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
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.
So why do brokers not now sell secured loans in just the same way they do a mortgage? The compliance regime is essentially the same and effective loan sourcing systems are readily available, which can produce detailed research, suitability letters and support compliance throughout the sale process. The answer is: many brokers who are aware of this option do, in fact, mirror the mortgage sale almost exactly. They prefer to control the sales process at the outset, add more value to the client relationship and only fully hand the application over to their loan packager once they and their client are happy with the offer. At the outset they can use a loan packager to search the market, provide evidence of its research and produce all the documentation to support the adviser in completing the sale. Post-sale, a robust compliance process will create the loan equivalent of anything a broker might reasonably add to his compliance file is available.
Technology plays a major part and loan-sourcing systems now empower brokers to quote and sell loans compliantly but this does bot just mean offering the lowest repayment. Sourcing systems can compare the total cost of credit in the event borrowers might redeem the loan early as well as comparing, lender fees, early repayment charges and offering filters to sort fixed, variable, tracker products and much more.
Such technology is great for those brokers who use and understand it, but it can also expose those brokers who do not. For many years brokers have ranked secured loans by cost, but this may not wash with the FCA. For example, it can often make sense to arrange a loan over a longer term in order to make the repayments more affordable, but secured loans are, on average, repaid within four years. Therefore the lowest repayment over 15 years may not be as important as comparing the lender fees, the early repayment charges and the repayments over a four-year period and it may be better for a client to pay £5 or £10 a month more to avoid a redemption figure, which is £1,000 higher.
Shift
Appointed Representatives have been particularly affected by the regulation shift. Networks, who have thus far handled all the compliance needs of their brokers, have been made to apply for principal status in order to offer secured loans in the new regulatory environment. They can do this from 1 June, but the process could take some time. As such, ARs who are used to having their networks there to lean on, may feel exposed. That said, ARs are in the same position as a direcly authorised broker so can equally well use the tools that are already available. It is also worth noting that PI insurance is not a mandatory requirement for secured loans and most loan brokers self-insure.
Principal
Once networks start to achieve principal status – and not all may apply for it – ARs may have to decide if the one they are currently with is the right choice. Given that ARs can have multiple principals for secured loans, one would imagine they can belong to different networks for different disciplines – that is, to network A for mortgages and network B for loans. However this scenario would put any network that does not effectively offer loans, or delays offering them, at risk of losing members to other networks that offer both.
It, therefore, seems to follow that all networks must offer secured loans to ARs to avoid attrition of the membership. Time will tell. Those networks that offer loans will have to decide whether to adopt a referral process or mirror the sales process they currently employ for mortgages and, more importantly, will have to ensure their members are given all the necessary tools and procedures needed either way.
The introduction of FCA regulation may have been rather muted, but that does not mean the impact of it will be. Rather than avoiding secured loans or cutting corners, advisers should adopt the same compliant approach they take with mortgages to ensure secured loans become the next big success story and not the next big mis-selling scandal.
Steve Walker is managing director of secured loan broker Promise Solutions
Key points
- On 1 April, the Office of Fair Trading handed over responsibility of the secured loans sector to the FCA.
- Brokers do not now sell secured loans in the same way they do a mortgage.
- Networks have been made to apply for principal status in order to offer secured loans in the new regulatory environment.
