As a result of consumer law consumers had to remunerate two professional advisers rather than one, unsurprisingly this led to high commission and fees.
Prior to MCD, secured loan packagers would regularly charge between 5 to 10 per cent of the loan size requested. This fee, alongside commission, would cover paying a fee to the introducing mortgage broker, valuation, third party references and operational costs.
Packagers offered potential borrowers an all-inclusive fee, payable on completion, which meant the consumer faced no up-front liability. One of the major uses for secured loans is consolidation of debt, so some people in this position welcomed with relief a product that did not require any up-front commitment.
Ostensibly advantageous, the reality with any product lacking transparency is a bad deal for consumers. Customers did not understand or know the costs of set-up and often over-estimated, meaning they were happy to pay high fees, considering it good value for money.
This problem compounded by successful applicants paying for abortive set-up costs incurred as a result of valuations being lower than expected and other cases becoming unviable for a host of reasons.
Post MCD, fee charging has parity with the first charge market where customers can pay fees associated with a transaction up-front or, where available, choose to add them to their loan. Customers are now able to understand the cost of obtaining a valuation for mortgage purposes via a European Standardised Information Sheet (ESIS) and their liability for fees is isolated to their application and unaffected by choices taken by others.
Post MCD, fee charging has parity with the first charge market , which will naturally lead to a reduction in advice fees charged in order to remain competitive. With packagers no longer forced to pay upfront costs, they should see a reduction in abortive costs, which again supports a downward trend in advice fees.
Secured loan agreements prior to MCD were structured according to consumer credit law. They contained a calculation of APR and confirmed redemption balance at a one-quarter, half and three-quarters of term.
Financial details of a proposed loan were often squeezed into a single page and, while detailed, agreements failed to provide rationale. An example of this is early repayment charges (ERCs). Under consumer credit law, ERCs were limited to one-month written notice plus 28 days’ interest, yet this explanation was never confirmed in writing, leading to difficulties in understanding how early redemption figures could be derived, despite knowing the absolute amount at three stages of the loan term.
