The whole question of regulation of the secured loan, or second charge, market seems to have been taxing the great and good for some time and the debate shows no sign of waning in the near future. I believe that the current focus on regulation in this market and the number of times it appears in the trade press has a lot to do with the mindset among first mortgage players who think that because first charges are regulated, it is not fair that secured loans aren’t also under the same regime. This kind of ‘like me’ attitude is not dissimilar to the small boy, who complains about the unfairness that his bedtime is earlier than his peers.
Leaving the childhood analogy to one side, it did seem strange that the Financial Services Authority (FSA) was not given overall control of all consumer mortgage and loan regulation at the same time. However bearing in mind the fact that the FSA had only just taken over the regulatory burden of earlier regulatory bodies covering investments, insurance and pensions, its ability to administer the lending industry in its entirety would have been too much of a stretch. In fact, with ‘Mortgage-Day’ now becoming a distant memory, which will be two years in the past by November, the FSA has still got work to do in completely digesting the mortgage industry. Look at the anomaly represented by mortgage packagers, which are still unregulated even though they stand as a hugely important conduit between regulated intermediaries and lenders.
Likelihood of regulation
It is worth looking at what the FSA and Office of Fair Trading (OFT) have said about the likelihood of formal regulation of the secured loans market. The surprise was that this announcement was stuck away in the notes section of a release on the OFT website back in March, which is probably why there is still so much, ‘Will they, won’t they?’ discussion going on. The direct quote from the website was as follows:
‘A footnote to the Hampton Report on reducing administrative burdens, published in March 2005, suggested that the government should consider the transfer of responsibility for consumer credit regulation from the OFT to the FSA. John Tiner and John Fingleton were responding to the announcement that the government has considered this suggestion and, following discussions with stakeholders, and in the light of recent changes, does not propose additional reforms to the consumer credit regime.’
That sounds pretty unequivocal. Of course it won’t stop the debate, but as it stands the OFT and the FSA, are clearly of the opinion that formal regulation is not on the agenda, at least for the time being. What was clear however, was that the FSA and the OFT would work closely together and that the OFT would strengthen its regulatory remit and be more active in the oversight role. In recent weeks, the proposed changes to the Consumer Credit Act (CCA) have highlighted the extra teeth that the OFT will have both in terms of stronger vetting of applicants and those reapplying for a Consumer Credit Licence (CCL) as well as new statutory rights to enter premises of CCL holders to investigate complaints and verify applications.
Perhaps the strongest hint we have yet of a convergence of regulatory ambition is in the announcement that the Financial Ombudsman Service (FOS) will handle all complaints against CCL holders and that, more tellingly, all CCL holders will have to have in place a robust complaints procedure, which will mirror the complaints regime to which FSA regulated intermediaries have to adhere. By beefing up the existing regulation under the CCA and giving the OFT more powers as well as ensuring that all individuals, selling any lending product, have a proper complaints procedure, they believe that the public good is being better served in this way, rather than by full on regulation.
Tinkering with the framework
If we consider the thrust of ‘Treating Customers Fairly’ (TCF), in terms of the proposals illustrated above, many of the major requirements are being met and if there is no will to formally regulate the second charge industry, then we can probably expect to see more tinkering with the existing framework to create a structure that ensures the same obligations on practitioners as exist for those within an FSA regulated environment, but without actual regulation.
The secured loan market has not been standing still while its mortgage cousin has been regulated. Ironically, it is the second charge market that has been voluntarily changing to meet the needs of a modern industry. The ‘bad’ old days of dual pricing were consigned to history’s scrapheap a long time ago. The rule of 78 calculation for early redemption, which was the cause of so much intermediary unease, was replaced, for regulated loans of less than £25,000, by a simple payment of one month’s interest. Further proposed changes in the CCA look to the removal of the £25,000 threshold in April 2008. As it is, many lenders in unregulated loans are not charging more than two months interest.
The wider market
Maybe the question should be whether second charge lending will be regulated at some time in the future? But before we get to that, it is worth looking at the effect that a regulatory environment has already had on the wider mortgage market. Mortgage regulation has made brokers look carefully at all the options available to clients before offering advice. The whole ethos behind TCF has widened the range of products that brokers are prepared to examine and while before it was unlikely that many brokers would even consider looking at a secured loan when faced with a request from a client for extra funds, the fact is that brokers are alert to the value of having as wide a choice available to them from which to make a recommendation.
So mortgage regulation has already had a beneficial effect on the attractions of second charge lending but the formal regulation of the secured loan market is only really necessary because of the importance of ensuring the customer for lending products is not confused by two different paths before having the loan or mortgage they want. Mortgage sales now have a predetermined sequence of steps, which intermediaries are obliged to follow in the search for the best deal. Secured loans go through a different system and while it has proved to be successful, there is a need to be able to demonstrate to the consumer that the lending industry has a single sales process.
Future regulation of the secured loan market will depend on the will of government, the resources of the FSA, the public mood for consumer protection and, of course, our real political masters in Brussels. There has to be an argument that the consumer probably needs to be presented with a harmonised industry standard for seeking advice. The differing methodology for obtaining advice on mortgages and secured loans will look increasingly strange to consumers, particularly as the complaints procedures are going to mirror each other. It stands to reason that the template for advice should provide a consistent experience for the consumer regardless of the type of lending product they select. However, the announcement not to further reform consumer credit, apart from the amendments already discussed earlier, suggest that we might have already reached the highwater mark of root and branch compulsory regulation for the time being.
Continuing argument
The arguments will go on, naturally. The secured loan market owes not a little of its recent resurgence in popularity among mortgage brokers to the FSA’s regulatory regime and the need to demonstrate real research for the right product. It might take full regulation for secured loans to get that real seal of approval in the eyes of ‘die hard’ intermediaries, who still resist the hard facts that there are increasing cases where secured loans can be considered better financial advice than straight remortgaging.
