Steve Harness is commercial director at The Loans Engine
When the history of financial services regulation is written, the lucky individual who gets the job might wish to look at how the major regulatory reviews and directives of our time have actually translated from theory into practice. The reason is that so often with new regulation, the proof of the pudding is in the eating, or as we might say, the success of the rule is in its interpretation.
As a sector, the second charge mortgage market has been reminded of this recently, with the introduction of the Mortgage Credit Directive (MCD) and how it has (and will) translate off the theoretical page into practice. Even if the rules seem clear cut you can guarantee that, once introduced, they might have the tendency to take on a life of their own, and those who are charged with implementation might choose to look and introduce them rather differently. One need only look at the immediate period post-MMR when lenders decided the safest thing to do was to implement it to the letter, rather than the spirit, to see how unintended consequences can leave consumers high and dry.
Even since March 21 this year, when we have been working in an MCD environment, it’s already possible to see how, what we might have considered likely to happen, hasn’t turned out that way.
However, let’s start with where our expectations have been met and how the market (and advisers in particular) have been reacting as anticipated. Firstly, given the requirement, at the very least, to disclose second charge mortgages when looking at capital-raising options, it seemed obvious to us that advisory interest in second charge products was going to escalate. Now, this might not translate to a huge surge in take-up but it was our belief we would see a significant uplift in lead volumes, and this is exactly how it has played out.
Where we have been surprised, and this became obvious in just a matter of days post-MCD, is the route advisers are taking in order to comply with the rules to ensure they could offer clients access to second charge loans. While in the network market, it is clear that many principals are insistent their AR firms deal with a sanctioned master broker from a panel in order to refer onto, for DAs the options were more open. They could either choose to provide the advice themselves – dealing with the lender direct; or they could provide the advice and link up with a master broker like ourselves to package the deal; or they could, like most AR firms, refer completely to the master broker who would provide the advice and package the case.
Now, our anticipation pre-MCD was that most DAs would opt for the referral route, and very few would wish to provide the advice themselves. However we have seen DA firms of various sizes opting to continue to provide the advice themselves, thus maintaining control of the client relationship. However, what is very clear is that these advisory firms don’t wish to be burdened with the complexities of packaging the deal and once the advice has been delivered they turn to a master broker to manage the application process.
For others in the customer journey, this advice/package-only choice being made by DAs has also perhaps been surprising, and has certainly divided opinion among some lenders in producing documentation which accurately describes who is involved in the advice/packaging process. I suspect, like us pre-MCD, their anticipation was more along the lines of a referral and the master broker providing the full advice service, rather than the way it is currently playing out.
The good news of course is that clients are being exposed to the second charge option and these advisers are actively engaging with the sector. It’s incredibly encouraging that intermediaries are recognising that a second charge can deliver a better outcome for many clients, including those on low-rate trackers, interest-only mortgages, or those who can be described as victims of circumstance – perhaps they have fallen on hard times or undergone a change in employment circumstance.
DA firms in particular have the best of all worlds in that they are able to choose their partnerships from the entire market, not just the ones the networks has set up for them. And of course, their engagement with second charge mortgage advice can span the entire range from total control in their hands, to advice and packaging, or if they wish a full referral.
In this sense, it’s important that whatever option is chosen, DAs opt for a master broker partnership that is flexible enough to deliver whatever the choice. We would certainly urge all DAs in this situation to choose their partner wisely and make the most of the opportunity that currently presents itself – in that sense, the practical application should not be any different from the theoretical goals of client satisfaction, income generation and quality outcomes.