Regulation of second charge lending was brought under the Financial Conduct Authority’s mortgage rules last March, as part of the regulator’s implementation of the Mortgage Credit Directive.
Under MCD rules, a firm cannot describe themselves as independent unless they give advice and recommend products from the whole of the market, including second charges.
Brokers can choose not to offer seconds within their scope of business and therefore do not need to advise on them, but they must still ensure that customers are made aware that a second charge may be more appropriate than a remortgage.
Alistair Ewing, managing director of The Lending Channel, said: “There will be potential claims if the adviser has independent or whole of market status but is not offering or discussing a second charge with the client and documenting this.”
Steve Walker, managing director of Promise Solutions, said some mortgage brokers rely on their misconceptions of the market to justify avoiding engagement with the second’s industry.
He said: “Seconds regularly result in far better outcomes for borrowers and those brokers who explore this will enjoy the rewards now and potentially avoid criticism of their sales process in the future.”
Although Walker said it is not necessarily an area claims companies would “jump on”, he said there is the potential for a customer to complain to the Financial Ombudsman Service that they were sold a remortgage when a second charge would have been more suitable.
He said: “If a broker claims to be whole of market and can’t defend such a complaint via FOS, a dangerous precedent might be set which could ignite activity by the commercial claims companies.”
“Surely it is better to do the right thing and evidence it, rather than ignore it and hope for the best.”
Tim Wheeldon, chief operating officer at Fluent for Advisers, said: “There are clear cases where due to a client’s circumstances, deteriorating credit profile, existing cheap mortgage, high early redemption fees etc, that the regulator could rightly claim that if a remortgage was recommended, it was detrimental to the client. Brokers should be careful.”