Anyone who follows the news on the second charge market will not have failed to notice the FCA’s recent interest in the sector.
The fact the regulator sent letters to chief executives of every second charge lender gave the impression in some quarters that all had been found to have come up short in their assessment of affordability. In fact, just a small number of lenders had used income and expenditure calculations, which the FCA required to be strengthened.
The reason the letter was sent to all lenders was to ensure they have reviewed their processes, made adjustments where necessary and confirmed by 1 May 2018 that they are compliant.
From the feedback I am getting, lenders are confident the deadline will not be a problem. While the FCA has rightly raised concerns, none of these represent issues serious enough that they could not be resolved by the time it comes around.
It is important that media reports reflect the facts rather than create headlines that provoke the assumption the whole second charge sector has been failing to meet the FCA’s requirements.
Let’s be clear: there have been mistakes. With a compliance regime based on interpretation rather than rigid rules, it would be surprising if some lenders had not erred.
However, it is worth remembering that second charge mortgages have only been operating under the MCOB rule book for two years, having only had 18 months to prepare for the Mortgage Credit Directive changes.
By comparison, the FCA and its predecessors have been regulating the first charge sector for more than 20 years. If the two timelines are compared side by side, it demonstrates how simplistic the criticism of second charge lenders really is.
No lender is unaware of the dangers of chasing market share at the expense of quality business
During those 20 years, the first charge sector was subject to regular thematic reviews. In that time, the regulator of the day had to issue requests that lenders review their processes on different aspects of lending procedure. Of the more recent events, both the PRA and FCA had to move to ensure that buy-to-let lenders complied on affordability assessment.
So, it should not be such a surprise the second charge sector is of interest to the regulator, as it should be under the same scrutiny as its first charge cousin. It is just a shame the headlines do not reflect a more balanced view of the way regulators work and the relative timescales under which the second charge sector has had to come up to speed.
As I sit on the Association of Mortgage Intermediaries’ board, representing the second charge sector, I am often asked whether the industry’s relationship with the regulator could be tested by the recent correspondence and the spotlight it has brought to bear.
A work in progress
To me and my colleagues, the FCA is undertaking its review in exactly the same way and at the same time as it did with other sectors under its purview.
It is too early to predict the outcome but, as we have been bedding in a new regulatory system, it will undoubtedly throw up areas on which the industry can improve or modify.
That said, I am confident that the more we work closely with the regulator, the more we will understand of its requirements and as a result create a healthier, cooperative environment and a better industry.
With repossession data on second charge loans showing an all-time low, it is unlikely that criteria will tighten. More likely, criteria will harden if the economic or political landscape makes lenders draw back. Pressure on interest rates is more likely to have an impact on affordability in the medium term, which could seep through to criteria.
But there is not a single lender that is unaware of the dangers of chasing market share at the expense of writing quality business. A great deal has changed since the credit crunch.
On growth in the sector, I am firmly of the opinion it will continue this year. Such growth will be steady rather than dramatic. There is still a way to go, but the potential for increasing volumes of new business – particularly from advisers new to second charge – is where the market should be putting resources this year.
Tim Wheeldon is chief operating officer at Fluent Money