Ah, Europe. Home to French wine, Italian opera, Belgian chocolates and German sausages. In recent years, however, to us Brits, Europe has come to mean the EU – faceless Eurocrats and reams of red tape dressed up as European law that seem to make our lives tougher.
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The latest proposals to emerge from Brussels are a raft of consultation documents and initiatives aimed at tidying up Europe’s mortgage and consumer credit markets, with the emphasis on making the EU a more level playing field for both consumers and lenders alike.
Although the final detail of these proposals is not yet known, there is a very strong likelihood that EU rules in the next year or so could bring about major changes to the UK’s flourishing secured loans market. The impact of these could result in the Financial Services Authority (FSA) taking control of secured loans and implementing new regulations similar to those faced by the mortgage industry on ‘Mortgage Day’.
The secured loan market is worth over £6 billion in the UK and is still growing, particularly as it is becoming a popular product and finance option among brokers. So will advisers be ready when ‘Secured Loans Day’ comes, and what impact will the EU’s changes have on how brokers sell second charge loans?
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Two area focus
The EU’s financial proposals focus on two areas – mortgage and consumer credit. In theory the mortgage proposals are a good idea because currently members like Germany and France like to invoke local laws that can make it tough for foreign lenders to set up business in their territories. Not only are these tactics against the spirit of the ‘common market’, they are also against European law.
However, hand-in-hand with these proposed structural changes is the suggestion of introducing common consumer protection rules across the whole of the EU, designed to encourage borrowers to shop abroad for credit and mortgages, with standardised literature and credit terms supposedly making it easier for them to compare products from different lenders in different countries.
Again, nice in theory but will the average borrower consider going to Spain to get a loan? The biggest worry is what sort of impact these rule changes would have on our own national legislation, which in the mortgage sector is one of the toughest in Europe. Not only could EU legislation cause the FSA to throw out its rulebook and start again, there is also real concern that European-wide consumer laws could be based on the lowest common denominator. This would mean that UK consumers shopping overseas and European lenders trading here would be covered by foreign regulations that are not as strict as British legislation. The impact of the EU’s ideas will not be clear until June when the White Paper is published outlining its proposals.
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The long-awaited Consumer Credit Directive (CCD), which has been floating around the EU for a number of years now and was due to be implemented this year, only adds to the uncertainty and confusion surrounding mortgages. The major thrust of this particular piece of EU legislation is to give consumers more rights and empower them to challenge in court lenders and credit agreements that they feel are unfair, either in their terms and conditions or costs. Again there is a strong element of European harmonisation, but the big impact for the UK is the possibility that second charge and secured loans could be re-classed as mortgages by the EU.
Regulation questions
Currently secured loans are regulated under the UK’s Consumer Credit Act, along with standard personal loans and credit, which is controlled by the Office of Fair Trade (OFT). If the EU’s Consumer Credit Directive does decide that any form of secured lending should be treated the same way as a mortgage, the UK government will have to decide whether this means secured loans should be regulated by the FSA in the same way existing residential mortgages are.
Such a decision would trigger a new round of consultation as the government and the FSA decide what compliance procedures are required and how secured loan lending should fit in with existing mortgage rules. It would also probably mean that many existing secured loan lenders that do not offer mortgages, and are therefore not regulated by the FSA, would have to undergo regulation.
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Here again the impact of the directive will not be known until it is finally published, which will not be until the Summer at the earliest because the EU has commissioned an economic analysis to gauge the financial impact of implementing common rules across Europe. This is a move that will clearly find favour with the Association of Finance Brokers (AFB), a sister body to the Association of Mortgage Intermediaries (AMI), set up to promote second charge lending and lobby on behalf of brokers and lenders.
The AFB maintains that legislation should only be implemented if industry led initiatives fail to address issues within the second charge industry. The body also questions whether the financial cost of such changes would outweigh the potential benefits to consumers.
Although the AFB was only set up last year, it has already done much to address the issues surrounding the perception of the second charge loan industry, promoting high standards and representing the views of brokers to ensure that any new legislation is good for consumers but not too onerous for introducers.
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Secured loans have often been seen as the funding option of last choice by critics – an image supported by the legion of loans promoted in the papers and daytime television, often targeting consumers needing to consolidate debts or who have been turned down by mainstream lenders. In fact many brokers also have a poor opinion of secured loans, believing that homeowners are better off remortgaging to raise cash or rolling other debts into a single home loan.
Yet secured loans are popular with consumers and the market is now worth £6 billion, according to figures from Datamonitor, with annual growth of more than 50 per cent in the past five years alone. Datamonitor estimates the market will grow steadily to £6.3 billion by 2010. Research by AMI in advance of the launch of the AFB found that 44 per cent of its members already offered secured loans advice to clients, with 66 per cent planning to in the future.
Acceptance
This acceptance by mortgage brokers reflects a shift in the way secured loans are being marketed, as well as the type of products that are now available. A number of lenders, particularly from the specialist sector, have recently entered the second charge market, bringing their knowledge of innovative lending solutions and great customer service.
They are also bringing with them the experience of lending under stringent FSA regulations, which means that a new generation of secured loans are now available that offer competitive rates with fair terms and conditions, designed to be easy for consumers to understand. With the uncertainty surrounding the future of secured lending under proposed EU directives, it also means that mortgage lenders are best placed to provide compliant products if the sector falls under the control of the FSA.
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In fact for mortgage brokers, looking at secured loans when considering the finance options for their clients could make sense in certain circumstances, as well as being in-keeping with the FSA’s ‘Treating Customers Fairly’ (TCF) principles.
Take, for example , the customer who is midway through a fixed mortgage deal and needs to borrow more, but knows that remortgaging could cost him dearly in terms of charges and a higher rate. In this situation a secured loan could be more cost-effective. Similarly for a customer on a standard mortgage who has suffered from recent credit problems, a remortgage might mean an adverse product that is more expensive than staying with the existing lender and taking a separate secured loan.
One of the new self-certification secured loans could also be ideal for the self-employed person who wants to raise some money for their business without tinkering with their mortgage. Modern loans also offer one plus one redemption charges and bolt-on accident, sickness and unemployment with ‘back to day one’ cover.
Whatever the EU decides to do with secured loans, their popularity is unlikely to wane. It makes sense for brokers to use lenders that understand the needs of their clients, as well as being prepared for whatever Brussels may send our way.
