Implementation of the EU mortgage credit directive
Response by the Council of Mortgage Lenders
to the HM Treasury consultation paper
Introduction
1.
The CML is the representative trade body for the residential mortgage lender industry that
includes banks, building societies and specialist lenders. Our 125 members currently hold around
95% of the assets of the UK mortgage market. In addition to lending for home-ownership, the CML
members also lend to support the social housing and private rental markets.
2.
We welcome the opportunity to respond to HM Treasury’s (HMT) consultation on the
legislative amendments needed to implement the Mortgage Credit Directive (MCD), Implementation of
the EU mortgage credit directive. We have some general views on the consultation as well as points
about some specifics.
3.
This response relates only to HMT’s consultation on implementing the MCD. However, it
makes occasional cross-reference to the FCA consultation paper on implementing the MCD.
4.
We are grateful for HMT’s open and consultative engagement with the industry on the MCD.
We look forward to continuing this as the legislation is developed.
General comments
5.
From the perspective of both borrowers and lenders, the MCD adds little value to the UK
mortgage market. The UK’s existing regulatory regime, recently reinforced by the Mortgage Market
Review (MMR), is already robust, clear and offers consumers full protection in areas where the MCD
now makes extra provisions. No extra protection for consumers is conferred by the MCD. Rather, new
processes for delivering existing protections are required, which will be neither visible to nor
appreciated by UK borrowers.
6.
We consider the UK’s general approach to implementing the MCD should be minimalist and
only do what is absolutely necessary to meet the obligations of an EU member state. Going further
will simply damage a well functioning and well regulated market that already provides good outcomes
for consumers.
7.
While we broadly agree with HMT’s proposed overall approach to implementing the MCD, we
have some specific recommendations where HMT should consider particular proposals to ensure the
minimum possible change.
8.
One major area concerns applications in the pipeline. The absence of a way of dealing with
applications that cross the MCD’s effective-from date will reduce the time firms have to implement the
new rules and would likely cause significant market disruption. We therefore welcome HMT’s decision
to consider what further steps it can take to smooth the implementation. We will participate
enthusiastically in continuing discussions to identify a solution that fully addresses the problem.
9.
For buy-to-let (BTL) lending we believe the changes proposed are at best unnecessary. At
worst they will lead to a reduction in the functionality of the market where borrowers able to obtain
mortgages now will have additional confusing burdens placed upon them. A potential side-effect of
this could be a reduction in BTL lending as a borrower’s capacity to obtain BTL mortgage finance may
be diminished. While we recognise that HM Treasury must deliver a system which complies with the
MCD our clear preference would be for HM Treasury not to go beyond the legal minimum so as to
minimise any detrimental impacts on the BTL market.
address North West Wing Bush House Aldwych London WC2B 4PJ
telephone 0845 373 6771 fax 0845 373 6778 website www.cml.org.uk
10.
We welcome HM Treasury’s aim of finalising the measures needed to implement the MCD by
March 2015 so industry has sufficient time to comply with the changes. It is vitally important this
timetable is met so that industry has as much time as possible to implement the requirements.
Transitional period for mortgage applications
11.
We welcome HMT’s decision to consider whether there are further steps the government
could take to smooth the process for cases open but not complete by 21 March 2016. We believe
there could be substantial disruption to the market if a way of fully dealing with these cases is not
found. Our comments in this section apply to all mortgage types in scope of the MCD, including
consumer BTL.
12.
The MCD does not make specific provisions for cases open but not complete before 21
March 2016, when the MCD’s requirements take effect. A case open before this date may therefore
have to revert to an earlier stage under the MCD rules if it is not complete before 21 March 2016.
13.
The implications of this could be substantial. Firms issue mortgage offers that are typically
valid for up to six or twelve months. We therefore estimate the number of cases in train but not
completed by 21 March 2016 could be in the hundreds of thousands. This figure is especially high
because March is part of the annual peak period for UK mortgage activity.
14.
This could cause significant customer confusion and frustration and may have financial
implications. Customers will be at different stages of the process, with many close to completion.
Delaying or slowing the completion could lead to their incurring certain charges or losing completion
incentives if their house purchase is upheld. There may be a disproportionate impact on buyers of
new build homes. Lenders may give extensions to mortgage offer periods to allow building to
complete and there are likely to be more of these transactions in the pipeline towards the end of the
financial year when the MCD is implemented.
15.
