Consultation response: FCA Implementation of the … · Consultation response: FCA Implementation...

Consultation response: FCA Implementation of the Mortgage Credit Directive

Response by the Money Advice Trust Date: December 2014


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Contents

Contents

Page 3 Introduction / About the Money Advice Trust

Page 4 Introductory comment

Page 5 Responses to individual questions


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Introduction

About the Money Advice Trust The Money Advice Trust is a charity founded in 1991 to help people across the UK tackle their debts and manage their money wisely. The Trust’s main activities are giving advice, supporting advisers and improving the UK’s money and debt environment. We help approximately 1 million people per annum through our direct advice services and by supporting advisers through training, tools and information. We give advice to around 200,000 people every year through National Debtline and around 40,000 businesses through Business Debtline. We support advisers by providing training through Wiseradviser, innovation and infrastructure grants. We use the intelligence and insight gained from these activities to improve the UK’s money and debt environment by contributing to policy developments and public debate around these issues.

Public disclosure Please note that we consent to public disclosure of this response.


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Introductory comment We welcome the FCA’s clear intention to create a regulatory regime that will aim to ensure that consumers are protected from unfair and irresponsible practices. We welcome the intention behind the proposals on the disclosure of alternative finance options, although we have misgivings as to the practical application of the measures. We welcome the proposal that the same creditworthiness requirements should apply to both first and second charge mortgages. We agree with the proposals to collect transaction-level data on second charge mortgages. We are pleased to see the measures proposed on the fair treatment of customers with payment shortfalls and in particular, that the provisions under CONC 7 for the fair treatment of vulnerable consumers are transposed to MCOB 13. As a consumer organisation, it is heartening that the FCA recognises so clearly the greater risk posed by second charge lending. We are therefore on the whole supportive of the Government’s proposal to incorporate second charge lending into the FSMA regime. However, we are extremely concerned that the removal of CCA protections will result in a reduction in consumer protections overall. We are particularly concerned that the FCA has failed to demonstrate that time order provisions will continue to apply to both second and first mortgages. We are not reassured that this is the case.

• We are similarly concerned that the FCA has failed to demonstrate that there will be no loss of consumer protection in removing the CCA unfair relationship provisions from the second charge mortgage regime.

• Furthermore, we are concerned that the FCA proposes to replace the CCA early settlement rules with an estimate of reasonable costs under MCOB. This completely removes the certainty under the CCA where firms use a set formula to recover up to two months additional interest.

• We do not agree with the proposals to remove the generic risk warning for financial promotions in relation to first and second charge mortgages. The generic risk warning at least makes an attempt to warn the consumer of the nature of the loan and the risks they are running by taking out secured credit.

• We do not agree with the proposed weakening of Consumer Credit Act protections as they relate to preventing firms from charging interest on arrears charges until notice has been given and the removal of the 29 day grace period to make payments before interest is charged.


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Responses to individual questions Question 1 – Do you agree with our proposed approach to implementing the transitional arrangements by requiring ‘top-up’ disclosure? We have no comments to make on the proposed approach to transitional arrangements. Question 2 – What, if any, might be the alternative approaches that would allow us to meet our legal obligations when implementing the transitional? We have no alternative approaches to suggest. Question 3 – What difficulties, if any, can you see with using the ESIS instructions and template (see MCOB 5A Annex 1R and 2R) to prepare pre-sale mortgage illustrations? We cannot comment on this question. Question 4 – Do you have views on whether the ESIS instructions should be drafted in standard Handbook format? We cannot comment on this question. Question 5 – Do you agree with the proposed approach to implementing the MCD requirement for a binding offer? We cannot comment on this question. Question 6 – Do you agree that the MCD consideration period is better enacted as a pre-sale reflection period, rather than a post-sale cooling-off period? We see the sense in this proposal to avoid extra costs on firms of having to cancel post-sale rather than pre-sale. We would much prefer that the FCA sets out a prescribed notice that the firm has to serve setting out the pre-sale reflection period requirements. In our experience, it only encourages poor practice by less scrupulous firms where there is discretion on the content of notices or a lack of certainty concerning the type of evidence should be provided to demonstrate compliance.


