Mortgages  

All change, please

On 1 April, the Office of Fair Trading handed over responsibility of the secured loans sector to the FCA, yet there are many in the industry who still do not fully understand what impact this regulation change has had and indeed what it means for the sector.

One pretty big change the new regulation will (hopefully) bring about is a change in perception. The secured loans sector has, for too long, been thought of as a last resort of lending, and somewhat murky. That reputation may once have been justifiable, however much has been done to clean up the industry – so much so that several reputable mortgage lenders have recently made the move into the secured lending market. The onset of FCA regulation is the final step towards the sector being viewed as a respectable market and, as a result, secured loans should now be viewed as a sister product to mortgages, which may require advisers and networks to change the way they currently sell – or indeed, do not sell – secured loans.

TCF

Article continues after advert

With FCA regulation comes Treating Customers Fairly, so immediately mortgage brokers not offering loans (whether direct or referring) need to be mindful. A secured loan may often be a better option, for example, when a remortgage may result in borrowers losing an existing low rate. There will also be many opportunities to fulfil borrowers’ short-term needs where a remortgage is not currently available due to more stringent criteria being applied by mortgage lenders. With rates from 5.45 per cent and statutory low early repayment charges a secured loan will often be the best advice for your client.

With that in mind, both directly authorised advisers and networks may need to revisit their compliance processes when it comes to secured lending. Previously, many advisers have adopted an ultra-light touch to secured loans by simply referring potential loan enquiries – usually their declined mortgage cases – to a loan packager. While that is still an option, greater regard must be had to demonstrating why a secured loan is appropriate and checking that the ultimate product offered by the loan broker is still in the client’s best interests. Maintaining proper records and oversight of the loan process is key and it all boils down to the question of who has responsibility for the client. As an adviser, if you refer a client to a secured loan broker, you may be under the impression that the responsibility for that client now lies solely with the loan broker – but a duty of care still remains to ensure that such a referral was the best solution for the client.

Let us look at a scenario: your client is on a low tracker rate. You advise him to keep the existing mortgage and raise funds instead with a secured loan. You refer the case to a loan broker and leave him to it expecting the client to get a loan at around 7 per cent. In your mind, you have done the right thing but, unbeknown to you, the only loan your client can get has a much higher rate, say 14 per cent. Because you have not checked with the loan broker or revisited the case, you never find this out. If, later, the client was to claim the loan was mis-sold, defending your position may be difficult unless your broker gives you records of his research and you have checked the product remains appropriate.