Newsflash: FCA responsible lending call to second charge lenders

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FCA concerns

On 1 March 2018 the Financial Conduct Authority (FCA) wrote to the CEOs of all active second charge lenders to explain that, following the implementation of the Mortgage Credit Directive (MCD) in March 2016 and the moving of second charge mortgage regulation into the FCA’s mortgage regime [1], it has reviewed second charge lenders’ compliance with the ‘Mortgages and Home Finance: Conduct of Business sourcebook’ (MCOB).  In particular, the FCA was interested in Chapters 11 & Chapter 11A of MCOB and how firms are complying with the Senior Management Arrangements, Systems and Controls (SYSC) module of the FCA Handbook.

The FCA found that some second charge lenders might not always be lending responsibly and raised the following areas of concern:

  • Affordability assessments. Some firms were basing lending decisions solely on equity, debt to income ratios or income multiples, which is in breach of MCOB 11.6.5 R (1).
  • Some income assessments for self-employed customers were poorly handled. In some cases it was unclear how income and expenditure had been determined; lenders were not taking account of tax and national insurance deductions; and/or accountant certificates were accepted without challenge even where the figures were not plausible.
  • Firms were not always using realistic assumptions in expenditure assessments.
  • Some firms’ quality assurance and oversight arrangements were not fully capable of identifying unaffordable loans and associated risk and were too focused on procedure/inputs rather than effectiveness/outcomes.
  • Financial crime continues to be a significant problem and some second charge lenders appear too ready to accept supporting documents at face value, without carrying out further due diligence or authenticity checks.

What firms can do

The FCA has therefore asked CEOs to review their procedures, systems and controls to assess whether they are sufficient to ensure that firms are lending responsibly. Specifically, firms should take into account the FCA’s findings from the thematic review: Embedding the Mortgage Market Review: Responsible Lending Review (TR16/4) and should:

  • consider whether affordability calculation is now at the heart of each lending decision;
  • ensure that net income calculation methods focus on obtaining robust figures;
  • ensure that modelling data used is producing realistic results and that assumptions about basic essential expenditure and quality of living costs are sufficiently detailed to consistently produce reliable results;
  • consider whether oversight arrangements are focused on reducing the risk of customer harm and whether they meet regulatory requirements;
  • critically assess the firm’s arrangements for protecting itself from becoming a party to financial crime; and
  • assess whether the firm can evidence that it is lending responsibly and complying with regulatory requirements.

How Walker Morris can help

Walker Morris’ Regulatory & Compliance and Banking Litigation teams are skilled and experienced in helping financial institutions to put into place robust policies and procedures to protect against the risk of customer harm and to meet regulatory requirements. We can also offer advice, training and practical solutions to help counter financial crime and to minimise the risk of institutions’ inadvertent involvement [2].

For further information or assistance, please do not hesitate to contact Louise Power.


[1] See Walker Morris’ earlier briefing on the MCD and second charge mortgage lending
[2] See our recent briefing on Cybercrime, fraud and protecting your position