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Question 7 – Would it simplify matters, for example in terms of the compliance obligations for firms, to apply the MCD approach to the APRC calculation to all lending rather than just that covered by the directive? We would usually support simplicity and transparency. However, it is beyond our expertise to comment on whether this is a good idea for the same calculation of APR to apply to all lending. Question 8 – Do you agree with our proposed approach to specifying a benchmark that firms may need to use when calculating a second APRC? We cannot comment on this question. Question 9 – Do you agree with our proposed approach to transposing the MCD requirements on financial promotions and the wider simplification of our rules in this area? We do not agree with the proposals to remove the generic risk warning for financial promotions in relation to first and second charge mortgages. The paper at point 2.28 states as the FCA reason for this as follows. “We believe this is appropriate for mortgages because of the relatively limited role advertising plays in the purchasing decision. This is very different from the role of advertising for some other financial services, including unsecured credit.” We cannot support this reasoning as it relates to second charge mortgages. We cannot comment on how people may choose a first mortgage, but the second charge lending sector acts in a very similar way to the unsecured consumer credit market. We cannot believe that it is appropriate to confuse potentially vulnerable consumers under pressure to find a debt consolidation loan in this way. It is not at all clear from general advertising for loans that a loan is secured or unsecured. The generic risk warning at least makes an attempt to warn the consumer of the nature of the loan and the risks they are running by taking out secured credit. In our view the FCA is in danger of forgetting the different nature of the second charge lending market despite recognising that it has caused consumer detriment in the past in relation to selling techniques, lending to high risk and vulnerable consumers and in the high level of arrears present in the lending book as compared to arrears on first charge mortgages. Question 10 – What challenges do you see in providing consumers with an adequate explanation, for example in an execution-only sale? It is difficult to see how lenders can ensure that those opting for execution-only have the right information to proceed in an informed way. Even if an ‘adequate explanation’ is provided on


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a lender’s website, there is no way of ensuring that the consumer has read the information or understood it. During the MMR consultation process, we did not support the introduction of execution-only sales for first-charge lending. Apart from the difficulty of ensuring that consumers have the information required to make an informed decision, we also believe there is scope for misuse of execution-only as a way round regulation. Choosing the wrong course of action can cause enormous financial losses to the consumer and even, the loss of the home. Given the higher risk of second-charge sales, we consider that the scope for detriment is even higher. We would support the removal of execution-only for all mortgage sales. Question 11 – What do you consider will be the impact of the new MCD rules on the availability of foreign currency mortgages? We cannot comment on this question. Question 12 – What do you think will be the impact of this approach on firms and consumers? We are not familiar with this type of credit so cannot comment in any detail. Question 13 – What, if any, might be alternative approaches that would allow us to meet our legal obligations when implementing the Directive for this type of lending? We are not familiar with this type of credit so cannot comment in any detail. Question 14 – Do you consider that the proposed transitional approach is effective in allowing firms to prepare early for the implementation of the MCD? We have no comments to make on the proposed transitional approach. Question 15 – Do you have any comments on the draft rules in relation to implementation of the MCD set out in the draft Mortgage Credit Directive Instrument 2014 at Appendix 1? Do you agree that the rules reflect the stated policy intention? We have set out our general high-level concerns throughout our response. We have not commented in detail on the draft rules themselves.


