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FCA reveals potential impact of MCD on second charge mortgage market

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The FCA has revealed its assessment of the Mortgage Credit Directive (MCD) and its impact on the second charge lending market.

A report published on the 23rd March 2017 highlighted the costs of MCD for both second charge lenders and brokers.

The FCA revealed that around 50 lenders had applied for mortgage permissions since April 2015, following the publication of its rules implementing MCD and second charge mortgage regulation.

The impact of MCD costs were estimated by using the sales and performance data from loan providers and a survey of second charge loan providers and intermediaries.

In total across firms in the market, compliance costs were estimated to be around £330,000 one-off and £225,000 ongoing annually for lenders.

Meanwhile, compliance costs for brokers were around £85,000 one-off and £35,000 ongoing annually.

Following the response to the survey by KPMG/Ignition House, firms were estimated to incur compliance costs arising from making changes to IT systems, developing new sales processes, HR/training costs and additional time to process loans.

The FCA also revealed the potential impact of MCD on revenue and profitability as a consequence of reduced volumes of lending.

The report estimated how past second charge loans would have been different if the responsible lending proposals had been in place, using the methodology used in the Mortgage Market Review.

Based on the post-2008 financial crisis period only, between 10-17% of consumers were estimated to be no longer able to borrow and between 22-30% of consumers would be lent less.

These impacts would indicate a reduction in second charge lending volumes by around 20%, implying a reduction of around £100m in lending using 2013 lending volumes.

Since the KPMG survey estimated an average profit margin of 11% in 2013, this reduction would result in an ongoing cost to business of £11m.

The FCA added that any impact would not be equivalent across firms but depended on differences in behaviour.

Firms with narrow profit margins and in particular companies with worse post-lending outcomes may be at some risk of exit, but the ability to pass on costs through higher prices could temper this.

The FCA also revealed a number of caveats to these estimates and said both compliance costs and the reduction in lending would therefore be a significant overestimation of the true cost.

The regulator felt the greater alignment between the regulation of first charge and second charge lenders would be expected to encourage responsible entry into the second charge lending market and improve competition in the market, although such effects had not been quantified.

Nonetheless, the FCA’s rules on arrears handling were estimated to have cost lenders approximately £600,000 to roll out and would cost £700,000 a year thereafter.

Again the regulator said in theory that the costs presented should be an overestimate, but added that this theoretical overestimate was offset by firms underestimating the costs of complying with the Mortgages: Conduct of Business versus the Consumer Credit Act.

Meanwhile, the MCD rules on service disclosure would give an annual cost of around £250,000, based on 2015 lending, but the FCA said there would be some double counting of costs given the other changes to firms’ disclosure processes brought about by MCD.

Rules regarding advice were estimated to have cost lenders £400,000 and intermediaries £700,000 as one-off costs.

The requirement for mortgage lenders and intermediaries to report data to the FCA to help identify and assess risks to customers was also estimated to cost lenders £500,000 in one-off costs and £300,000 in ongoing annual costs.

For second charge intermediaries the costs per firm was £200 one-off and then approximately £800 per year.

Finally, the ban on automatic rolling-up of fees and charges was expected to be around £150,000 one-off cost across all second charge lenders in the market.

The FCA added that there could be additional small ongoing costs from ensuring explicit consent for each loan, but these are not expected to be material.

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