Secured loans regulation

Tony Machin, Group Managing Director, Freedom Finance.

When people talk about the need to regulate the secured loans market, it implies the market is not regulated at the moment, which is not true.

The sale of secured loans is regulated by the Consumer Credit Act (CCA), whilst the sale of mortgages is controlled by the Financial Services and Markets Act. All brokers are required to hold a Consumer Credit Licence and their loan activities are subject to supervision by the Office of Fair Trading. If a broker sells payment protection insurance alongside any loan product then the insurance is regulated by the Financial Services Authority.

However, this dual regulation does create some real operational problems. For example, developing advertising campaigns which include both mortgages and secured loans is difficult. Some adverts need to comply with the stringent FSA advertising regulations, which immediately puts any secured loans proposition at a disadvantage to an advert created solely under the CCA regulations. In reality, this type of advertising is unlikely to become commonplace until there is greater harmonisation of regulation between the two sectors.

However, the FSA has made it clear that it intends working more closely with the OFT in future and the secured loans market will be one area which will come in for closer scrutiny. One joint initiative between the OFT and FSA is focusing on risk warnings and the way in which they are expressed in adverts and both regulators are seeking ways to reduce the financial promotion rule book in lending sectors which are subject to dual regulation. The FSA is also looking at ways to reduce the administration burden on companies seeking authorisation from both regulators – good news.

Perhaps most significantly, this month the Financial Ombudsman Service is taking responsibility for handling complaints on all consumer credit issues. This is good news for both brokers and consumers and should build confidence in the way the sector is regulated.

There is a danger that momentum builds for all financial services to be regulated by the FSA, simply because it is tidier from a regulatory perspective to do so. ‘Creeping regulation’ of this sort can create more problems than solutions and there needs to be a justifiable reason for amending regulations still further. However, where real anomalies exist and where consumers are exposed to greater risks in some markets than others, then extending regulation has to make sense.

From my point of view, I am fully in favour of creating a level playing field, so that companies such as Freedom Finance, which are active players in the mortgage, secured and unsecured loans markets, are not disadvantaged in their business activities. The EU will publish White Papers on mortgages and loans during the summer, and here I also sense a will to bring these markets under one regulatory framework.

The sooner that secured loans are regulated by the FSA, the better.

Rob Field, Head of Sales and Marketing, Unity

Second charge or secured loans are becoming increasingly popular for a whole host of legitimate reasons. However, should lenders not subject to the stringent TCF and principles-based advice process be allowed to offer loans of over £25,000 under the much less stringent Consumer Credit Act regulations?

As a lender that specialises in picking up the pieces, and helping people back on the property ladder after financial difficulty, we know that consumers see mortgages and loans very differently, especially their understanding of what happens when it all goes wrong.

We cannot escape the fact that repossessions are rising, and IVAs are increasing, at a time when the UK economy and employment remains strong. The underlying reason for this is that, as consumers, we have much greater access to credit, which for responsible adults is entirely reasonable but, as we all know, everyone is not always responsible.

The CML states that 50% of borrowers with significant unsecured credit, experienced difficulties paying their mortgage. And, a recent survey by repossession lawyers, Moore and Blatch, showed 70% of lenders thought more should be done to curb excessive lending on non-mortgage credit. The lawyers also found overwhelming support from lenders for a repossession risk warning to be added on all lending: THINK CAREFULLY BEFORE BORROWING, YOUR HOME MAY BE REPOSSESSED IF YOU HAVE A MORTGAGE AND ARE UNABLE TO KEEP UP REPAYMENTS

However, is it fair to damn a whole industry on the basis of what some reckless credit card providers do? The answer has to be no, but I believe that professional intermediaries have the right to expect all lenders to operate to the same exacting standards that you are required to.

Intermediaries often prefer to recommend a secured loan rather than a complete remortgage as it is often works out cheaper for smaller loan sizes, due to the costs of remortgaging the whole loan, and it is often quicker to arrange. It is for this reason that it could be argued that a relaxation of the CCA rules, for sums of over £25,000 makes sense. The same argument applies to business borrowers who should arguably not be burdened with any needless red tape.

However, consider the homeowner who has spiralling debts, but plenty of equity. Does the lender not have the same duty of care that professional intermediaries do? Our current mortgage regulation ensures that this process happens, and is becoming even more effective as TCF and the principles-based approach gains momentum. But, do lenders that ply their trade on daytime TV and over the Internet offer the same level of care? And should they not be required to act as diligently as we do? After all, £25,000 represents roughly the average annual salary in the UK.

In conclusion, I would support a change to the maximum loan size, but that this should only be applied to loans advised by suitable qualified intermediaries. It is only by adopting such prudent advice and lending criteria that we will be able to halt the spiralling level of repossessions and IVAs.

Ian Giles, director of marketing at Kensington

All Change in Secured Loans?

It could be ‘all change’ for the UK secured loan sector if a string of new legal proposals comes into play over the next year.

Currently second charge or secured loans are regulated by the Office of Fair Trade (OFT) under the Consumer Credit Act (CCA), along with all other non-secured personal loans and credit agreements. Despite the fact they are secured against property, until now the Government has decided not to lump secured loan products in with traditional mortgages and put them under the auspices of the FSA.

A revised Consumer Credit Act will be introduced later this year, the main thrust of which is to improve consumer protection. Borrowers will be able to challenge in court any elements of the credit agreement they deem unfair, including small print and charges.

The OFT will also have greater powers to take action against credit providers they feel are engaging in poor trading practices, with punishments including fines and the withdrawal of their credit licence. Currently firms regulated under the CCA need a credit licence, but this is not as complex and onerous as the FSA’s mortgage regulation. Consequently many credit brokers have a poor reputation, particularly when it comes to in-store credit, motor finance offered by dealers, and, unfortunately, secured loans.

But this will not be the end of the changes as the European Union’s (EU) Consumer Credit Directive (CCD) is also due to be implemented later this year. The CCD is designed to harmonise rules across Europe relating to the supply of credit, bringing in standardised documents and terms, which in theory should make it easier for borrowers to shop around different European states and compare different products to find the best deal. Critics say that most British consumers are unlikely to go to abroad for a loan, and they are also worried that the cost on the European wide legislation would eventually have to be borne by borrowers.

The biggest potential impact of the CCD in relation to secured loans is the possibility that the EU will re-class secured lending products as mortgages. How this is administered in each country is up to the individual member state, but it is highly likely that the UK Government would decide to hand over the regulation of secured loans to the FSA.

If they did this, then the Government and the FSA would have to set up a consultation process – similar to that prior to mortgage regulation – to get input on how second charge loans should be regulated. The bottom line is that the secured loans sector would have its own S-Day and credit brokers who wanted to offer the loans would probably face much tougher regulation.

If that were to be the case then mortgage brokers and lenders, who are experienced in FSA regulation, would be in a much stronger position to offer the newly regulated secured loans, providing innovative solutions in a marketplace worth over £6 billion a year.