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Question 16 – Are there any particular elements that you think should be implemented on a different timetable to MCD requirements? If so, which elements, and why, and to what timetable? As a consumer organisation, we are approaching these changes from the standpoint of ensuring the maximum protection from unfair and irresponsible practices for all mortgage consumers, whether they are first or second charge borrowers. The changes that have been identified by the FCA as not directly related to the MCD and not therefore subject to the March 2016 timetable, have implications for consumer protection (particularly the provisions around advising and selling standards and training and competence qualification requirements). We would therefore like to see these implemented as early as possible. We would point out that firms have had an intimation of these changes for a considerable period of time. Many have already made the internal changes to ensure that they will comply with the new regime. We would therefore welcome a decision to bring all firms into compliance at the earliest possible date. We see no reason why this cannot be March 2016. Question 17– Do you agree with our proposals for sales disclosure for second charge mortgages? Overall, the proposals seem appropriate. We had not appreciated one of the implications of the removal of second charge mortgages from the CCA is the potential for up-front fees to be more readily used. Mindful of the FCA’s recent action regarding credit brokers, we urge that practices in this area (particularly, disclosure around the fees that are charged if an application does not go ahead) are monitored very carefully and speedy action taken should further safeguards be required. Question 18 – Do you agree with our proposals for post-sales disclosure for second charge mortgages? On the whole, the proposals for post-sales disclosure appear to be reasonable. However, we would ask that the FCA rethinks the proposal not to replace the CCA obligation on the lender to provide a copy of the agreement. We note that in the CP, it is suggested that firms ‘should aim to help’ and provide copies of contracts under their Principles for Businesses obligations, but we do not think that this is good enough. We would like to see it being made clear in MCOB that all firms will be expected to comply with a post-sale request for a copy of an agreement. Question 19 – Do you agree with our proposal to extend our mortgage advice and selling standards to second charge mortgages? We believe it is important that all consumers are helped to ensure that they understand the financial products that they are buying and the implications of this purchase. Also, that the products are appropriate for their circumstances. We therefore welcome the proposal to extend the advice and selling standards into the second charge market.


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Question 20 – Do you agree that all borrowers looking to increase their borrowing should be made aware that a second charge or unsecured loan may be more appropriate, during initial disclosure at the start of the sale? We believe it is important that consumers seeking a second charge are made aware of all their options. In an ideal world, we would like to see all consumers who seek a second charge, shopping around and considering an array of lenders and products. The evidence however, is that only a small number of consumers act in this way. We therefore welcome the proposal that borrowers seeking to increase their borrowing should be made aware that that in addition to a further advance or re-mortgage, a second charge or unsecured loan may be more appropriate. We will be interested to see how this actually works in practice. Question 21 – Do you agree that we should apply MCD creditworthiness assessment requirements to second charge mortgages through our MCOB affordability rules? We supported the introduction of stricter affordability rules for first charge lending during the Mortgage Market Review process. Given that second charge lending is even more risky, we welcome the proposal that the same creditworthiness requirements should apply to both first and second charge mortgages. Question 22 – Do you agree that we should apply the MCOB interest rate stress test to second charge mortgages? For the reasons given above (Question 21), we welcome the proposal that the same interest rate stress test should apply to both first and second charge mortgages. Question 23 – Do you agree with the proposed approach to stress testing higher priority loans against expected interest rate increases? Yes, this seems a reasonable approach. It makes sense for the second charge lender to take account of interest rate rises that will affect the borrower’s entire secured lending including higher priority loans. Question 24 – Do you agree that we should apply the MCOB debt consolidation requirement to all second charge debt consolidation mortgages? Yes, we agree that the MCOB debt consolidation requirements should be extended to all second charge debt consolidation mortgages. As we have said before in our response to the MMR proposals, we suggest that when consolidation loans are set up, lenders should be required to ensure that the funds are used to pay off the debts.


