The FCA will transfer the regulation of the second charge market from its consumer credit regime to its mortgage regime and is set to include a requirement for all second charge sales to be advised.
In a consultation paper on secured loans and implementing the EU’s mortgage credit directive published today, the regulator said it plans to bring second charge lending under its mortgage rules from 21 March 2016.
FCA director of policy, risk and research Christopher Woolard says: “We recognise that second charge mortgages are beneficial for some customers but we are concerned that consumers can be put at risk by poor sales practices and ineffective affordability assessments.
“Given the risk of consumer detriment, we want to embed good practice and we believe that applying our mortgage rules is the best way to do this.”
Many rules that govern first charge lending, like checking affordability, verifying income and disclosure requirements, will be introduced for second charge lending, but the FCA is proposing to bring in an additional set of new rules for the sector.
As with first charge lending, the regulator is proposing that all second charge loans are advised.
The FCA is also proposing to implement the directive’s creditworthiness assessment by extending its existing Mortgage Conduct of Business rules on affordability to cover the second charge market. This will require second charge firms to base affordability assessments on verified income, credit commitments and other expenditure and any foreseen changes to expenditure.
In addition to affordability checks, the FCA is proposing a requirement for second charge firms to apply the same stress tests to borrowers as required by first charge firms.
The Bank of England’s requirement for first charge lenders to stress test borrowers against a 3 per cent increase in the prevailing interest rate when the mortgage was originated, would also apply to second charge firms under the FCA’s proposals.
However, as second charge loans typically charge higher rates than first charge loans – meaning second charge product prices may be less affected by fluctuating interest rates than first charge prices – the FCA says this may be reflected in the stress used by second charge lenders. These firms will have to justify the basis they use for interest rate stress tests.
In addition, the FCA is proposing that second charge lenders stress against the first charge loan too.
Second charge firms must use the European Standardised Information Sheet (ESIS) when providing product information, but may give customers additional information on a separate document. The FCA says it must also remove any contradictory product information requirements from existing national rules.
Under the regulator’s MCOB rules, first charge firms must disclose any limitations in the range of products they will offer customers as well as the basis on which the firms will be remunerated. The FCA is proposing to apply these rules to the second charge market, as well as a third requirement for firms to inform customers about alternative borrowing options, as included in the MMR.
MCOB rules prohibit the automatic rolling-up of first charge loan fees and charges into the loan itself, and the FCA is proposing to apply the same restrictions on the second charge market.
Anderson Harris director Jonathan Harris says: “Bringing second charge mortgages under the regulator’s jurisdiction is long overdue. It is astonishing that they were previously unregulated when the charge is normally secured against a borrower’s home.
“Given that the mortgage market review ensures that all borrowing is affordable both now and when interest rates rise, it simply doesn’t make sense that second charge loans have been excluded from similar scrutiny.
“It will regulate an area of the market that can be vulnerable to sharp practices and protect those who may be desperate because they need to take on extra borrowing in the first instance.”
The FCA says responses to the consultation must be received by 29 December 2014.