The FCA may have bigger fish to fry at the moment but if history teaches us anything, it is that the regulator is no stranger to retrospective action.
Not only this, but in a market that is plagued by claims firms, any small discrepancy could cost firms dearly.
If brokers choose to still carry out debt counselling activities without Category E, it will be essential to maintain proper records and document what advice was and was not given.
Another option could be for the regulator to allow firms to add Category E to their licence during the interim period or offer some form of amnesty.
Not carrying out debt counselling activities throughout the interim period may seem unfair or even impractical to some, but it may be a small price to pay for what could otherwise be a major problem further down the line.