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We strongly believe that if a consumer has taken out a consolidation loan, that this is used to consolidate debts. Yet it is commonplace for money advisers to speak to clients who have obtained a consolidation loan and only used the loan in part to pay off their debts. Sometimes this is because they were not allowed to borrow enough to pay off all of their debt or because the consumer then decided to spend the money, or part of it, on something else. In such circumstances we can often identify this as the trigger that caused the debts to spiral out of control. We therefore consider it vital that the example of current market practice for second charge lenders to make out cheques to creditors explained in point 3.61 of the paper is set out as a minimum requirement on second charge lenders. We would like to see this requirement extended to any first charge consolidation loans as well. Question 25 – Do you agree that we should apply the MCOB interest only rules to second charge mortgages? Yes, this seems a sensible approach. Question 26 – Do you agree with our proposed approach to contract variations for second charge mortgages? We are not confident that the proposed approach to contract variations will be sufficient for second charge mortgages. We appreciate the current consumer credit rules on modifying agreements can be cumbersome. However, we are concerned that the MCOB rules on variations may not capture or prevent bad practice in the market. The proposal of a “light touch” approach where the transaction does not involve further borrowing may miss the point. If the variation is to increase the term of the loan and/or to increase the interest and charges on the loan, could this not be to considerable consumer detriment? Borrowers may find themselves signing up to new terms and conditions that cause them considerable disadvantage but these may fail to be scrutinised properly under the proposals because they do not involve further borrowing. We would seek reassurances as to how the FCA will identify bad deals for consumers in this area and be able to intervene. Question 27 – Do you agree with our proposal to prohibit the automatic rolling-up of fees and charges into a second charge loan? We support the FCA approach to prohibiting the automatic rolling-up of fees and charges into a second charge loan. However, where a desperate borrower wishes to consolidate their borrowing into a second charge, when confronted with an up-front lending or brokers fee that they cannot afford, it would not take much for them to agree to choose to have the fee included in the loan. It would be better in our view, to have a requirement for the borrower to be signposted to sources of free debt advice at this point. Question 28 – Do you have any comments on how our proposed approach to implementing the MCD requirements on ERCs will affect the second charge market?


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We are concerned about these proposals for early settlement charges. MCOB 12.3.1 allows the lender to charge: “a reasonable pre-estimate of the costs as a result of the customer repaying the amount due under the regulated mortgage contract before the contract has terminated.” This completely removes the certainty under the CCA where firms use a set formula to recover up to two months additional interest. It is not clear to us what redress customers will have beyond a complaint to the Financial Ombudsman Service if they feel that the firm has charged them costs that are not “reasonable”. The requirement for costs to be reasonable does not have the degree of certainty that we would wish for in a market where practice has not always been exemplary. Furthermore, the market for secured consolidation loans includes those who are potentially vulnerable due to being in debt. This market segment is less likely to assess or complain about the reasonableness of the charges being made. We believe that this is not a good outcome and that the CCA formula should be retained. Question 29 – Do you agree with our proposal to apply MCOB 12.5 to second charge firms? Yes, we agree with these proposals to prevent lenders adding excessive charges. We are keen to know how MCOB 12.5 will interact with MCOB 12.3.1 so alleviate the concerns we have raised in relation to “reasonable costs” for early resettlement of loans. Question 30 – Do you agree with our proposed approach to fees and charges relating to payment difficulties? We appreciate that MCOB allows for fees and charges to be frozen once a payment arrangement is agreed. We would like to see fees and charges being frozen for an extended period from the date that a customer tells the lender they are in financial difficulties to entering into a payment arrangement. This is the equivalent of a “breathing space” provision which is commonly applied by lenders recovering unsecured consumer credit agreements. Question 31 – Do you agree with our proposal to require interest to be charged on default fees only on a simple basis for second charge mortgages? We welcome the proposal for interest to be charged only on a simple interest basis for default fees on second charge mortgages. We do not agree with the proposed weakening of consumer credit act protections as they relate to preventing firms from charging interest on arrears charges until notice has been given and the removal of the 29 day grace period to make payments before interest is charged. The paper states at point 3.79: “These requirements were introduced by the CCA 2006 following concerns that consumer harm was occurring as a result of high and frequent arrears charges coupled with high rates

