There has been a lot of discussion around the Mortgage Credit Directive (MCD) and how the new rules affect firms which might refer to their services as being ‘independent’. Having heard and seen a number of articles, and a number of industry commentators actively discussing the subject, there is the potential for a degree of confusion particularly around the equity release sector. I therefore thought I would attempt to clarify some of these issues and dispell some of the myths that might be circulating
Firstly, it is only the rules around MCD-regulated mortgage contracts that are affected by the changes to independence. As most lifetime products sit outside these rules they are not affected and therefore a firm is not forced to advise on the equity release market to maintain independence.
There was a rule introduced as part of the MMR changes which did affect equity release and that was concerning lifetime mortgage contracts and home reversion schemes becoming one relevant market post-MMR. So if you advised on lifetime mortgage products you would also need to advise on home reversion schemes in order to maintain your independence
With regards to the MCD changes then, firms therefore only need to consider whether they are going to include second charges in their scope of services that they offer to their clients. If a firm wishes to hold themselves out to be independent or they have the word ‘independent’ in their trading name they will need to include second charges in their advice process.
If a firm does not want to offer advice on second charge loans they will need to remove the word independent from their name and review their disclosure documents to remove any reference to being independent. If a firm does hold themselves out to be independent they will need to offer a broad representation of lenders in both the first and second charge markets. Sourcing systems will be able to provide firms with the ability to source second charges and compare these options to a first charge remortgage and give the client the best possible outcome having considered all solutions. Access to second charge lenders will be available through specialist distributors as most of these lenders to begin with will not be available for firms to access directly.
One thing that is absolutely clear is whenever a client requests to borrow further money and use their property as security a firm will need to make an additional disclosure that there may be alternative financial options available to the client - other than a first charge remortgage - that could be more suitable such as a second charge, a further advance from their existing lender, or potentially unsecured borrowing.
This additional disclosure should not be a surprise to firms because MMR implemented a similar one where firms needed to inform clients borrowing additional funds that a further advance may be a more suitable option. MCD is now adding second charges to that statement.
In essence firms are not required to scope their services to include second charges unless they wish to refer to themselves as independent. Paradigm has some easy to read documents available to all directly authorised firms on our website should any one require further reading on this subject.
