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HBF Member Briefing: Regulation of Second-charge Mortgages

Date: 10/09/14

Regulation of Second-charge Mortgages

The EU Mortgage Credit Directive (MCD), to be implemented in the UK in March 2016, will require second-charge mortgage lenders to be fully regulated by the Financial Conduct Authority (FCA). At present such lending is regulated under the far-less onerous FCA consumer credit regime (the FCA took over responsibility from the OFT in April 2014).

The new requirements will have a major effect on house builders offering their own shared-equity products, or products offered jointly with the Government (e.g. schemes like the former FirstBuy or HomeBuy Direct). While this is not a significant issue at present, given HtB1, the new regulatory regime will also apply to existing back-books of second-charge loans. And at some point in the future, there will be another recession and house builders will want to be able to offer shared-equity products to maintain sales.

The Government has for some time been minded to bring the regulation of second-charge mortgages within the same regulatory regime as first-charge mortgages. However it waited until the MCD was passed (in February 2014) so that only one set of regulatory changes would be required.

HBF began discussions with the Treasury and FSA (the predecessor to the FCA) several years ago on the regulation of second-charge mortgages. Recently we have met officials from the Treasury and FCA to discuss the implications of the Directive for home builders, and the likely requirements of forthcoming consultations.

The Treasury has now published its consultation (

A further consultation from the FCA will follow shortly. The Treasury sets the broad requirements, while the FCA then proposes the detailed rules to implement these requirements.

The intention is to finalise the measures needed to implement the Directive by March 2015 to give lenders 12 months until implementation date (21 March 2016).

HBF Actions

It seems unlikely many (if any) house builders will wish to become fully FCA regulated mortgage lenders. In any event, we understand that even if a company were to apply now, it would take at least two years to get full FCA approval.

In our discussions with the Treasury and FCA, an idea that seems well worth pursuing is to have an external, fully FCA-regulated body undertake the requirements under the new rules on behalf of house builders, including the requirements for managing existing loan books. It is very early days, so we have not explored this idea in any detail. We are about to begin discussions with house builders and, if appropriate, outside parties. We will keep members informed as our discussions progress.

John Stewart
Director of Economic Affairs