Brokers who wish to exclude second charges could commit ‘scope creep’ in their efforts to demonstrate a duty of care
As the industry braces for full regulation of secured loans, I have noticed three schools of thought emerging. Brokers are broadly planning to either explain that a second charge loan is available but not get involved; refer secured loans to a master broker; or fully advise clients on whether to take a loan or remortgage.
All of these options appear fine. However, there is a risk that brokers who wish to restrict their scope by excluding second charges could commit ‘scope creep’ in their efforts to demonstrate a duty of care. As such, fully engaging with the loan advice process may be a better option all around.
Let me explain…
Take an example where a broker wants to steer clear of second charges but their client is on a cracking mortgage rate and needs to raise some capital. If you only offer mortgages and have no experience of seconds, how do you ensure the remortgage is suitable without researching the alternatives? Is it good enough to offer a remortgage and suggest the borrower makes their own enquiries about a second charge or further advance?
Restricted scope may allow this to happen and, while the emphasis seems to be moving from offering “the most suitable” to “a suitable” solution, there must be a tipping point where your best may be judged by another as not good enough simply because they have done more research into the alternatives.
What could this dilemma lead the conscientious adviser to do? Perhaps, before placing a remortgage, you should check with a master broker what loans they can offer. But then, what do you do with the answer, particularly if the loan is more appropriate? In exercising a reasonable duty of care, you could be faced with the dilemma of telling your client your product is not suitable and they should try elsewhere.
There is an obvious solution: set up a referral arrangement with a loan packager. But think about your scope for a moment. You started by wanting to avoid second charges but have just told your client your remortgage may be unsuitable and a second charge may be better. You could argue that you have not exceeded your scope and have not sold a product, so you cannot be on the hook for the advice on the loan. But it may feel uncomfortably closer than you first intended.
Let us follow this case a little further. The master broker starts processing the application and, perhaps due to a down-valuation or some other factor, the loan is looking less attractive. Do you take the enquiry back and tell your client the remortgage was better after all? That sounds like advising on a second charge and you definitely did not want to do that. Of course, you could let the loan broker continue with the loan. After all, it is their advice and their problem, right? But what about your duty of care to the client you introduced?
In a world where loan brokers want to offer second charges only and mortgage brokers prefer to just offer first charges, there has to come a point when somebody takes responsibility for the advice. How will either party become comfortable with borderline cases unless they work together until one decides their product is most suitable?
Aha! I hear you cry – it does not need to be the most suitable, just suitable. But where is the tipping point between most suitable, quite suitable and least suitable? Who knows unless you consider the alternatives?
The concept of a simple hand-off to a third party somehow seems too easy and maybe a little naive. Creating a firewall between first and second charge brokers cannot lead to the best outcomes. At the very least, surely the mortgage broker and second charge broker should be working closely together so that one can own the advice on their product while exercising a duty of care and considering the products of the other.
Some may say I am over-thinking the issue and looking for problems where they do not exist. I am happy to be proved wrong but some healthy debate now may help to avoid retrospective issues in the future.
Surely it is better to plan for the worst and hope for the best.
Steve Walker is managing director of Promise Solutions