A lack of accountability when it comes to sales practices and affordability assessments means that the second charge mortgage market has historically occupied the niches of the wider industry.
But times have changed.
The implementation of the Mortgage Credit Directive on 21 March 2016 brought the second charge mortgage market within the Financial Conduct Authority’s remit.
In its original consultation document on regulating the second charge market, the FCA predicted that its proposals were likely to result in a 20 per cent reduction in lending volume – amounting to about £100m.
Lending volumes of the entire second charge market are difficult to source, but the latest figures by the Finance & Leasing Association, which releases the aggregate lending data of its members, offers an insight into how the market has fared since the EU directive came into force.
It shows that second charge borrowing dipped by 6 per cent in January 2017 year-on-year to £69m.
There was a 4 per cent fall in second charge mortgage lending during the three months to January (£218m), but over a 12-month period lending rose by 1 per cent to a total value of £869m.
Fiona Hoyle, head of consumer finance and mortgage finance at the FLA, said: “It is important to remember that we are still in the bedding-in process. We are just over one year into the new regime and we cannot underestimate the significant amount of change that has happened. As the market adjusts to the new regulatory environment, the lending levels will change.”
She added: “There have been a couple of new lenders that have entered the space in the last 12 months, which is a testament to the strength and optimistic outlook of the sector.”
Bradley Moore, managing director of Brightstar Financial, said the year-on-year figures were "blurred" due to a spike in business volumes three months before the MCD came into effect.
He said: "All comparisons are therefore disingenuous because of this. That said, it is clear that there is work to do to ensure IFAs and mortgage advisers are fully embracing the sector."
The second charge market was previously regulated under the Consumer Credit Act.
Some CCA provisions were maintained, including the prohibition on interest being increased on default, the right to complete payments ahead of time and the right to a rebate on early settlement.
As a result of the change, many of the rules governing the first charge sector now apply to the second charge market. These include the requirement for firms to provide an “adequate” explanation of a product’s essential features, issue a binding offer and a seven-day reflection period at least.
Notably, brokers are now mandated to provide clients with a European standardised information sheet disclosure document by 21 March 2019. This replaces the key facts illustration requirement.
Lenders in the first charge space have been forced to slash rates on products and/or create innovative offerings in order to survive in an increasingly competitive environment – to the detriment of their bottom line.
