Stop Press : The Changing Face of Mortgage Regulation
From the 21 March 2016 the European Mortgage Credit Directive (MCD) takes affect and is to be regulated by the Financial Conduct Authority (FCA). This will lead to changes for all those involved in the mortgage process be they lenders, administrators, advisors or intermediaries and will also see changes for house builders and those involved in the buy-to-let market.
The changes will have impact for these involved with both first charge and second charge mortgages and this bulletin seeks to raise awareness of the new regime.
First Charge Mortgage Lenders and Administrators
The changes will see amendment to the Mortgage and Home Finance: Conduct of Business (MCOB) Rules, Training and Competence (TC) FCA Sourcebook and the Prudential Sourcebook for Mortgages (MIPRU). The key changes being:
- The need to provide a binding offer and seven-day reflection period
- An adequate explanation of a product’s essential features
- New disclosure requirements
At a practical level those involved in this area will need to be looking at the following:
- Whether the conditions attached to existing offers are appropriate
- The system changes required to provide a European Standardised Information Sheet (ESIS) or Key Facts Illustration (KFI) top-up information
- How your existing sales process might need modifying to deliver the adequate explanation?
First Charge Mortgage Intermediaries
Along with the changes highlighted above, intermediaries in particular need to be aware of the commission disclosure rules (the right for consumers to ask for information on the commissions paid by different lenders) and remuneration rules (new requirement that remuneration of advisers cannot be contingent on sales targets).
Second Charge Mortgage Lenders, Administrators and Intermediaries
The new regime means that for the first time Second Charge Mortgages will fall inside the remit of the FCA Mortgage Rules and the changes as outlined above in respect of First Charge Mortgages will also apply to Second Charge Mortgages.
Those involved in Second Charges Mortgages will also need to ensure that they obtain the relevant mortgage permissions from the FCA.
On a practical level familiarisation needs to occur as to how the FCA expects firms to deal with customers and conduct themselves throughout the life of a mortgage.
It should also be noted that those second charge mortgages which were regulated under the consumer credit regime on the 20 March 2016 will become a regulated mortgage contract.
House builders will often offer shared equity loans or incentives of a similar nature which lead to a Second Charge on the properties concerned. Such loans are now to be covered by the new regime as outlined above with the exception of certain government schemes and loans offered by social landlords.
As such those house builders offering these products will need to look to be authorised with the FCA to carry out such activities or appoint a regulated third-party to administer the loans in certain circumstance.
Consumer Buy to Let Mortgages
Advising on, arranging, lending and administering consumer buy to let mortgages will fall inside the remit of regulation by the FCA.
The MCD defines consumer buy to let mortgage contracts as a mortgage contract not entered into by the borrower wholly or predominately for the purposes of a business carried on, or intended to be carried on, by the borrower.
The legislation has considered those circumstances which would fall outside this definition and as such the following would not be subject to the new regime:
- A customer using a mortgage to purchase a property with the intention of renting it out
- A previously purchased property with the intention of letting it out and neither being inhabited by the purchaser or a relative
- Those customers who have already purchased other properties which has subsequently been let on the basis of a rental agreement
This bulletin seeks to set out a broad overview of the new regulatory framework for mortgage contracts and readers are advised to seek specific legal advice tailored to their individual circumstances.
James Vatcher (2006)