http://fshandbook.info/FS/glossary-html/handbook/Glossary/C?definition=G252

http://fshandbook.info/FS/glossary-html/handbook/Glossary/R?definition=G1321


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of interest. Compounding interest calculations meant that the monthly repayments were not always sufficient to prevent the levels of debt spiralling.” There is no justification given in the paper for the removal of these protections. We see no basis for the argument that the MCOB requirement for charges to be cost effective will prevent consumer harm. We believe that the nature of some of the historical practices of the second charge mortgage market means that more protection should be granted and not less. We would suggest the FCA reconsider their approach. Question 32 – Do you agree with our approach to protecting second charge mortgage customers in payment difficulties? We are generally in support of the FCA’s approach to protecting second charge customers who are experiencing payment difficulties. However, when the transfer of second charge lender from the CCA to FSMA was first mooted, one of our most immediate concerns was the loss of the option of time orders. We were then surprised to read in paragraph 3.87 and the reference to the availability of time orders for first charge lending. This was not something that we had been aware of and we pointed out in our response to the Treasury consultation on implementation of the MCD that we believed this is to be a virtually unknown provision and that this lack of awareness applies to money advisers, lenders and even the Court Service. We would like to see evidence from the FCA that there is a provision for time orders in first charge lending and demonstrate how the remedy can be accessed. We would like to hear more from the FCA on how it intends to promote the existence of time orders and the role they can play in helping customers in payment difficulties. We are not at all convinced that the FCA has satisfactorily done so at this stage. We therefore cannot accept the reassurances given in the paper. Question 33 – Do you agree with our proposal to apply the general conduct of business standards set out in MCOB 2 to second charge mortgages? We are generally supportive of the proposal to apply the general conduct of business standards to second charge mortgages. Question 34 – Do you agree with our proposed approach to shared equity loans? We cannot comment on the FCA approach to shared equity loans as this is outside our area of expertise. Question 35 – Do you agree with our proposed approach to second charge business loans? The experience of our Business Debtline advisers tells us that people running small businesses can find it hard to separate their personal and business affairs, especially if they are using their homes as security. In our response to the MMR proposed package of


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reforms we called for provisions to ensure that lenders carried out the same checks and apply the same rules to business lending as they do to non-business lending. We were disappointed that this approach was not adopted by the FCA and this remains our position. We are however pleased that the CCA protections for smaller business loans will be carried across to the mortgage regulatory regime. Question 36 – Do you agree with our proposed approach to second charge bridging loans? This seems to be a reasonable approach. Question 37 – Do you agree with our proposed approach to high net worth individuals taking a second charge mortgages? We are pleased to see that the Mortgage Credit Directive does not exempt high net worth individuals. With regards the FCA proposals regarding the tailored advice provisions matching those for first mortgages, we believe that it would be clearer and there would be less scope for detriment if all sales resulted from advice. We see no reason why this should not apply to high net worth consumers. Question 38 – Do you agree with our proposal to defer consideration of whether prudential requirements should apply to second charge firms? There are clearly potential risks to deferring consideration of prudential requirements as outlined in the paper. However, we are not qualified to make any judgments about how real these potential risks are or the effects of deferring the decision. Question 39 – Do you agree with our proposed timetable for deferral? We would only suggest that the FCA keeps the proposed timetable under review so that a decision can be brought forward from March 2017 if necessary. Question 40 – Do you agree with our proposed approach to training and competency? Yes, we welcome this approach and the requirement on second charge lenders to meet the same qualification and training rules as first charge lenders. Question 41 – Do you agree with our proposal to include second charge advising and arranging activities into the scope of FSCS? Yes, we welcome this proposal.


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Question 42 – Do you have any comments on the draft rules in relation to second charge mortgages set out in the draft Mortgage Credit Directive Instrument 2014 at Appendix 1? Do you agree that the rules reflect the stated policy intention? We have set out our general high-level concerns throughout our response. We have not commented in detail on the draft rules themselves. Question 43 – Do you agree with our proposed collection of transaction-level data on second charge mortgages? We agree with the proposals to collect transaction-level data on second charge mortgages. The FCA has noted that arrears rates are consistently higher for second charge lenders as compared to first charge lenders. We are therefore particularly keen for the FCA to be able to track the arrears rates of second charge lenders and how this relates to affordability checks. We hope that this data will help inform further FCA work in relation to protecting vulnerable consumers who should not perhaps have taken out the loan in the first place. Question 44 – Do you have any comments on the individual data items we intend to collect on sales and performance of second charge mortgages? We have no additional comments to make. Question 45 – Do you have any comments on our proposed adjustment to reporting frequencies for second charge performance data where firms are submitting data manually? We have no additional comments to make. Question 46 – Do you agree with our proposed treatment of second charge lending through MLAR? We have no comments to make on these reporting requirements. Question 47 – Do you agree with our proposed treatment of second charge mediation through RMAR? We have no comments to make on these reporting requirements. Question 48 – Do you agree with our proposed implementation timetable for second charge firms’ regulatory reporting?


