20th November 2015
Are you ready for the Mortgage Credit Directive implementation in March 2016?
The Mortgage Credit Directive (MCD) which introduces an EU-wide framework of rules for first and second charge residential mortgages and ‘consumer buy-to-let’ (CBTL) activity is being implemented in the UK with effect from 21 March 2016.
Because the MCD applies equally to first and second charge residential mortgages, the government has decided that second charge mortgage regulation should move from the Financial Conduct Authority’s (FCA’s) consumer credit regime into the FCA’s mortgage regime. This means that, to carry on second charge mortgage business after 21 March 2016:
- lenders, administrators and brokers will have to be authorised and hold the correct mortgage permissions, and
- the firms carrying out CBTL activity will have to be registered with, and supervised by, the FCA.
From 21 September 2015, the firms listed above can already choose to apply the new rules for first and second charge mortgage activity in order to ensure that the applications which are received before 21 March 2016 where the mortgage agreement will come into existence after that date are progressed smoothly and there will be no need to make duplicate offers of mortgage which comply with both sets of rules.
Any firms which have not been subject to the FCA regulation in the past should be aware that the authorisation process is substantive and they will need to start the application process well in advance of 21 March 2016.
The following businesses need to consider the implications of the MCD:
First charge mortgage lenders and administrators
The existing FCA regulation regime already provides first charge residential mortgage lenders with many of the consumer protection guidelines that the MCD will introduce. There are, however, some important changes being made to the Mortgage and Home Finance Conduct of Business (MCOB) rules in order to bring them in line with the MCD. These changes relate to the content of the documents which are usually provided to the borrowers, including:
- the replacement of the Key Facts Illustration (KFI) with a European Standardised Information Sheet (ESIS), and
- the introduction of a binding offer to be made by the lender and a cooling off period for the borrower.
Accordingly, firms should review their existing processes, make all necessary changes to ensure that they are compliant with the new rules and communicate such rules to their business partners (e.g. intermediaries and conveyancers). Consequential amendments to other FCA sourcebooks, including Training and Competence (TC) and the prudential sourcebook for mortgages (MIPRU) will also need to be considered.
First charge mortgage intermediaries
Intermediaries will need to consider the changes affecting the first charge mortgage lenders to ensure that they understand the relevant lenders’ approach to the changes and the intermediary may need to alter its documents to bring them in line with those of the relevant lenders.
In addition, the MCD introduces some changes in relation to the disclosure of commissions receivable by intermediaries from lenders and a requirement that any commission payable to them should not be dependent on sales targets.
Second charge mortgage lenders and administrators
Firms arranging, administering or advising on second charge mortgages will need to apply for and obtain permission for their relevant mortgage activities. The application process has already begun and firms which fail to apply will be operating illegally and committing a criminal offence if they arrange, advise on, enter into or administer second charge mortgages after 20 March 2016.
The rules for how firms should deal with borrowers and conduct themselves throughout the life of the mortgage are set to become more prescriptive than those which set out what is currently required under the consumer credit regime and firms will need to familiarise themselves with how the FCA expects them to operate going forward. The new rules include additional requirements as to the information which is provided to a borrower, the lender ensuring that a particular mortgage is affordable for a particular customer, the lender following certain steps once a customer is in payment shortfall (before taking any possession action) and the lender’s reporting requirements on the transactions to the FCA.
House builders who offer shared equity loans or incentives of a similar nature (where they take a second or subsequent charge over a house) will also be affected by the changes to the regulation of the second charge mortgages. Their existing loans will transfer into the new regime from 21 March 2016 and house builders with such arrangements in place (or who wish to put them in place from that date forward) will either need to hold permission to carry out regulated activities or appoint a regulated third party to take over, if appropriate, and administer their loans.
Second charge mortgage intermediaries
Firms carrying out this kind of business will need to apply for and obtain relevant mortgage activities permissions. As in relation to lenders and administrators above, the application process has already begun and firms which fail to apply in time will be operating illegally and committing a criminal offence if they arrange, advise on, enter into or administer second charge mortgages after 20 March 2016.
Again, the changes affecting the second charge mortgage lenders need to be considered by intermediaries in order to ensure that they understand the relevant lenders’ approach to the changes and the intermediary’s documents are in line with those of the relevant lenders.
In addition, the relevant firms will need to consider whether their existing sales processes need to be modified to ensure that the customers receive the required by law information about the services the intermediaries provide, the range of loans they offer and how they get paid, as well as the information about the terms of the proposed loan and the advice to the customers which is compliant with the FCA rules.
Consumer buy-to-let mortgages.
The broking of buy-to-let mortgages will no longer be a regulated credit activity but advising on, arranging, lending and administering consumer buy-to-let (CBTL) mortgages (i.e. buy-to-let mortgage contracts which are not entered into by the borrower wholly or predominantly for the purposes of the borrower’s business) – will be subject to regulation. The FCA will be responsible for registering and supervising firms carrying out CBTL activities.
Certain loans provided to a borrower for business purposes will continue being exempt from the FCA regulation.