At a recent major industry meeting the topic of second charge secured loan regulation was discussed between compliance personnel from networks, large intermediary firms and lenders. Without exception all around the table voiced concerns regarding implementation of Mortgage Credit Directive (MCD). Key concerns included establishing an appropriate client handover process, compliant transition of pipeline, representing scope of services in a fair manner, changes to packager fee structures, changes to client-charges, training for members and the advice process with two regulated firms involved.
The room was broadly in praise of the regulators approach to implementing MCD and the quality of various communication outputs to date but significant aspects of operational and commercial application has been mandated to regulated firms which has naturally led to varying interpretations of how best to apply the framework.
Although no ‘expert’ in this field I have certainly learned a vast amount over the last three months working with Chris, Paul and the team at Positive Lending who have been preparing for implementing MCD for the last 12 months. I will share with you our collective view on MCD and how we intend to implement with our network partners and directly authorised introducers.
Firms previously authorised to transact consumer credit broking could apply for mortgage permissions from 20th April 2015, the date of their application determined by the FCA and known as a ‘landing slot’.
Firms already holding permission to advise and arrange regulated mortgage contracts pre-MCD need not apply unless they wish to vary their permission by continuing to hold certain consumer credit functions. Firms already authorised to advise or arrange on regulated mortgage contracts will be able to advise on second charge mortgages and introduce second charge secured loan business to master-brokers up until 21st March and after this date as the new regime applies to secured lending on first and second charge mortgages. Voluntary adoption commenced on 21st September 2015.
Firms who only hold consumer credit permissions can continue to introduce second charge secured loan business until the regime commences on 21st March 2016.
The FCA requires mortgage sellers including advisers to obtain a relevant Level 3 qualification. Staff in a post at 21st March 2016 will have until 21st September 2018 to ensure they meet this requirement. After 21st March 2016 staff will have 30 months from starting to carry out the relevant activities to become qualified.
Scope of services
FCA rules do not require firms to broaden their scope of service to include both first and second charge mortgages. If firms do provide advice on both first and second charge mortgages they should declare this in their scope of services. Firms who refer clients to a master broker for second charge secured loans should make this clear. Where a master broker is used firms should not be described as being independent.
If you are providing advice relating to second charge secured loans your scope of services should name their panel of lenders and let customers know they have the right to ask for information on commissions paid by different lenders, ensuring they have access to relevant market data to respond to such a request.
Our process for client handover post MCD for second charge secured loans is very clear.
For directly authorised firms we offer the option of advised or execution only – in each instance we complete a declaration of advice document which clearly outlines who is providing advice to client.
For authorised representatives of networks for which our services are contracted we always provide advice.
At the enquiry stage we complete a standard declaration of advice form between our firm and introducing intermediary which clearly defines who is providing the advice to consumer. This form is signed by both parties and ensures there can be no uncertainty or confusion.
Our scope of services will be clearly defined and describe our firm as a whole-of-market second charge secured loan intermediary and limited panel first charge intermediary.
We need to clearly communicate to consumers that our first charge mortgage panel is specialist and limited and they should seek advice to determine a more appropriate product is not available i.e. further advance or remortgage.
We will also make reference to alternative borrowing options available where capital raising is requested (e.g. unsecured loan).
European Standardised Information Sheet (ESIS)
For second charge secured loans ESIS documents will need to be provided by 21st March 2015 or earlier of lenders choose to adopt early (from 21st September 2015).
ESIS is a prescribed and standardised product disclosure document designed to help customers shop around. It broadly follows disclosures within Key Facts Illustration but requires some further additional information, namely information on the seven-day reflection period and the potential impact of interest rates changes
The MCD does not provide transitional arrangements for ‘pipeline’ applications. The rules implementing MCD will apply to the granting of credit from 21st March 2016, unless the credit was granted under an agreement existing before that date. To assist firms in managing their sales pipeline those with mortgage permissions and interim permission for consumer credit can choose to adopt the new regime six months early, from 21st September 2015. It is likely second charge loan providers will adopt early in early 2016 providing intermediaries sufficient time to process existing business pipeline before 21st March 2016.
Binding offer and reflection period
The MCD dictates that conditional offers can continue to be provided but consumers must ultimately receive a binding offer that does not contain such conditions. When a binding offer has been made this is the starting point for consumers to have time to reflect on the offer. The period must be at least seven days and consumers have the right to accept the offer during this reflection period.
John Malone is chairman of Positive Lending