UK Implementation of the Mortgage Credit Directive
HM Treasury and the Financial Conduct Authority ("FCA") have in recent months published documents to implement the EU Mortgage Credit Directive ("MCD") in the UK. These are (i) HM Treasury's Mortgage Credit Directive Order (SI 2015/910) (the "MCD Order") and (ii) the FCA's Policy Statement 15/9 ("PS 15/9"). In this article we summarise the main changes from the existing regime on mortgage contracts.
The MCD Order
The MCD Order makes the following changes to the existing regime on mortgage contracts:
1. The MCD Order establishes a new regime for consumer buy to let mortgages
- A new regime for the regulation of consumer buy-to-let (CBTL) mortgages will apply to "CBTL firms", including those administering CBTL mortgages, credit intermediaries and advisory service providers. These firms will be subject to a number of requirements, such as the need to register with the FCA (even where they are already FCA authorised) and will be subject to new conduct of business and information disclosure requirements (as set out in Schedule 2 to the MCD Order).
- However, buy-to-let mortgages where the borrower is not a consumer (i.e. the borrower is acting by way of business) will not be caught. The applicable conditions for this are that the borrower intends to use the mortgage to purchase property with the intention of letting it out, has previously purchased the property with the intention of letting it out and neither the customer nor a relative have inhabited it, and the borrower already owns another property.
2. The MCD Order expands the definition of regulated mortgage contracts to include second mortgage charges
- A second mortgage loan is a type of loan which uses the borrower's home as security. Second charge mortgages take secondary priority behind the borrower's first charge mortgage. This means that if the borrower is unable to make their mortgage payments and the property is repossessed, the first charge mortgage lender is repaid from the proceeds of the sale before the second charge lender or lenders.
- The revised definition of regulated mortgage contract does not expand to cover assets other than land e.g. shares. However such assets can be used as security as part of a MCD credit agreement to acquire or retain property rights in land or in a building. These MCD credit agreements are covered by the MCD rules even if they do not involve mortgages over land.
3. The MCD Order shifts regulation of second charge mortgages from the consumer credit regime to the FCA's regulated mortgage contract regime.
- Second charge mortgages are currently regulated as consumer credit. The Government has decided to move the regulation of second charge mortgages to the FCA's regulated mortgage contract regime when the UK implements the MCD, which is scheduled to take effect from 21 March 2016.
FCA Handbook changes
Other areas of the MCD will be transposed through the FCA rules. The FCA has decided to implement the MCD through its existing rules for first charge mortgages where possible and will otherwise copy out the MCD into the existing FCA rules to cause the least possible disruption to the market, while ensuring that consumers are appropriately protected.
Changes to the FCA regime include:
- Affordability assessments to be undertaken when lenders take on existing borrowers from other lenders or agree to provide existing borrowers with additional monies to fund essential repairs to the property.
- Making 'binding offers' which can be subject to certain conditions and which will trigger the borrower’s entitlement to a reflection period of at least seven days after the offer has been given. There is some confusion over the drafting of these provisions. An offer is said to be 'binding' and therefore not 'conditional', notwithstanding that it is subject to conditions. We nevertheless believe this makes sense in situations where the 'binding offer' contains representations that are repeated at drawdown and the lender has the right not to advance the money if the customer notifies him, or he otherwise becomes aware that the representations, are incorrect at drawdown.
- Remuneration limitations so that firms implement remuneration packages that do not lead to poor conduct in the mortgage industry.
- Foreign currency mortgages: these mortgages are either in a currency other than that of the consumer's income or are in a currency other than that of the EEA state in which the consumer is resident. The new rules require firms to disclose where there is the possibility of exchange rate fluctuation and where an adverse movement in exchange rates has occurred. Firms must also put in place systems to protect borrowers from exchange rate risks. Consumers will have the right to convert the currency of a foreign currency mortgage into an alternative currency in specified conditions. In the absence of FCA guidance on the issue, firms would be expected to hedge their currency positions appropriately.
- New levels of knowledge and competence for creditors, credit intermediaries and appointed representative staff and for persons involved in the management of credit intermediaries or appointed representatives.
- A prescribed calculation method for the annual percentage rate of charge on credit.
- Disclosure requirements in the form of a "European Standardised Information Sheet" ("ESIS") to prospective borrowers so they can compare alternative products on the market before deciding to proceed. Template ESISs are available from the FCA.
The FCA has created a new webpage to guide firms through the changes. It plans to consult on how knowledge and competence requirements will apply to firms passporting into the UK under the MCD in the third quarter of 2015.
What next for mortgage firms?
From 21 December 2015 onwards firms will be able to apply the new requirements, and they will be mandatory from 21 March 2016.
Firms already holding Part 4a permissions for regulated mortgage contracts need not apply to vary their permission to carry out second charge mortgage business post MCD, whilst second charge firms who are not currently authorised can now apply to carry on regulated mortgage business under the new regime.
How we can help
Our team can advise on whether an application for FCA authorisation is needed and how this can be done. We can also consider your existing arrangements and suggest alternative approaches to ensure the new regime is optimally complied with.