A recent landmark ruling by the Court of Appeal has rocked the personal loans industry and has far-reaching implications for brokers in the specialist sector. The judgement referred specifically to a secured loan but I can see the unsecured sector coming under scrutiny too.
The case centres on a borrower, Delroy Wilson, who fell into arrears on a secured loan. When the case went to court, Wilson claimed the original contract was void as a commission payment made to the broker was not disclosed at the point-of-sale.
The Court of Appeal agreed and then went further. It stated that lenders must also seek borrowers’ permission to pay brokers commission and that its presence could mean their advice was not impartial.
The Finance Industry Standards Association is seeking urgent legal advice to ascertain exactly what brokers need to disclose and when. For those of us doing the job properly and honestly, there’s nothing to fear as the disclosure of commission can only improve competition and create a level playing field in the market.
The judgement may also help eradicate the rogue players in this largely unregulated part of the financial services industry.
They often stand accused of preying on the vulnerable, ramping up interest rates on loans while taking hefty commissions from lenders that I have to say are also culpable.
Sub-prime under the microscope
The Financial Services Authority has issued a further warning to brokers working in the sub-prime arena not to ignore prime opportunities for their clients.
It has long been known that the FSA considers sub-prime to be a vulnerable sector and plans thematic work in this area later this year.
Please do not let the word ‘thematic’ lull you into a false sense of security. As anyone who has been on the receiving end of one will tell you, thematic reviews are every bit as scary and potentially damaging to your business as Arrow visits.
In many respects they can be worse because they focus on one aspect of your business.
The regulator’s main aim is to ensure that brokers consider affordability and responsible lending, not just at the outset but throughout the entire term of the loans.
Speaking at a recent Council of Mortgage Lenders lunch, Vernon Everitt, director of retail themes and consumer sector leader at the FSA, confirmed that the regulator will be closely scrutinising sub-prime deals, particularly those recommended when borrowers may qualify for prime rates. It wants to know whether brokers have taken the appropriate steps to assess the prime option.
For brokers using packagers to place sub-prime business, there is an assumed level of competence. Packagers will assume that they have already tried to place customers on prime rates before coming to them. In short, brokers should not and cannot rely on packagers to ensure this occurs.
Of course, some lenders cascade deals up, offering better rates if clients qualify for
them rather than just sticking with the deals that come in.
Unfortunately, this does not overcome the main issue of ensuring prime deals are checked at the outset, so brokers still can’t abdicate their responsibility.
Cascading is just the tip of the iceberg. The FSA views the sub-prime arena as being as problematic as the lifetime mortgage sector, and we’ve all seen the ramifications of the thematic work the regulator has done there.
Many firms have chosen to stop advising altogether, referring their lifetime business to third-party specialists. Make no mistake, the same thing will happen in sub-prime sooner rather than later.
There are some packagers that understand this. They’ve made progress in providing the right support and technology to source across the majority of lenders in this arena, giving brokers all the information and tools they need to make informed decisions in a safe and compliant environment. This is the future, so get used to it.