AMI director Robert Sinclair says increased UK regulation after secured loans transfer from the Office of Fair Trading to the Financial Services Authority – due by the end of 2012 – and additional rules in the European Commission’s mortgage directive will crush the secured loan market.
Regulation will make it mandatory for intermediaries to consider the appropriateness of a remortgage or further advance alongside a second charge loan as well as provide a European Standardised Information Sheet (like the KFI) which Sinclair claims will increase operational costs so much the secured loan market will become untenable.
He says the result will be that lenders and brokers operating solely in the secured second charge market will be forced out of business.
He said: “I’m not sure second charge only brokers and lenders can go through the cost of transition in the current framework and I’d guess that we’ll see most of them go to the wall. The cost of implementing the affordability assessments you’d have to do as well as the impending European changes will be too high.
“The only time you could genuinely advise a secured second charge instead of a remortgage or further advance would be where the existing first charge mortgage lender didn’t want to touch a further advance. In that case a remortgage might still be better than taking a second charge - the volumes taken in that market could be damaged and make it so small it’s no longer viable.”
Sinclair said the existing secured loan market was around £200m which was “already nearly non-viable” and added that “anything that harms that market could eliminate it altogether”.
Currently secured loans are regulated by the OFT under the Consumer Credit Directive and intermediaries can advise a borrower to take this product without considering an FSA regulated remortgage or further advance.
When secured loans come under the FSA’s jurisdiction this will no longer be an option. Brokers will have to show why a secured loan is more appropriate for the borrower than a remortgage or further advance, forcing them to do a full affordability assessment.
Sinclair also said he was unsure whether the mainstream lenders would pick up the baton on secured second charge lending in the event that independent providers of secured loans went out of business.
“I’m not convinced anyone will want to do this sort of lending in the new regulatory regime,” he said.
