Lack of broker knowledge is still holding up second charge lending volumes and could play into a Financial Conduct Authority cull of unused regulatory permissions, according to experts.
Last week, the FCA said it will contact firms that do not use their regulatory permissions and is prepared to cancel them.
In a document, the FCA justified the information it requests in its retail mediation activities returns.
The regulator says that some of the information it requests lets it work out which firms are not earning income from activities demanding permissions.
The statement says: “If we feel the firm will not use its permissions in the future, then the Financial Services and Markets Act gives us the power to remove those permissions.”
The regulator says it will pay “particular attention” to investment firms that do not use permissions for a year. However, the FCA will also oversee how firms use permissions in other areas of financial services, including mortgages.
In the mortgage broker space, there is a significant gap between those with second charge permissions and business written in the sector, based on the volume of firms who applied when the market became regulated. One attraction for brokers is that getting second charge permissions lets them call themselves ‘independent’.
The FCA says that 2,021 firms applied for permission to advise on second charges by April this year, out of a total of 5,051 that have first charge mortgage advice permissions. The 5,051 figure does not include network brokers.
But the level of second charge lending suggests many brokers are not recommending the loans.
New business volumes in the second charge mortgage market shrank by 15 per cent year-on-year in October to £71m, according to figures from the Finance & Leasing Association released last week. Second charges fell 22 per cent by volume in the same period.
Early last month master broker V Loans announced it would close following “significant transition” in the second charge market since the Mortgage Credit Directive came into force.
Industry experts question the level of danger to consumers of unused second charge permissions.
Key Retirement director Dean Mirfin says one way for brokers to demonstrate second charge competence is to sell the product regularly. He adds that consumer understanding of seconds is still low.
He says: “There is still a way to go before consumers are aware of second charges and brokers are still learning where they are applicable. There are cases where a second charge would be a better option but customers are often only being offered a remortgage.
“It does come back to that issue of, ‘have you got firms that look like they are offering seconds but aren’t doing any?’ We’re nearly two years into the MCD. If there are firms out there that have got their permissions but have not done a single second, or have barely done any, that’s where that question mark of competence comes in.”
Brightstar chief executive Rob Jupp says: “Mortgage brokers who don’t consider second charge mortgages within their suite of advice considerations are simply not competent to do their job correctly. There are no longer any viable excuses.”
He adds: “The majority of brokers do advise on seconds and do a fine job but I do believe there is a significant minority who simply can’t be bothered to do their job correctly as this would involve change.”
London Money Loans founder Martin Stewart says: “Whether you do one second a year, or a hundred, that should not impact on the client. But what that says to me is the broker is not aware of the opportunity. It’s about turning the light on in the broker’s head, that’s what the industry needs to do. There’s still a stigma attached to the second charge market from the days of old.”
But there is also a risk to consumers when brokers sell second charges without proper knowledge, which the FCA might not easily pick up on, argues Positive Lending chief executive Paul McGonigle.
He says: “The bigger risk for me is where the broker doesn’t really understand it but does it anyway. There is a big issue with education in the marketplace and understanding what the products do. There is more of a risk to customer outcome there.”