Research into the secured loans market by Datamonitor in early 2006 suggested the sector was struggling. The introduction of Financial Services Authority regulation to the mortgage market had ensured secured loans were way down the list of intermediary’s priorities as they concentrated on getting the big stuff right. Indeed, since the market’s peak in 2003, when gross new lending totalled 7bn, the market contracted significantly. Gross new lending had fallen by 3.9% to 6.7bn in 2004 and by a further 26% in 2005.
In fact at the time of the report it was thought no more than six brokers dominated the intermediary secured loans market. According to the industry experts Datamonitor spoke to, these six brokers controlled around 75% of the intermediary secured loans market. All of these brokers competed in the non-standard end of the market. With relatively few second charge lenders in comparison with the traditional first-charge providers, the market was much smaller and there was considerable hesitation to offer secured loans as part of the wider business model in the newly regulated climate.
But this is changing. The sector is starting to enjoy a resurgence in interest coupled with an increase in UK debt. In 2003, at the peak of the secured lending market, debt consolidation was the most common reason for taking out a second charge loan.
Every indication is that if these weightings have changed, it is in favour of debt consolidation. According to Credit Action, total UK personal debt exceeded 1.25trn at the end of January 2007, and the growth rate increased to 10.5% for the previous 12 month.
The opportunities that the rising tide of personal debt in the UK could bring for financial advisers – particularly those that have access to good secured loan services – are significant.
Many prospective clients will need someone to make sense of their debt situation and restructure it into a manageable regime. Mortgage brokers who are finding remortgaging increasingly expensive and problematic have only to look at the value secured loan services could provide to their clients.
Intermediaries would do well to understand that such an alignment has significant implications for their advice, even though the Consumer Credit Act rather than full FSA regulation currently covers secured loans. There is evidence that more conscientious intermediaries are beginning to take this wider view in anticipation of these regulatory requirements, and there is an increasing amount of press comment on this subject.
The advice given by brokers in niche mortgage markets such as secured loans is of concern to the FSA and it is expected to focus more and more on this market sector because it is considered an area where customers are at most risk of receiving bad advice and service. Since M-day, the FSA has predominantly focused on the mainstream mortgage market in an effort to make sure the new regulations bedded in well. Now this process is coming to an end, the regulator will have more time to focus on niche markets. Hence intermediaries must consider the improvements already being made as an ongoing process, as the FSA is likely to clamp down hard on any intermediaries that fail to abide by its rules.
In support of this approach, the latest green paper on mortgage credit published by the European Union Commission confirms that secured loans are to be treated as mortgages under EU legislation. In the UK this is in line with the Hampton Report, issued with the Budget, which recommended that the FSA should assume responsibility for all personal borrowing secured on land.
This is widely predicted to become a reality within the next two years. However, since mortgages and general insurance are already regulated, it is debatable ” The opportunities that the rising tide of personal debt in the UK could bring for financial advisers – particularly those that have access to good secured loan services – are significant”whether the regulation of secured loans will significantly extend the compliance requirements already in force for these products.
The sales and marketing of secured loans alongside mortgages is therefore likely to come under the same regulatory framework. If this transpires, then the FSA is likely to expect to see mortgage and loan advice provided alongside each other within both the demands and needs analysis and treating customers fairly requirements.
The niche mortgage market is an area most intermediaries already operate in. Datamonitor’s recent mortgage intermediary survey showed over 90% of brokers advised on the sub-prime sector alone. Put simply, people who get into debt and who need a sub-prime mortgage are generally not financially skilled and so need more help and advice.
This is even more true in the case of a secured loan for debt consolidation so it is worthwhile assimilating the learning from the FSA in the sub-prime market 18 months ago.
In September 2005, the FSA released its findings on the quality of service in the sub-prime mortgage market. With the regulator focusing on this market, intermediaries had to improve their business. Of particular importance was making sure intermediaries obtained sufficient information from customers when advising on sub-prime mortgages. Since then, when it comes to obtaining information for debt consolidation cases in particular, over 90% have taken measures to improve their business.
Moreover, intermediaries had to show they were recommending the correct product by ensuring it met the customer’s needs and circumstances. When customers were looking to intermediaries to help them with debt consolidation, specific additional requirements had to be taken into account. This is an important area where the services of an intermediary can be invaluable.
With Datamonitor predicting the secured loan market could be worth 50bn by 2009, intermediaries should ensure they get their advice right now and set themselves apart as an intermediary that already embraces the principles of TCF in this increasingly lucrative niche area of the mortgage sector.
Undoubtedly, as customers’ personal circumstances vary significantly, there will be situations where offering a customer a mortgage or remortgage would not be considered best advice but to recommend a secured loan might be more appropriate. Some examples of these circumstances might be where:
– a remortgage would attract an early redemption penalty;
– the customer has a high-street lender mortgage and recent adverse history means a remortgage would be non-status;
– the customer could lose the benefits of the original mortgage terms by remortgage;
– it is important for the customer to avoid paying an arrangement fee and/or other costs;
– the time it takes to raise the funds is important to the customer;
– the customer is looking to raise additional money to consolidate short term loans or credit expenditure;
– the customer needs to raise funds beyond the maximum available under a mortgage or remortgage (secured loans can be raised up to 125% LTV or 100% for self-cert).
So there are plenty of opportunities to meet customer needs with a robust secured loan offering. Until now, the intermediary’s choice has been somewhat limited in where to obtain an appropriate offering. However, recent rumours of technological innovation by the likes of Trigold and some specialist lenders appears to point to a way forward in suggesting the intermediary will increasingly be able to source secured loans quickly and easily direct from the lender.
This may open the way for those that have been reticent about entering the secured loan market, such as Premier Mortgage Service. But with so much at stake in terms of both customer satisfaction and enduring credibility, this decision is too important to get wrong MDfor any reputable distributor.
John Malone is managing director of Premier Mortgage Service