Time’s up. The deadline has passed and we’re now all operating under MCD rules. For many firms this new way of working is a world away from what they are used to and many of the changes to the second charge model have been significant. There’s an awful lot of information to take in so to make sure you don’t miss a thing, here we present a handy A-Z guide to the new second charge world.
A -Automatic adding of fees is no more
Traditionally when a customer takes out a second charge loan the fees they pay are automatically added to the loan at the point of sale. However, under the new advised process this can no longer be the case. Indeed, clients are able to choose which fees to pay when – something which could make the process more complicated and time consuming.
B – Binding offers
Once a lender is satisfied that the client can afford the second charge mortgage (remember, affordability is the responsibility of the lender now) it will issue a binding offer, valid for 30 days.
C – Client responsibility
Once regulated advice is in play the issue of who is responsible for the client rears its head. If a mortgage broker advises on a second charge mortgage (perhaps using a packager to help source the loan) he retains responsibility for the client. If he chooses to refer the client to a second charge partner (forfeiting his independent status in doing so), the second charge master broker is responsible for the advice given.
D – Disclosure rules
For all brokers the rules of disclosure have changed. You must ensure your client is fully aware of what you offer, what you can and can’t advise on and what options are available to them. Even if you choose to avoid advising on seconds you must make the client is aware that such loans exist and could be worth exploring.
E – ESIS
Lenders will provide an illustration of the product chosen in the form of a European Standardised Information Sheet (ESIS).
F – FCA regulation
If you didn’t know this one you should probably be worried! March 31st marked the date the interim permissions period ended and the consumer credit industry came under full FCA regulation.
G – Getting paid
The way brokers are remunerated has changed – as too has the way in which you must inform your client. If you receive proc fees from a lender (or several lenders) you must make your client aware of this and be able to clearly outline your commission levels.
H – How does a second compare to a remortgage?
This will be a key question for mortgage brokers going forward. No longer is it acceptable to assume a remortgage is the best option. The broker must show they have at least considered a second as an alternative solution for raising funds.
I – Independent status
Last year the regulator sent shockwaves around the industry when it announced that brokers who wanted to retain their independent, whole of market status must offer advice on second charges. If a broker chooses to refer clients to a master broker he forfeits his right to label himself independent.
J – John Griffiths Jones
Now the FCA is running the show it’s important to get to know its key people, one of which is John Griffiths Jones. Jones became Chairman of the new Financial Conduct Authority in April 2013, and Chairman of its subsidiary, the Payments System Regulator in April 2014. He joined the FSA Board as a non-executive director and deputy chairman on 1 September 2012.
K – KFI is dead, long live the ESIS.
Key Facts Illustration (KFI) documents traditionally used in the first charge world will be replaced by the European Standardised Information Sheet.
L – Lender integration
One of the issues that arose when the seconds market moved to an MCD model mid-February was the need for great lender integration. Having to key in a case on several lender systems to run each lender’s affordability check was deemed impractical and there were calls for greater XML integration between lenders.
M – MCOB
With second charges now fully under the FCA’s remit the sector is now covered by Mortgage Conduct of Business rules so second charge firms need to get familiar with them.
N – New entrants
With second charges brought into the FCA fold it’s likely we’ll see a host of new lenders enter the market (and existing lenders expand their offerings). Experts are also predicting a rise in the number of specialist packagers operating in this space as more mortgage brokers looks to advise on seconds with the help of a packager.
O – Obtaining first charge mortgage consent
As has always been the case first-charge lenders will have to give consent for a borrower to take on a second charge and has the right to decline it. Speculation as to whether this will affect the market’s ability to operate a level playing field continues.
P – Packagers
If mortgage brokers choose to advise on second charge loans – something they will have to do if they value their independent status – the likelihood is they’ll need to utilise the expertise of packagers. Masterbrokers that don’t already offer a packaging service are likely to head down this route.
Q – Quick fact finds a thing of the past
For master brokers, offering advice will mean a much longer sales process and much more thorough fact find. The days of asking a couple of questions to determine what your client is looking for before suggesting a loan are gone. Fact finds can take over an hour.
R – Reflection period
In an attempt to promote sensible borrowing, the new regulation stipulates that consumers should be given time to consider their offer in the form of a seven day reflection period. The reflection period begins the day the binding offer is issued.
S- Stress testing
In order to comply with the Financial Policy Committee, second charge lenders will now have to perform stricter stress testing on loans. The market must operate like the first charge mortgage market which was told by the FPC in 2014 ‘When assessing affordability, mortgage lenders should apply an interest rate stress test that assesses whether borrowers could still afford their mortgages if, at any point over the first five years of the loan, Bank Rate were to be 3 percentage points higher than the prevailing rate at origination.”
T – Time difference
Traditionally taking out a secured loan was a quick and easy process. The client would tell the broker what he wanted and the broker would find a product that best suited those requests. There was no lengthy advice service and as such the funds were released pretty quickly. The new system is a much more complicated process and as a result will take a lot longer. With lengthy fact finds and much more importance placed on finding the correct product to suit the customer’s needs the days of quick and easy sales are long gone.
U – Unsecured
As a result of the sales process for seconds becoming more clunky and cumbersome experts believe some borrowers may be tempted to opt for an unsecured loan instead, particularly if they’re only after a relatively small amount.
V – Verifying affordability
The responsibility for assessing affordability now lies firmly at the door of lenders. The MCD dictates that lenders must look at a customer’s income and expenditure, to determine whether they can afford the mortgage loan.
W – Whole of market
If a broker wants to remain whole of market he will need to offer products from the whole of the mortgage market – and that means second charge loans too.
X – X-ray vision
Brokers are going to need X-ray vision to see through some of the pitfalls that may lie ahead if they are not used to offering true advice.
Y – Yes
It’s as simple as that. If you want to retain your independent status and offer advice on seconds that is.
Z – Zero
Hopefully the number of complaints you will receive as you get to grips with the new regime.