The Mortgage Credit Directive (2014/17/EU) is relevant to credit agreements for consumers relating to residential immovable property, meaning credit lines secured on residential real estate and loans otherwise relating to residential property. It is relevant to firms acting as mortgage lenders, administrators and intermediaries. Member States have to transpose its provisions into national law by March 2016.
The MCD has several objectives including improving competition and opportunities for cross-border lending activity as well as embedding consumer protection and reducing irresponsible lending practices that can cause financial instability.
These strands are picked up in the MCD through reasonably familiar themes, such as:
- advertising and pre-contractual information disclosures;
- transparency of costs and charges;
- remuneration strategies;
- affordability/suitability/appropriateness assessments;
- training and competence; and
- conduct standards.
The MCD offers bands of latitude, since the MCD does not generally restrict member states from introducing or retaining more stringent measures, save with two areas of maximum harmonisation (see Article 2):
- a prescribed calculation for the Annual Percentage Rate of Charge (APRC); and
- requiring firms to follow the model European Standardised Information Sheet (ESIS) to provide pre-contractual information.
The UK approach
In the UK, HM Treasury (see the Implementation of the EU Mortgage Credit Directive) and the Financial Conduct Authority (FCA) have both consulted on their approach to implementation in the UK.
The current government position is that the UK regime offers sound protections to UK consumers; the government will, therefore, push the minimum harmonisation approach as far as it can. UK firms that have been through MMR or adjustments for the amended consumer credit regime in recent years may nevertheless be frustrated by these additional changes.
The Mortgage Credit Directive Order (SI 2015/910), which partly transposes the MCD into UK law, will make a number of changes to UK legislation. The Order was published on 26 March 2015 with an explanatory memorandum. Changes are designed to ensure that the FCA has suitable powers to design, supervise and enforce MCD rules. In summary, the Order:
- amends the Regulated Activities Order so that second or subsequent charge mortgages are regulated in the same way as first charge mortgages (rather than potentially as consumer credit, as is the case now);
- introduces a new legislative framework for the regulation of buy-to-let lending to consumers (using the light-touch framework permitted in Article 3 paragraph 4 of the MCD) – for the most part, this is currently an unregulated sector; and
- amends the Financial Services and Markets Act 2000 to allow mortgage intermediaries to exercise their right under MCD to passport (i.e. engage in cross-border activities within the EEA).
The provisions mainly come into force on 21 March 2016, with some provisions being effective from 20 April 2015 and 21 December 2015. There are a number of transitional provisions within the Order and firms should consider how they can benefit from these.
Other areas of the MCD will be transposed through FCA rules. FCA PS 15/9 was published 27 March 2015 and a further policy statement will be released following on from the FCA consultation on consumer buy to let mortgages (CP15/3), published on 19 March 2015.
As stated in PS 15/9 the FCA intends to implement the MCD through its existing rules for first charge mortgages wherever possible and will use "intelligent copy out" where changes are needed. The biggest change, therefore, is that second charge lending moves from the consumer credit regime to the mortgage regime (introducing qualification requirements and interest rate stress tests and data reporting obligations, for example). However, first charge lenders will need to make changes to address a range of rule changes including:
- requirements for affordability assessments when a lender:
- takes on a borrower from another lender; or
- makes further advances to fund essential repairs;
- making binding offers (which may impact decisions in principle or indicative offers);
- lifetime mortgages;
- foreign currency mortgages;
- how the charge for credit is calculated (see new MCOB 10A);
- prudential responsibilities set out in MIPRU (e.g. senior management responsibilities and insurance); and
- pre-contractual disclosure requirements (which need to follow the model ESIS approach).
The FCA has published a new webpage setting out FAQs relating to the UK implementation of the MCD. These cover areas such as: the authorisation process, fees and approved persons.
What do firms need to do?
Firms offering lines of credit relating to residential real estate should consider how the new regime applies to their business:
- firms offering first charge lending do still need to consider how to comply with any revised rules; they should expect to hear from the FCA in Q4/2015-Q1/2016 but should not need to apply for revised permissions as a result of the MCD implementation; and
- firms currently authorised in relation to second charge mortgages on an interim permission basis (as part of the consumer credit regime) will have to apply for appropriate mortgage permissions and review their approach to compliance against any revised rules, if they plan to continue this business line after 21 March 2016; and
- firms should consider the extent to which the passporting regime will represent an opportunity or threat to them.
Particular issues are likely to be thrown up by the introduction of the APRC and the ESIS and other requirements where driving change through is likely to need a longer lead time (for example, IT systems changes or documentation revisions). Firms will also need to be aware that organisational change may be required (e.g. under MIPRU changes, to passport or to reflect requirements in relation to remuneration).
Other areas to take into account include how any high net worth exemptions may apply going forward as well as the scope of the regime to affect schemes such as builders shared equity offers. The FCA is expected to finalise its policy in relation to consumer buy-to-let in June 2015 and firms will need to review their approach against changes set out in that.