We also note it is not clear to what point in the MCD-regulated process customers would have
to revert. Would customers at an advanced stage have to be given a reflection period that they would
likely waive anyway, for example? It should be borne in mind, too, that many cases will be in property
chains, magnifying the disruption if some chose to accept the reflection period and some chose to
waive it. A possible consequence of all this is that firms simply reduce their activity around this time to
manage the number of affected cases.
16.
One option to mitigate the impact of this is to allow firms to comply with the rules before 21
March 2016. We therefore welcome the FCA’s proposal to enable the rules from 21 December 2015
but we think this is only a partial solution. Firms already have only a year to make the necessary
changes to comply with the directive. Being compliant early would reduce what is already a very
challenging timetable for making a substantial number of changes to systems and processes.
17.
We welcome HM Treasury’s proposal to include in its draft legislation the exception provided
by the MCD for loans existing before 21 March 2016. The MCD is explicit at article 43 (1) that this is
the case. However, this is not included in the FCA’s draft Handbook rules. We recommend the FCA
matches the legislation by including this in its rules.
18.
We would welcome continuing discussions we have had with HMT to-date about this issue to
find an approach that fully addresses the problem. This will reduce the likelihood of substantial
customer and market disruption that we describe above.
19.
We note there was very little overall disruption to the market from implementation of the
MMR. A major contributor was having a period from 26 April 2014 for non-advised cases to proceed
under the previous rules if there had been no material change in circumstances.
Buy-to-let mortgage lending
20.
Buy-to-let lending in the UK has always been considered to be a business transaction and
therefore has, predominantly, remained outside a conduct regulated system (for consumers) such as
the one for residential mortgages.
21.
The case for introducing further regulation into the BTL sector, as HMT observes in this
consultation, has simply not been made. There has been no demonstration of customer detriment,
dissatisfaction or distortions within the wider housing market because of BTL transactions.
22.
Therefore, it is disappointing that the UK is required to adjust this long-standing approach
because of European rules.
23.
It is inevitable that some landlords will find the process of obtaining BTL mortgages less
straight-forward than before and the range of mortgage products available could become more limited
for those landlords.
The proposed approach
24.
We recognise that HMT is attempting to achieve the least-worst solution in order to comply
with the requirements of the MCD.
25.
While we would have preferred for HMT to allow the industry to self-regulate through the
adoption of its own ‘framework’ for BTL lending we understand why this is not considered to meet the
legal minimum expectations of the European Commission in delivering the MCD.
26.
We are wholly supportive of HMT’s preference to use the discretionary ‘framework’ (the
framework) option for BTL lending rather than to apply the MCD in full to the BTL market. To apply the
MCD in full would have a significant negative impact on BTL as an investment vehicle and severely
constrain housing supply within the private rented sector.
27.
In designing the framework for consumer BTL lending we support the principles contained
within this consultation and that it must not apply to all BTL borrowers, only a cohort, who because of
their circumstances are choosing to become a landlord and exhibit the characteristics of a ‘consumer’.
28.
Because of this principles-based interpretation, and the narrow set of circumstances when a
customer is likely to fit the framework and be considered to be a ‘consumer BTL’ customer, the impact
on the BTL market is likely to be minimal. But there is likely to be some exclusion at the margins.
29.
It is important to recognise that the UK will, once these changes are applied, move to a three
tier regulatory system (non-regulated, MCOB regulated & consumer BTL regulated) for BTL lending
which may cause confusion for borrowers and will create complexity and cost for lenders.
Market fragmentation
30.
In defining consumer BTL as a new transaction type HMT is creating an artificial sub-market
and because of the FCA regulatory overlay mortgage lenders will be required to opt in if they wish to
offer mortgages to these customers.
31.
It is likely that, given the additional cost and complexity, some lenders will choose not to
service this part of the market.
32.
In order to aid the decision-making process we encourage HMT to ensure the FCA release
their consultation in a timely manner so that lenders can better understand the practical requirements
of participation and cost as well as making the necessary system and process changes in order to
adopt consumer BTL within their business.
Borrower declaration
33.
As currently worded the legislation provides a large degree of uncertainty around who is a
‘consumer’ for the purposes of the framework. As the determination is made, largely, on a customer’s
own circumstances it is important that responsibility for the correct regulatory streaming remains with
the customer.
34.
The use of a declaration form at the point of sale, where responsibility for the decision
remains with the customer, is a useful tool and will be helpful for lenders to ensure there is a reduced
risk of regulatory cross-over into a system that is not appropriate for them.
