RegulationOct 2 2014

FCA proposes second charge mortgage reform

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The FCA has proposed to apply “most elements” of its existing mortgage regulation to second charge mortgages, citing “very similar” or even greater risks than first charge mortgages.

In its 334-page consultation paper, entitled Implementation of the Mortgage Credit Directive and the new regime for second charge mortgages, the FCA outlined its plan to move second charge mortgages from its consumer credit regime to its mortgages regime in March 2016.

This is in keeping with the EU’s Mortgage Credit Directive, which also includes a new series of regulations for buy-to-let lending.

The FCA said that while some consumer credit measures would “no longer apply” to the mortgages, the changes mean that “these will be replaced with more appropriate measures specifically designed to protect consumers with mortgages”.

The FCA added that although 1,400 lenders and 4,500 intermediaries had applied for interim permission to carry out activities linked to second charge mortgages when the regulator assumed responsibility for consumer credit regulation, it believes the number of businesses actively engaged in the market is “somewhat smaller”.

FCA proposals for second charge mortgage regulation

Firms must “make an initial disclosure covering two key messages about their scope of service and remuneration”

Firms must “provide consumers with an adequate explanation of the product disclosures they have made, the essential features of the product, any ancillary products and the impact on the consumer”

Firms should send their customers “post-sale” annual statements

It noted that there may be “as few as 20 to 25 active lenders”, and said the average second charge loan made between 2005 and 2013 was worth between £25,000 and £30,000, much less than the average first charge loan of roughly £137,000.

The regulator said that while second charge mortgages can be beneficial for consumers by allowing them to borrow money at rates lower than unsecured lending, and are primarily used to consolidate debts, there are “downsides”, mainly the risk that the consumer would lose their home if they could not repay the money.

But it added that there have been “poor practices” in the market, including selling a bigger loan than originally requested by the customer, selling loans without making the customer aware of any alternatives, carrying out poor affordability assessments, charging high fees and not making the customer aware of the risk of losing their home.

The FCA’s consultation closes on 29 December.

Adviser view

Jonathan Harris, director of London-based Anderson Harris, said: ‘Bringing second charge mortgages under the regulator’s jurisdiction is long overdue. It is astonishing that they were previously unregulated when the charge is normally secured against a borrower’s home.”