You may have read recently about possible alternatives to the future of secured loan regulation. Once such suggestion is that the Financial Services Authority (FSA) will turn its attention to the regulation of the sector. Common sense dictates – not that this seems to apply to our industry – that surely a loan secured against a property should be subject to the same rules and procedures that mortgages are? However, this is currently not the case. In fact secured loans are not alone in this. Buy-to-let loans and commercial loans, whether secured against a residential property or a commercial property, are not regulated by the FSA. So why is this?
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Current situation
Secured loans of over £25,000 are currently covered by the provisions of the Consumer Credit Act (CCA), the reasons for regulating similar products in differing ways are shrouded in regulatory red tape, consultation papers, think tanks and other civil service mumbo jumbo and really are just about anybody’s guess. However, the reason may lie with the fact that when the FSA took over mortgage regulation in November 2004, it was barely able to cope with the enormity of that challenge. In 2004, mortgage brokers had all been regulated by the Mortgage Code Compliance Board (MCCB) and were all required to have passed either the Chartered Institute of Insurance (CII) Certificate of Mortgage Advice & Practice (CeMAP) or the Chartered Institute of Bankers (CIB) Mortgage Advice Qualification (MAQ) qualifications. Mortgage brokers all have professional indemnity insurance and consumer credit licenses, so in a sense perhaps what the FSA decided to do in its wisdom was initially just regulate the brokers that were the easiest to quantify and control. Perhaps the FSA has always had it in mind to regulate buy-to-let, commercial and secured loans later on, when the dust had settled from mortgage regulation.
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I am sure that there are brokers who ‘specialise’ in secured loans; buy-to-let and commercial loans specifically because they are not regulated by the FSA. This reason alone is sufficient to alert the government to the need to ‘protect the public’. In my opinion it is not so much if, but when. Secured loans will fall under the control of FSA regulation. Many of us who have been around long enough to remember FIMBRA, LAUTRO, PIA and all of the other ‘self-regulatory’ bodies will recall that ‘retrospective regulation’ of certain areas of financial planning has featured on more than one occasion. I distinctly recall that in the 1990s, the government took to advertising on TV the benefit of personal pensions as an alternative to occupational schemes. Opting out of the State Earnings Related Pensions Scheme (SERPS) was also heavily promoted in the 1990s and Free-Standing Additional Voluntary Contributions (FSAVCs) were also introduced around about the same time. From the 1970s, millions of borrowers were encouraged to take out endowment mortgages as the way to pay off their interest only loan, then suddenly all of these various schemes fell out of favour for a variety of reasons. The popular press, industry watchdogs and a plethora of ‘compensation companies’ sprang into action to defend the humble public from the evil financial services sector. So could all this happen again with secured loans, unsecured loans, credit cards, not to mention equity release? Based on the compensation culture that has crossed the Atlantic and the actions of the current government and its nanny state, I would say that the chances were fairly strong.
Broker impact?
So what does all this mean to the hardworking, hard pressed mortgage broker? It probably means that change is just around the corner, and if it is then I reckon that you should be dealing with your secured loan clients in the same manner as your regulated mortgage clients. So much so that I believe firms should apply the same systems and controls as regulated mortgage broking. The principles of ‘Treating Customers Fairly’ (TCF) should now be applied to all other forms of loan advice and processing. Customers should be given product confirmation letters, disclosure documents, Key Facts Illustrations, and yes; should be warned that ‘their home is at risk of repossession if they fail to keep up payments on a secured loan’.
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There is already growing evidence that many of the larger organisations share this opinion and already require their employees or appointed representatives to adopt this regulated approach.
Change is inevitable, competition is inevitable, and so it would seem is regulation. Therefore broker firms should take heed of the changing market conditions and incorporate this lucrative and often essential part of a client’s financial planning into their business. The alternative is to forge links with one of the emerging secured loan specialists, and introduce clients when a secured loan is the best advice for a client’s situation. This often occurs when a client needs to raise money, but is in the middle of a fixed rate period with their mortgage lender. Secured loan business will often lead to inevitable remortgage repeat business when a client is in a position to remortgage their main mortgage and incorporate any additional secured loan borrowing at the same time.
Planning for the inevitable
If we know that regulation is more than likely to affect us, we can plan for the inevitable. We can organise and prepare ourselves; in fact we can get a head start on ‘the competition’. Firms can begin to apply the TCF principles to all of their loan transactions. Technology can be a considerable help in this – for example, document management, note and record-keeping, allayed to product confirmation and product reporting. When choosing a case management system, brokers should take great care to ensure the specific requirements of the secured loan sector are properly catered for. To compliment correct case management, there are a number of new secured loan comparison systems emerging from both the traditional mortgage sourcing providers as well as some new software houses. Naturally, the case management software will allow the broker to upload client data to the secured loan search engines without re-keying of data.
Although the debate is unlikely to be resolved in the near future, there are certainly valid points to be made either side of the argument. Whatever happens, preparation and a focus on best practice will stand you in good stead whatever the regulatory outcome.