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We support the implementation timetable for the reporting requirements on second charge firms. We agree that it is imperative that the FCA gains vital information on the activities of second charge lenders from the earliest start point possible to help ameliorate any possible consumer detriment in the market. Question 49 – Do you have any alternatives to minimise any cost burdens on firms, while ensuring that the FCA can meet its statutory objectives? We have no alternative proposals to put forward. Question 50 – Do you have any comments on the draft rules set out in Appendix 1? Do you think the rules reflect the stated policy intention? We do not have any comments to make on the draft rules. Question 51 – Do you agree with our proposed rules requiring firms to make customers aware of alternative finance options where they are looking to increase their secured borrowing? We are supportive of the proposals to require firms to make customers aware of alternative finance options to an extent. It seems reasonable to raise alternative finance options with customers such as unsecured loans but unless there is some supplementary information setting out the pros and cons of each type of finance and some indication of what to look out for when making the decision, this may not have a beneficial effect. For example, it may be difficult to identify the circumstances where a second charge loan offered at a higher interest rate and over a shorter term than the original lender will be a good option. Furthermore, we believe it will be very difficult for the average consumer to make an informed decision regarding the merits of various options. Question 52 – Do you agree that these proposed rules should form part of the initial disclosure, applicable to both advised and execution only sales? We agree that the proposed rules should form part of the initial disclosure, although we would still question the likely effect if there is no requirement on the firm to set out whether the other options might be more appropriate for the customer. Question 53 – Do you agree with our proposal to transpose the CONC 7 provisions for vulnerable customers into MCOB 13? We strongly support these proposals. We are very pleased to see the provisions under CONC 7 for the fair treatment of vulnerable consumers transposed to MCOB 13. This will mean that the provisions will apply to both first and second charge mortgages and will be instrumental in developing best practice for both first and second charge lenders with supporting their customers in vulnerable circumstances.


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We are strongly supportive of the MALG’s work in this area and have worked with MALG to develop the MALG mental health guidelines and the debt and mental health evidence form. We would draw your attention to the recently updated “Lending, debt collection and mental health: 12 steps for treating potentially vulnerable customers fairly” briefing.1

Question 54 – Do you agree with the scope of our proposed information sharing requirements? The information sharing requirements appear to be eminently sensible. Any measures that will assist mortgage lenders to share information and prevent extra stress and expense for consumers through unnecessary court action and litigation costs are to be supported. It is to be hoped that greater transparency will also provide a disincentive to those second charge holders who may be tempted to block a voluntary or agreed sale. We would hope that the FCA will keep a close eye on this to look at whether there should be further rules in place to deal with such obstructions by subsequent charge holders to agreed sales. Question 55 – Do you agree that our proposed information sharing requirements should apply to all firms with a regulated mortgage secured against the property? Yes, we agree that the proposed information sharing requirements should apply to all firms with a regulated mortgage secured against the property. The policy intention behind the information requirements will not succeed unless this applies to all firms. Question 56 – Do you agree with the amendments made to PERG? We have not been able to scrutinise the amendments to PERG in any detail. Question 57 – Are there any business models which need further consideration under PERG as we propose to amend it? We have not identified any business models which need further consideration under PERG at this time. Question 58 – Do you agree with the costs and benefits identified? We have looked in particular at the costs and benefits identified where consumers would be estimated to not be able to access a second charge mortgage for the purposes of debt consolidation. One of the effects identified is that consumers already in debt will fall behind with payments and seek a debt solution. We would reiterate that when refused the loan application, it should be a requirement on lenders and brokers to signpost to sources of free debt advice. In many cases, it would be beneficial for the consumer to look at their entire financial 1 http://www.malg.org.uk/dmhdocuments/12%20steps%20Mental%20Health%20Nov%2014%20(1).pdf Royal College of Psychiatrists and Money Advice Trust

http://www.malg.org.uk/dmhdocuments/12%20steps%20Mental%20Health%20Nov%2014%20(1).pdf


