Moving the regulation of second charge lending into the mortgage regime

Now the final rules are out, what does it mean for both old book and new?

The Financial Conduct Authority (FCA) will transfer the regulation of second charge lending from its consumer credit regime to its mortgage regime. This is expected to take place on 21 March 2016.

Many of the 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. The idea behind this is to continue to enhance consumer protections by preventing irresponsible lending and borrowing and to create a more efficient and competitive single market for mortgages.

Key changes to be applied to second charge lending are:

• ensuring all second charge loans are advised, as is the case with first charge lending
• implementing the Mortgage Credit Directive’s creditworthiness assessment by extending its existing Mortgage Conduct of Business (MCOB) rules on affordability to cover the second charge market. This will require second charge firms to now base affordability assessments on verified income, credit commitments and other expenditure and any foreseen changes to expenditure
• requiring second charge firms to apply the same stress tests to borrowers as required by first charge firms
• as with first charge lending, requiring that second charge firms use the European Standardised Information Sheet (ESIS) when providing product information, but may give customers additional information on a separate document. In addition to the ESIS, second charge firms must disclose any limitations in the range of products they will offer customers as well as the basis of their remuneration and inform customers about alternative borrowing options as included in the Mortgage Market Review
• prohibiting the automatic rolling-up of fees and charges into the loan itself for second charge lending which is currently applied to first charge lend firms in the MCOB.

As of 20 April 2015, the FCA has already started to accept applications. Therefore, any firms dealing with second charge lending who wish to add regulated mortgage activities to their permission under The Financial Services & Markets Act 2000 (FSMA) are encouraged to act as quickly as possible.

It is important to act quickly. We are already advising people on this subject so if you require any assistance or have any questions relating to this topic, please do not hesitate to contact us.