The Financial Conduct Authority (FCA) issued a Dear CEO letter last month to all mortgage intermediaries highlighting concerns with advice in the two sectors.
Speaking to Specialist Lending Solutions, AMI chief executive Robert Sinclair (pictured) said while the sectors had been separated in the FCA letter, there were common threads between second charge and equity release.
“There are concerns people start down that journey and then end up with that product no matter what they say,” he said.
“Also, all the costs end up being paid by those who complete and there are concerns about quality of advice around debt consolidation.”
He added: “I’m concerned that both markets aren’t listening to what the FCA has been saying to them. It is continuing to ask them to think about changes to business models.”
Poor quality fact finds
Sinclair noted that it was expected the FCA would return to examine the second charge sector in 2020 with the coronavirus pandemic delaying that.
But he said the regulator had raised concerns about the quality of advice around debt consolidation in the sectors and the issue of borrower vulnerability.
“They don’t see a great deal of good advice in the suitability letters that go out to people, there’s poor quality in terms of fact find and suitability,” he said.
“This isn’t a standard mortgage and often it’s being taken because they have debt distress, so there has to be a higher level of care.”
Sinclair added that AMI would be talking to its member firms about all the risks and issues but highlighted that the FCA’s vast data pool now meant it was much harder for firms to hide from the regulator’s scrutiny.
FCA scrutiny makes sense
Rob Jupp, CEO of The Brightstar Group, said it was understandable people reacted to news of an FCA review with a jolt of suspicion that something must be wrong with a sector, but noted it was the job of a regulator to review the markets that it regulates.
“Second charge mortgages have come under the remit of the FCA for a relatively short period of time and so it would make sense that it pays particular attention to the market to ensure that it is operating to the standards expected in other areas that fall under the regulator’s charge,” he said.
“The FCA may well find incidents where the advice process has not been up to scratch or fees are deemed to be excessive, but it will also find a lot of examples of excellent consumer outcomes and very good practise by firms that operate across the spectrum of secured lending, treating each element with the same level of professionalism.
“My biggest concern about the second charge market is not that the FCA is looking at it, but that so many brokers still are not, and that by excluding this important product from their advice process they are denying some of their clients the best outcome for their circumstances.
“If an FCA review of the second charge market provides a reminder to brokers that it sits on a level playing field along first charge lending then that can only be a good thing.”
Business models are changing
Brilliant Solutions managing director Matthew Arena agreed that the industry was improving with the benefits of the FCA’s post-credit crunch changes and added that a stable industry was positive for all.
“The fact they are going to revisit this means there are some issues to get to grips with,” he said.
“We focus on our own business and operate very differently to many others; that means low fees and an obligation to consider appropriate alternatives.
“Fees was a longstanding problem in the industry but so much has improved with more businesses than ever operating a similar low fee business model to ours.”
He added the industry has been improving and more mortgage advisers were seeing the benefits thanks to the low fee solutions available now.
“What I will say is that secured loan advice and secured loan packaging is more in depth than it is given credit for,” he continued.
“The level of work involved in offering and demonstrating compliant advice is incredibly high so the sector can justify higher fees than standard first charge mortgages, even where the procuration fees are higher.”
Equity release dabblers
Meanwhile, yesterday in his Mortgage Solutions column, Air Group CEO Stuart Wilson said he believed the FCA’s focus in the equity release sector was on so-called dabblers.
“Historically the regulator has been concerned with advisers who only carry out a very small number of equity release cases every year, and this appears to be a warning to those who may have the permissions and authorisations to provide this advice but who are not necessarily specialists in the sector,” he said.
“In other words, of course you may be able to work in this space, but are you necessarily best positioned to be doing so?
“I suspect the regulator is potentially concerned advisers might be lured into a sector which they perceive as more lucrative, only to give advice which is not appropriate because they may not understand it fully.”