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situation in a holistic manner with a debt advice body before deciding that a consolidation loan is the way forward for them. In many cases, this will not be the best outcome. Early intervention by way of debt advice has been shown to be beneficial. The risk of mortgage arrears, and repossession or worsening the debt spiral by taking out further secured credit in an attempt to deal with a debt problem is to be avoided. We would also question whether the full impact of the loss of consumer protections embodied in the CCA have been fully considered by the FCA There is nothing in the cost benefit analysis assessing the impact on consumers of the loss of time orders and the unfair relationship provisions in particular. As we have stated in our response we are not convinced that there is a general provision for time orders in the first charge market which means that time orders will continue to exist. This is set out in point 3.87 of the paper. We would expect the FCA to set out in detail what these provisions are and how consumers and their advisers can access them. “Although consumer groups have expressed support for this proposal, we are also aware of a concern that CCA protections around time orders will no longer apply for second charge mortgages, to the harm of consumers. In fact, although not well understood, time orders will continue to exist, as they do for first charge loans, although they are rarely used in the first charge market. We anticipate that although time orders will continue to apply to both first and second charge lending we will see a marked reduction in their use, as MCOB 13 will require second charge firms to engage with customers much earlier in the process. Therefore consumers should not need to rely on time orders to agree forbearance with the lender.” The FCA acknowledges that there is evidence that second charge firms more aggressively threaten court action and take borrowers in arrears to court compared to first charge mortgage lenders. However, the loss of vital protection for consumers by removing the CCA provisions on time orders and unfair relationships have not been considered in the cost benefit analysis. We would strongly suggest that it is an inadequate response to an acknowledged problem with second charge lenders to say that consumers “should not need to rely on time orders to agree forbearance with the lender.” We would suggest that it is not a good way forward to water down protections in the area of second charge lending where the loan term and conditions have been shown in past years to be less beneficial to consumers and more likely to contain unfair terms and conditions. We do not see how the FCA can prevent early and aggressive repossession action by lenders in the case of an individual borrower. A time order provides exactly that protection from repossession for that individual. Forbearance is no substitute for the rights and provisions available to individual consumers as a result of the protection afforded by the CCA 1974. We are strongly supportive of a revised and more flexible equivalent to the time order provisions. There needs to be a mechanism in place to allow consumers to reschedule payments under an agreement when a borrower has financial difficulties in relation to not just the monthly payments, but the terms and conditions, and consequent interest rate and charges. There is no equivalent in FSMA of the unfair credit relationships test which was introduced by the 2006 Act under section 140A of the CCA 1974. This provides the court with wider powers to release security, rewrite agreements and liabilities. In contrast, consumers only have a right of private action for damages for similar practices under FSMA. Whilst we believe that actions to challenge unfair credit relationships could be made more accessible to consumers, we remain strongly in support of this part of the CCA being retained.


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Furthermore, the FCA acknowledges at point 27 of the paper that the lower consumer detriment caused by firms’ behaviour in this market has not been as a result of greater consumer awareness, but the impact of the financial crisis. There is a substantial risk that if the market changes, then the second charge market, unchecked, could increase consumer detriment. “However, it is important to remember that correction in the second charge market (lower observed detriment for customers) since the start of the financial crisis has not come about because of customers’ ability to discipline firms. In other words, it is not the informed actions of customers in the market which have led to firms’ changing behaviour. Therefore, the risk remains that in the absence of regulation, increasing house prices could shift lenders’ focus lenders back on to borrowers’ equity in their homes. This could consequently partly reverse the self-correction observed. It is in precisely this situation that our responsible lending proposals should be most effective.” Given this view, then we would expect the FCA to conduct further analysis into the risks of removing CCA protections from a group of potentially vulnerable consumers at an acknowledged risk of detriment in the second charge market.

For more information on our response, please contact: Meg van Rooyen, Policy Manager [email protected] 0121 410 6260

mailto:[email protected]


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The Money Advice Trust 21 Garlick Hill London EC4V 2AU Tel: 020 7489 7796 Fax: 020 7489 7704 Email: [email protected] www.moneyadvicetrust.org

mailto:[email protected]

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