Affecting the Secured Loans Industry: Legislation and Regulatory Bodies

Introduction

The market for Secured Loans is frequently referred to as ‘Unregulated,’ but what does this term mean? This article will attempt to answer this question by examining the various governing bodies, both official and unofficial, that have an impact on Secured Loans. Additionally, it will discuss briefly the various Parliamentary Acts enacting legislation affecting the Secured Loans or Second Charges market. The article’s intended audience is either those in the finance industry, specifically those involved in secured loans, or members of the general public with an interest in Consumer Credit legislation that may affect them.

The Office of Fair Trading (OFT) The Office of Fair Trading (OFT) The Office of Fair Trading (OFT) The Office of Fair Trading

The Office of Fair Trading, or O.F.T. for short, is responsible for a number of critical areas with the ultimate goal of protecting the consumer. It serves three primary functions. These include enforcing Competition and Consumer Protection rules, analysing markets to ensure they are functioning properly, and communicating with consumers, businesses, and government.

In terms of Secured Loans, the O.F.T. regulates a number of areas that impact how market participants promote themselves. The first method is through the administration of Consumer Credit Licenses. Due to the rapid growth in the number of people taking out credit in the early 1970s, Parliament passed the Consumer Credit Act in 1974, which governs the granting of Consumer Credit Licences. A Category C Consumer Credit License is required if an entity advertises, promotes, or brokers Secured Loans. On receipt of an application, the O.F.T. will conduct a background check on all individuals associated with the business to ensure that they are all individuals deserving of issuing or guiding people into credit. While there is a widespread misconception in the market that a Consumer Credit License is required only if the Secured Loans Company offers loans of less than £25,000, the Act states plainly that a Category C licence is required for businesses that provide credit of ANY amount secured on land.

Additionally, the O.F.T. enforces other provisions of the 1974 Act that affect secured loans, as well as the Act’s 2004 updates, which include the ‘Agreements Amendment’, ‘Disclosure of Information’, and ‘Early Settlement’ Consumer Credit Acts.

These acts regulate a variety of aspects of secured loans. The first is the manner in which businesses can advertise secured loans. The Acts contain rules governing what can and cannot be said in advertisements, as well as requirements regarding certain words that must appear in advertisements. For example, most Secured Loans advertisements must include the phrase “YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON A MORTGAGE OR ANY OTHER DEBT SECURED ON IT.” Additionally, the Acts require the Annual Percentage Rate (APR) to appear on credit advertising and provide rules for its calculation (commonly known as the TTC calculation or total charge for credit).

There is growing momentum in the mortgage and secured loan industries that secured loans will eventually be regulated by the Federal Housing Administration. With the F.S.A’s workload already increased, it is more likely that a ‘official’ recommendation for their regulation by the F.S.A will originate with the O.F.T.

Financial Services Authority (FSA) Financial Services Authority (FSA) Financial Services Authority (FSA) Financial Services Authority

The Financial Services Authority, or F.S.A for short, is responsible for enforcing the Financial Services and Markets Act (FSMA) 2000’s rules. Contrary to popular belief, it is a non-governmental independent body that is funded entirely by the organisations over which it legislates. Although it is accountable to Treasury Ministers, it operates independently on a day-to-day basis.

In terms of secured loan legislation, the F.S.A regulates payment protection insurance activities (P.P.I). Therefore, if a business assists customers in purchasing or claiming payment protection insurance, it is highly likely that it will need to register with the F.S.A. In the Secured Loans market, whether you are subject to F.S.A regulation is highly dependent on your involvement in P.P.I. If an organisation merely acts as an introducer, it is unlikely that it requires regulation; however, it is always prudent to seek legal advice.

The FSA is very active in the area of P.P.I. at the time of writing. It is currently investigating what happens to insurance premiums when a loan is paid off early or when a borrower wishes to cancel only the P.P.I. component of a secured loan. Currently, the majority of insurance providers have a ‘no refund’ clause in place for both scenarios.

Another area in which the F.S.A is involved that may affect Secured Loan providers is mortgage regulation. According to the FSMA, if an authorised lender obtains business from an unauthorised lender for second charge loans, their advertisements must be approved by an F.S.A-approved firm.

Finance Industry Standards Institute (FISA) Finance Industry Standards Institute (FISA) Finance Industry Standards Institute (FISA) Finance Industry Standards Institute

The Finance Industry Standards Institute (FISA) is an industry-led self-regulatory body established independently to regulate the Secured Loans market. FISA is funded by an annual subscription fee collected from its members. It publishes a Code of Conduct for its Members that outlines the standards for advertisements that it requires. In essence, these are guidelines outlining the O.F.T’s requirements for the Secured Loans sector. Additionally, FISA publishes a disciplinary procedure and warns in its documentation that it will enforce legislation against non-members, first contacting the offending organisation and then notifying the appropriate regulatory body.

Additionally, FISA offers training courses approximately once a month. These provisions address the legislative requirements associated with participation in the Second Charge sector. The organisation intends to have three levels of ‘qualification’ in the future: Foundation, Associate, and Member, but is awaiting developments in the O.F.T. and F.S.A. One would assume that whether this occurs will also be influenced by the level of regulation imposed on the Secured Loans sector by those two bodies.

The Information Commissioner’s Office (ICO) is responsible for enforcing the Data Protection Act’s requirements (1998). Given that all businesses in the secured loans sector will hold information about individuals at some point, they must register with the ICO as a Data Controller. In summary, the Data Protection Act ensures that all personal information about an individual (including employees) is accurate, fairly and lawfully processed, adequate, relevant, and not excessive, used for limited purposes, not transferred overseas, and securely stored.

Other Regulatory Bodies and Secured Loans

Although the following organisations do not have direct power or control over the secured loan market, it is worth mentioning them for clarity’s sake and also because it is possible that legislation will change and these organisations will gain more influence over the secured loan sector in the future.

The Consumer Credit Trade Association (CCTA) is another self-regulatory organisation, but unlike FISA, it represents the entire consumer credit market. Additionally, it offers training courses, publishes regular newsletters, and actively advocates for consumer credit-related issues with the government. In a world where we assume credit is a relatively recent phenomenon, it’s worth noting that the CCTA was founded in 1891, well over a century ago.

The Intermediary Mortgage Lenders Association (IMLA) is a non-profit organisation that represents the views and interests of institutions involved in the generation of mortgage business via intermediaries.

The Council of Mortgage Lenders (CML) is another self-governing organisation that operates within the mortgage industry. Similar to the CCTA, it works with the government on legislative issues and issues policy guidelines. Additionally, it is well-known for producing statistics on the UK lending market, including arrears and repossessions, the number of mortgages taken out, and specifics such as the number of buy to let mortgages taken out.

To conclude this section, one more independent organisation, the Association of Mortgage Intermediaries (AMI), serves as the industry’s trade association.

Conclusion

Although the secured loans sector is frequently referred to as ‘unregulated,’ this document has hopefully demonstrated that there is still a significant amount of regulation (both official and informal) that affects and encompasses the secured loans sector. In the finance sector, where the UK enjoys a reputation for being the most regulated country in Europe, it’s only a matter of time before secured loans fall under the FSA’s purview. The FSA’s instruction to take control of the secured loans market is believed to have originated from the Treasury rather than the FSA itself. What is certain is that in the coming years, the secured loan market will become more regulated. One thing to keep in mind if you intend to conduct business in the Mortgage or Secured Loans markets is that annual subscriptions to these organisations can total in the thousands of pounds.

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