Rosanna Bryant, Addleshaw Goddard LLP

It is only a few months since the upheaval this spring caused by the UK’s Mortgage Market Review (MMR) which imposed stricter lending requirements on borrowers. Now the industry must prepare for further regulatory change from Brussels which a reluctant Government and regulator have to implement in readiness for the EU’s deadline of 21 March 2016. The Mortgage Credit Directive (MCD) seeks to prevent a repetition of irresponsible lending and borrowing practices, create a more efficient and competitive single market for mortgages, improve consumer confidence and mobility, as well as establishing a level playing field for cross-border activity.

This article discusses the key changes arising from the MCD and how they will be implemented. In particular, how second charge mortgages will be impacted, the proposals for consumer buy-to-let loans and additional regulatory rules. It also looks at the timescales for implementation and what the changes mean for firms.

Impact

The MCD seeks to increase the cross-border provision of mortgages and intermediation services. While firms may wish to explore these opportunities, it is likely to be challenging to operate in other EU markets where borrowers prefer local lenders and the differences in legal and judicial systems will add further uncertainty to business models.

As the UK’s residential mortgage market has been largely regulated for a decade and the Financial Conduct Authority (FCA) has recently implemented new rules under the MMR, HM Treasury has been openly sceptical about the MCD’s value and plans to minimise its impact as far as possible. MMR took effect from 26 April 2014 and affects responsible lending, product distribution and disclosure, arrears management and non-bank mortgage lending. In consequence, measures in the directive on, for example, affordability of lending and forbearance (when a borrower is experiencing financial difficulty) will have less impact on UK firms than in other Member States.

Nonetheless, areas such as second charge lending, consumer buy-to-let and disclosure requirements are subject to significant change that will require mortgage businesses to adapt processes and amend their documentation. Moreover, in contrast to the MCD, the FCA (through the MMR) has sought to reduce information overload for customers by replacing information disclosure documentation with a requirement for firms to disclose “key messages” to the customer, thereby reducing the trigger points for the presentation of Key Facts Illustrations (KFI). To avoid any regression in this regard, the FCA proposes, as far as possible, to keep the same timing triggers in respect of disclosure for the new European Standardised Information Sheet (ESIS), and retain the requirement to provide key messages verbally where there is verbal interaction with customers.

Unusually, but reflecting the Government’s sceptical approach, the UK will not (with some notable exceptions) use “copy out” to transpose the directive into law. Instead, it will make such bespoke changes as are necessary to UK legislation and the FCA’s rulebook (e.g. the Mortgage Conduct of Business Rules ((MCOB)).

The transfer of second charge loans to mortgage regulation from the Consumer Credit Act 1974 (which HM Treasury planned in any event), will mean the loss of certain bespoke consumer credit protections. There will though be provisions in respect of certain protections for back-book loans. Historic lender activity will be assessed against the rules in force at the time (e.g. information disclosure requirements when the loan was agreed) and where MCOB cannot provide equivalents (e.g. the ability to challenge unfair relationships and the rules over early settlement).

Buy-to-let from a UK perspective, is the most contentious part of the MCD and, until recently, HM Treasury planned to maintain the regulatory status quo but this has not proved possible. To comply with the directive for “consumer buy-to-let,” HM Treasury proposes to introduce an appropriate framework in secondary legislation. Buy-to-let borrowers subject to the appropriate framework include “reluctant landlords,” (i.e. those who have inherited properties or have lived in them and are unable to sell for the time being).

The methodology for calculating the annual percentage rate of charge (APRC), although not dissimilar from MCOB will be copied out from the MCD, which is similar to that in the Consumer Credit Directive. In a further change, a second APRC will be needed where interest or charges are variable.

Challenges

Firms should review their business models and ensure that processes and procedures align with the proposed changes to consumer credit and mortgage regulation. Much “re-papering” of documentation is likely with some buy-to-let lenders and brokers having to register with the FCA under the appropriate framework regime.

Work will also be needed to put in place knowledge and competency arrangements for staff. A further year will be allowed (after March 2016) for staff to comply (although, the FCA considers these are already met in the UK except for product design and for those granting credit). Businesses will have until March 2019 to move away from using only professional experience to assess knowledge and competency.

The question of how to deal with pipeline business remains. HM Treasury and the FCA are considering how best to minimise disruption. There is also the issue of second charge back-book loans transferring over from the consumer credit regime while retaining some, but not all consumer protections, and how lenders are to manage this business in the context of their overall lending book.

Next Steps

In contrast to HM Treasury’s paper, which focuses on the Government’s policy towards implementation and legislative changes, the FCA seeks comments on its authorisation process and detailed rules changes.

HM Treasury plans to finalise the necessary secondary legislation by March 2015 with feedback due until 30 October 2014. Meanwhile, the FCA will publish its final rules in a policy statement in the first quarter of next year; feedback to its consultation is due by 29 December 2014.  Firms will then have a year to prepare for the amended regime on 21 March 2016. This is important because with the exception of the new ESIS and competency arrangements, there are no transitional provisions. To help this objective, the FCA will allow firms to use the new rules early from December 2015.

Rosanna Bryant is a partner within the Financial Regulation team at Addleshaw Goddard LLP. She provides regulatory advice to financial services clients on compliance of financial products such as bank accounts, credit cards, charge cards, loans and mortgages and savings and investment products. Within these segments Rosanna has substantial experience advising on large scale regulatory implementation projects, product structure and design, compliance risk, drafting of terms and conditions, marketing materials, policies and manuals and commercial arrangements with third parties. Email: [email protected].