35.
As customers will be provided with information to enable them to make a determination of
their status we believe that such an approach is suitable and would comply with the requirements of
the MCD.
36.
As currently drafted, the wording states that lenders can assume the declaration by the
borrower is correct unless they “know” or “have reasonable cause to suspect” the declaration is
incorrect. There will be circumstances where this is simple to determine; however, there will be a
significant number of cases where the lender will have to presume the information supplied is correct.
37.
Our strong preference is for lenders to be able to rely on the information provided unless they
are alerted to a change in status before the mortgage has completed. To assume that lenders will
verify the customer’s declaration feels unnecessary and in our view goes beyond what the MCD
requires.
38.
In the case of incorrect regulatory ‘streaming’ where the borrower has inaccurately declared
their status, either accidentally or deliberately, the lender should not be held accountable where the
borrower was provided with the information necessary to make a decision as is required within the
legislation.
Definition
39.
The definition of a ‘consumer’ for the purposes of the framework is particularly unclear. While
we recognise the efforts of HMT in adopting a definition which allows for some flexibility, it is important
to increase the certainty of the definition so that lenders treat borrowers consistently and in a manner
which is aligned to regulatory expectations.
40.
To be clear, any customer with a pre-existing rental portfolio of one property or more should
be excluded from the ‘consumer’ regime as to not consider them to be persons acting predominantly
for business would be counter-intuitive. This point should be made explicit within the legislation.
41.
Often the determination of a ‘consumer’ will have to be made on a case-by-case basis by
lenders in conjunction with the borrower’s declaration. However, some consistent principles would be
needed if for no other reason than to help ‘consumers’ understand which category they best fit in to.
42.
Therefore we propose that the following rules be adopted to make the definition of a
‘consumer’ clearer for all parties involved in a mortgage transaction:
i.
All customers who have an existing rental property, with or without a mortgage, should be
considered exempt from the ‘consumer’ regime;
ii.
All customers who are first time landlords and engaging in a let-to-buy transaction would
be included within the ‘consumer’ regime;
iii.
All customers who inherit property from a family member and are a first time landlord
would be included within the ‘consumer’ regime.
43.
In adopting these principles within the scope of the definition it will give lenders additional
certainty that borrowers are being subjected to the correct regulatory system. This is especially
important for the larger lenders who cannot, because of volumes, interrogate applications on a caseby-case basis to determine the customer’s status.
FCA oversight
44.
We are pleased that HMT has given the FCA a tightly controlled remit within legislation which
does not allow the regulator to create rules. This is an important consideration and will prevent
regulatory scope-creep.
45.
As we say earlier, lenders need to understand the mechanisms under which they will be
required to function in particular when developing systems, processes and reporting in time for
implementation in 2016. These changes will run concurrently with changes being made in both
residential and second-charge lending and HMT needs to be mindful of the burden this will place on
lenders.
Disclosure, advice and early repayment charges
46.
Paragraph 6 (1)(o) of the Schedule in relation to the amendments to the Financial Services
and Markets Act 2000 requires lenders to provide an illustration of how the annual charge may
change if the interest rate increases by 1%. This is different to the requirements in the MCD for
residential lending where the illustration is provided in reference to a rate over a period of 20 years.
We do not believe there is a case for doing things differently for consumer BTL and therefore propose
that the requirements of the ESIS are aligned for consumer BTL.
47.
Paragraph 1 (2) of the Schedule in relation to the amendments to the Financial Services and
Markets Act 2000 discusses the provision of ‘advisory’ services. Our assumption is that this is not in
reference to the established understanding of regulated advice as defined by the FCA for residential
lending but is instead a generic reference. Regulated advice does not exist for BTL lending. We would
like additional clarity to confirm that advice does not have to be provided.
48.
Paragraph 16 of the Schedule in relation to the amendments to the Financial Services and
Markets Act 2000 sets out the approach that lenders must take in relation to early repayment charges.
We note there are a number of similarities to the proposed approach taken by the FCA in relation to
residential lending and which are set out in their consultation. As both sets of wording are believed to
be compliant with the MCD our preference would be to harmonise the approach between residential
and consumer BTL so there is a single, consistent, form of words. Alternatively lenders will need the
reassurance that they can rely on either form of words for the purposes of consumer BTL lending.
Creditworthiness assessment
49.
