Regulations and Regulatory Authorities Impacting the Secured Loan Sector

 Regulations and Regulatory Authorities Impacting the Secured Loan Sector

Word Count:

1580



In brief:

The secured loan market is said to be uncontrolled frequently, but is it really? This piece aims to address that important query.





Key words:

loans, OFT, FSA, secured loans, and secured loan industry





Article Text:

Preface

It's common to refer to the Secured Loans industry as "unregulated," but what exactly does this mean? This article will look at the official and non-official regulatory agencies that have an impact on secured loans in an effort to provide an answer. Additionally, a quick overview of the different Parliamentary Acts that contain laws impacting the market for secured loans or second charges will be provided. The intended audience for this article consists of individuals working in the finance sector, particularly in the area of secured loans, or members of the general public who are interested in consumer credit laws that may have an impact on them.

The Office for Fair Trade (OFT)

The primary responsibility of the Office of Fair Trading, or O.F.T. as it is more well known, is consumer protection in several important domains. Its three primary goals are as follows. These include communicating with consumers, companies, and the government; enforcing competition and consumer protection laws; and analyzing markets to ensure they are functioning.

The O.F.T. addresses a number of issues related to secured loans that have an impact on how market participants advertise. Firstly, through the management of Consumer Credit Licenses. The Consumer Credit Act, which was passed by parliament in 1974 in response to the sharp rise in credit usage in the early 1970s, is the legal framework under which consumer credit licenses are issued. An organization needs a Category C Consumer Credit License if it markets, promotes, or brokers secured loans. After receiving an application, the O.F.T. will look into every individual associated with the company to make sure they are all qualified to grant credit or assist others in obtaining credit. Although the Act makes it plain that a Category C license is necessary for companies that provide credit of ANY size secured on land, there is a widespread misperception in the market that the Consumer Credit License is only necessary if the Secured Loans Company offers loans less than £25,000.

The enforcement of other provisions of the 1974 Act as well as the 2004 Act amendments known as the "Agreements Amendment," "Disclosure of Information," and "Early Settlement" Consumer Credit Acts are additional areas that the OFT handles that have an impact on secured loans.

These Acts regulate certain aspects of secured loans. The first is the manner in which businesses can promote loans that are secured. The Acts specify criteria on what can and cannot be expressed in advertisements as well as terms that must be used in the advertisement. Most advertisements for secured loans, for instance, almost certainly have to 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." The Acts further mandate that credit advertisements display the Annual Percentage Rate (APR) and provide guidelines for calculating it. (often known as the TTC calculation or total charge for credit).

In the mortgage and secured loan sectors, there is growing pressure for secured loans to eventually come under FSA regulation. An 'formal' recommendation for its regulation by the F.S.A. is more likely to come from the O.F.T. given the agency's already heightened workload.

The FSA is the Financial Services Authority.

The Financial Services and Markets Act (FSMA) 2000's regulations are enforced by the Financial Services Authority, or F.S.A. as it is most well known. Despite the general public's misconception, it is an independent non-governmental organization that gets all of its funding from the very businesses it regulates. It is operationally independent but answerable to Treasury Ministers.

Regarding laws pertaining to secured loans, the F.S.A. controls payment protection insurance (P.P.I.)-related operations. Therefore, it's very possible that a company that assists clients in purchasing or filing a claim for payment protection insurance will need to apply for regulation with the FSA. Your participation in P.P.I. is a major factor in determining whether you need to be subject to FSA legislation in the secured loan market. It's likely not necessary for an organization to be regulated if it only serves as an introducer, but it's always a good idea to have legal counsel.

As of this writing, the FSA is heavily involved in P.P.I. It is now investigating what occurs to insurance premiums when a borrower chooses to cancel only the P.P.I. portion of a secured loan or settles a loan early. Nowadays, 'no refund' clauses are present in most insurance policies for both situations.

The regulation of mortgages by the F.S.A. is another area of activity that could have an impact on suppliers of secured loans. According to the FSMA, ads by an authorised lender that receives second charge loan business from an unauthorised lender must be approved by a firm that has been approved by the Financial Services Authority.

The Financial Industry Standards Association (FISA)

The industry established the Finance Industry Standards Institute (FISA) as a self-governing organization to oversee the secured loan sector. FISA is funded by an annual subscription charge from its members. It releases a Code of Conduct covering the criteria it demands in advertisements for its Members. These are essentially recommendations outlining the O.F.T. regulations particular to the secured loan industry. In addition, FISA posts a disciplinary mechanism and notes in its records that it will enforce the law against non-members, first by contacting the offending organization and then by notifying the appropriate regulating agency.

Additionally, FISA offers training sessions around once a month. These address the legal criteria for working in the Second Charge industry. The organization intends to offer three levels of "qualification" in the future: Foundation, Associate, and Member. However, before implementing these plans, it will wait for changes in the OFT and F.S.A. It stands to reason that the degree of regulation those two entities impose on the secured loan industry will likewise have an impact on whether or not this occurs.

The ICO (Information Commissioners Office)

The Data Protection Act of 1998 is enforced by the Information Commissioners Office (ICO). Since every company in the secured loan industry will eventually have personal data, they all need to register with the ICO as Data Controllers. To summarise, the Data Protection Act guarantees that any information stored on an individual, including employees, is truthful, processed fairly and legally, sufficient and relevant but not excessive, used for certain purposes only, not transferred abroad, and stored securely.

Additional Regulating Organizations and Secured Loans

The following organizations are not directly in charge of the secured loan market, but it is still important to list them for clarity's sake and in case the law changes and these organizations end up having more sway over the secured loan industry in the future.

Another independent organization is the Consumer Credit Trade Association (CCTA), which is different from FISA in that it covers the entire consumer credit business. It also provides training programs, sends out publications on a regular basis, and actively advocates to the government on matters pertaining to consumer credit. It is important to remember that the CCTA was established in 1891, more than a century ago, in a society where people like to believe that taking out credit is a relatively recent phenomenon.

An independent organization called the Intermediary Mortgage Lenders Association (IMLA) represents the interests and viewpoints of institutions involved in the creation of mortgage business through intermediaries.

Another self-governing organization that works in the mortgage industry is the Council of Mortgage Lenders (CML). It interacts with government through legislative concerns and policy guidelines, much as the CCTA. It is also well known for producing data on the UK lending industry that includes information on arrears and repossessions, the quantity of mortgages obtained, and particulars including the quantity of buy-to-let mortgages obtained.

The Association of Mortgage Intermediaries (AMI), an independent organization that serves as the trade association for mortgage intermediaries, completes this section.

Conclusion:

Despite the widespread belief that the Secured Loans industry is "unregulated," this paper has hopefully demonstrated that there is still a great deal of regulation (both official and informal) that impacts and permeates the secured loans industry. It will not be too much of a stretch to see secured loans fall within the purview of the FSA in the finance sector, where the UK is known for having the strictest regulations throughout Europe. It is thought that the Treasury, not the FSA, will be the one giving the order for the agency to seize control of the secured credit market. One thing is for sure: in the upcoming years, there will be additional legislation pertaining to the secured loan industry. If you plan to operate in the mortgage or secured loan markets, keep in mind that membership fees for these organizations might total several thousand pounds annually.

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