by Nicola Mooney, Head of Secured, Intermediary & Business Finance at Freedom Finance

Are brokers ready for the Mortgage Credit Directive?

It’s becoming increasingly difficult for brokers to keep up with the constant tide of regulatory changes that are sweeping across Europe.  One of the biggest changes is the Mortgage Credit Directive (MCD), which introduces an EU-wide framework of conduct rules for mortgage firms.

The MCD has been on its way for a while and brokers will be feeling its effects as soon as March next year. Initial guidelines for the directive were published in February 2014, and it is therefore surprising to discover that more than a year later the industry remains sceptical and unprepared.

There are still doubts in the industry of the benefits that the MCD will bring to the market and  concerns that it will lead to a reduction in efficiency, a rise in costs, and further tightening of lending in the UK. The government has said that it is doing its utmost to align the directive’s requirements with existing UK regulations. This should help to minimise the impact on both the industry and consumers, although many brokers seem unconvinced. With the market still adjusting to recent regulation, such as the Mortgage Market Review (MMR), many brokers are still trying to figure out how to comply with the MCD while striking a balance between offering protection and access for consumers.

To alleviate some of this pressure, the Bank of England has announced that it will hold an open forum in November to discuss areas where regulation may conflict. Whilst this support is certainly welcome, the reality for UK brokers is that the MCD is coming – and soon. This means that those in the industry have no choice but to ramp up their preparations for the regulatory change if they want to keep consumers informed while staying competitive in the market.

Client retention and the second charge market

The implementation of the MCD is expected to have a significant effect on the second charge market in particular. This is because the regulation is going to be transferred from the FCA’s consumer credit regime into the mortgage regime.

To minimise disruption, the government has proposed that the arrival of MCD should be timed to coincide with the second charge market falling under the same regime as first charge lending. This means that second charge firms will have to comply with stricter rules and affiliates will have to be authorised (and hold the correct mortgage permissions) in order to carry on second charge mortgage business after 21 March 2016.

This means that some exemptions will exist for second charge lending that do not exist for first charge lending, which is why brokers need to educate themselves about these changes now. Meanwhile, advisers will need to get used to issuing different disclosure documents to clients from different lenders.

The second charge industry is projected to double in size in the next three years, as regulations change and as more customers choose to use the equity in their home as security against another loan. In order to retain and grow clients, advisers will therefore need to better educate themselves on this previously under-used option.

The second-charge market will continue to develop and blend even further into the mainstream mortgage market; interest rate stress tests will be applied, along with mortgage advice and selling standards. Brokers need to keep themselves up-to-date with these changes and make sure they are ready for the new regulations – otherwise they could damage their relations with customers, or worse still, lose them to competitors.

The MCD will enhance consumer protection by ensuring that second charge mortgages are being sold correctly.  For the first time, both second and first charge loans will be subject to the same regulatory environment, so it makes sense for advisers to be fully compliant on both types of loans. This will allow them to attract new clients looking for either type of loans and also retain clients who may be looking for a first charge loan now and a second charge loan later on.

The FCA will be contacting authorised first charge firms towards the end of this year and the beginning of 2016 to understand whether they will carry out second charge activities once the MCD is in effect. Second charge lenders have been able to apply for mortgage permissions since the 1st of April 2015. So, with less than one year to go, all firms urgently need to consider how the new rules apply to their business and implement the necessary changes within the remaining timeframe.