Paragraph 12 (1) and (2) of the Schedule in relation to the amendments to the Financial
Services and Markets Act 2000 sets out the requirements for the assessment of creditworthiness. It
states that lenders must take into account “rental voids, rental arrears and typical letting costs.”
50.
Lenders do not, routinely, attribute a value to each of the three items listed above in isolation
and instead use an interest cover ratio (ICR) where the income generated in rent must exceed the
cost of the mortgage payments. This difference between rent collected and mortgage payment allows
for the management costs of the property which includes costs the landlord may be required to bear.
51.
Our view is that under the proposed form of words lenders will feel that an ICR could no
longer be used and instead lenders would need to take into account these items in isolation. This
feels onerous and unnecessarily complex and therefore we would urge the wording to be adjusted in
order to allow for ICR calculations to continue.
52.
This could be achieved by re-wording paragraph 12 (2)(a) as follows: “…obtained by the
lender from relevant internal or external sources and can include reference to a lenders own
modelling. Information from the borrower, and including information provided to the credit intermediary
during the credit application process must also be considered”.
Continuity
53.
The MCD uses the term ‘entering into’ when discussing the completion of a mortgage
between a lender and a borrower. For the purposes of consistency, references to ‘executing’ and
‘concluding’ should be adjusted within the legislative changes proposed to be more reflective of the
wording used in the MCD.
Knowledge and competency
54.
Given the principle of a light-touch approach for consumer BTL lending, it is unclear why
these requirements should be established as they appear to go beyond what is legally required. We
believe this is unnecessary and amounts to gold-plating.
55.
We note the extended timetable for these proposed requirements and believe that this will be
helpful for lenders in delivering the MCD. It is however, unusual, that the requirements for consumer
BTL are to be enshrined in legislation unlike the requirements for residential lending which are taken
account of in the FCA’s rules. It is a blunt tool and any changes required in response to market
dynamics would be much slower than for residential lending.
56.
As drafted, it is not clear to what extent lenders will be required to ensure their employees
possess the expected knowledge and competency and how this will be delivered and assessed.
57.
It would be helpful if additional clarity on expectation was provided to ensure consistent
interpretation across lenders.
Second charge mortgage lending
58.
We believe that it is appropriate for subsequent charge mortgages to be regulated upon the
same basis as first-charge mortgages to ensure the best outcomes for customers. The current system
has led to confusion and inconsistent treatment of borrowers, especially when they suffer payment
difficulty.
59.
We do not believe there is any merit in creating a new regime for this kind of lending as this
will not necessarily result in any customer benefit and will result in the same, disparate approach,
which presently exists.
60.
It is important that we give proper consideration to the types of lending caught under the
proposed regime, particularly on specialist products like equity lending and mortgages with a secured
loan (drawdown) facility.
61.
There is no explicit reference to first-charge consumer credit act regulated mortgages
transferring across to the regime for regulated first charge mortgages. It would appear unusual for
these types of loans to remain outside of the FCA’s MCOB rulebook when all other types of loans are
transferring in.
62.
Given the high-level nature of the proposals in this consultation we will provide more
substantive feedback on this in the FCA’s consultation.
Further changes to the scope of FCA mortgage regulation and amendments to the Financial
Services and Markets Act 2000
63.
HMT proposes to amend article 61 of the RAO so that mortgage contracts are secured by a
mortgage on land in the EEA. We note this could make it uncertain to which transactions MCOB
applies. This introduces the possible risk of overlapping jurisdictions, with the FCA and the local
regulator potentially both regulating the transaction.
64.
There also appears to be some inconsistency between the proposed legislation and the
FCA’s consultation. The FCA’s proposed definition of a regulated mortgage contract in its glossary of
terms is a mortgage on land in the United Kingdom (page 11). The FCA’s proposed PERG changes
refer to land in the EEA. There would be substantial uncertainty for firms if the adopted definitions that
differ between the RAO and the FCA rules.
65.
We believe the current scope of the jurisdiction set by the existing RAO and PERG gives
firms clarity about which regulator oversees which territories if they have operations in the UK and the
EEA. We would welcome HM Treasury clarifying this territorial application issue.
66.
We also note the proposed changes to article 29 regarding exclusions in arranging regulated
mortgage contracts. There may be an issue for those, such as developers or estate agents, who
provide mortgage product information to a customer but who do not formally advise the customer on
the transaction. We would also welcome clarification here.
Contact
67.
We have prepared this response with our members. Please send comments and questions to
Andrew MacLachlan ([email protected]) or Matt Burgum ([email protected]).