UK: Property Law Briefing FSA Regulation Of Second Charge Mortgages What Will This Mean For Shared Equity Schemes?

On 26 January 2011, the Government announced that regulation of new, and existing, second charge mortgages will transfer from the OFT (under the Consumer Credit Act 1974) to the Financial Services Authority, or its successor. Implementation is planned for the end of 2012. This will change, fundamentally, the way shared equity arrangements can operate unless they are part of a Government sponsored scheme

The Background

In recent times, housebuilders have had to be creative in their marketing and have adopted "shared equity" arrangements as a way of helping buyers overcome the hurdle of high deposits. Although a bit of a misnomer (none of the equity is actually retained by the seller) these deals generally involve deferring payment of a percentage of the purchase price - typically 25% - with the amount deferred being secured by way of a second ranking security over the property.

It is probably fair to say that shared equity is, at best, a necessary evil and I suspect it would be rare to find any housebuilder who regards it as core to their business plan in the long term. With the Government's increasing focus on consumer protection, providing any kind of retail finance is difficult and costly. For these facilities to be viable economically, it is key that regulatory requirements are minimised. In order to avoid the need for a consumer credit licence and the burden of the detailed CCA form and process rules, housebuilders have made use of a rule which exempts such shared equity arrangements, where repayable in four or fewer instalments, from the bulk of the CCA's rules (although it's worth bearing in mind that the CCA's advertising and unfair relationships rules still apply).

Housebuilders will have been pleased to learn that the recent changes to consumer credit law, emanating from the new consumer credit directive, did not impact on these secured arrangements. However, the relief has proved to be only temporary. The Government's announcement on the 26 January means that any business offering shared equity will need to reassess the way in which these schemes operate.

The Change

This change is not a surprise - it has been debated for some time and is, perhaps, inevitable. Since 2004, the FSA has regulated most residential first charge mortgages under the Financial Services and Markets Act 2000. There is little sense in first and second charge lending falling under two separate regimes. The Government argues that the change will reduce consumer confusion and save the cost of dual regulation for mortgage lenders. The perception is that second charge loans, typically providing equity release, are inherently more risky for consumers. Arguments that shared equity arrangements have quite a different underlying purpose have been dismissed. There are concerns that the key protection of the CCA's unfair relationships provisions will be lost with no clear parallel in the FSA regime.

The Consequences

However, irrespective of the merits of the decision, it is going to have widespread practical implications for shared equity plans. Although the detail of the new regime is still to be clarified, it seems likely that only Government sponsored schemes will be exempt and that, with effect from December 2012, housebuilders will not be able to offer any sort of secured, deferred payment arrangement nor, more worryingly, will they be able to administer existing arrangements, without either themselves being authorised by the FSA or perhaps, more realistically, entering into an arrangement with an existing mortgage provider or administrator. Either way, the regulatory burden on any business that continues to offer or administer these facilities will be increased significantly.

And think again, before considering unsecured lending (admittedly unlikely). The Government is consulting on a complete reconstruction of the consumer credit regime, proposing that responsibility for all consumer finance be transferred to the FSA's successor using an FSA style approach, and that the CCA should be abolished. There is talk of de-regulation and proportionality - time will tell. Granted, the Government has acknowledged that the industry will require a number of years to prepare for such radical change. However, for now, the only certainty is uncertainty.

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