A detailed Feature Piece in Edition 10 of this SCM Briefing outlined the key provisions of the EU Directive on Mortgage Credit, which aims to harmonise EU laws relating to all lending to consumers where the purpose is to buy or retain rights on a residential property (including where that lending is unsecured or secured on an asset other than residential property). The final version of the Directive was published in the Official Journal of the EU in February 2014, and it requires transposition in EU Member States by 21 March 2016. The Directive's provisions extend to mortgage lenders, credit intermediaries and appointed representatives (together referred to here as 'lenders' for ease), whether they are banks or not. Broadly, the Directive introduces new requirements for lenders to act responsibly, not provide misleading adverts and information, conduct affordability tests, and meet minimum advice and information standards. The legislation also provides borrowers with additional rights of redress. The Directive will only apply to mortgage agreements made after the 21 March 2016 transposition date. In order to give effect to the Directive in the UK, HM Treasury has released a Consultation Paper on its transposition, which makes clear that the implementation of the Directive will build on existing rules rather than copying out the Directive into UK legislation (since, as you may be aware, the introduction of the Mortgage Market Review (MMR) in the UK from April 2014 (seeEdition 2 of this SCM Briefing for detailed background on the MMR) means the UK has implemented many of the Directive's key provisions already). In addition, while the HM Treasury consultation focuses on the required changes to the UK legislative framework, the Financial Conduct Authority (FCA) is consulting on the changes required to the FCA Handbook to give effect to the Directive, specifically to introduce the new rules relating to second-charge lending. The consultative documents clarify that the Directive will be implemented primarily through amendments to existing FCA Rules, with some new rules being added in the following areas which are not already provided for in the UK framework:
To bring the regulation of second-charge mortgage lending (such as for debt consolidation or home improvement) into line with first-charge mortgage lending (rather than regulating second-charge mortgages within the UK consumer credit regime as at present), such that, going forward, the FCA will regulate all lending secured on a borrower's home. However, the FCA plans to retain some of the existing exemptions for second-charge mortgage lending under the consumer credit regime, and specific feedback is sought on this point. New rules effecting these changes would mean that second-charge lenders would (subject to relevant exemptions) need the same FCA permission(s) as first-charge lenders, and feedback on whether the possible additional time and cost burden involved would be prohibitive for those lenders is sought. New FCA rules for second-charge lenders will be added to the Mortgages and Home Finance: Conduct of Business (MCOB) Sourcebook, which will also incorporate significant changes to the pre- and post-sale disclosure requirements, data reporting requirements and new requirements relating to the authorisation regime for second-charge lenders. Further changes necessary to the Consumer Credit (CONC) Sourcebook, to reflect the move away from Consumer Credit Act 1974 (CCA) regulation of second-charge mortgages, will be consulted on separately in December 2014. The FCA proposes deferring the consideration of whether the prudential requirements of the Prudential Sourcebook for Mortgage and Home Finance Firms and Insurance Intermediaries (MIPRU) should apply to second-charge lenders, until March 2017.
To provide new rules for buy-to-let mortgage lending, where the lending is to consumers rather than for business purposes. Currently, in the UK, a mortgage is only conduct regulated if at least 40% of the property will be occupied by the borrower or a relative (and these are called "regulated buy-to-let mortgages"). As such, most buy-to-let lending in the UK has fallen outside the scope of regulation. As the Directive makes no such distinction, the FCA proposes to regulate all mortgage lending in the UK. However, the Directive allows Member States the option to exempt buy-to-let consumer lending from the detailed requirements of the Directive, but if they do so, they must put in place an alternative appropriate framework to protect consumers engaged in buy-to-let borrowing. HM Treasury proposes to do this via provisions in the draft secondary legislation that will implement the Directive (these provide for specific provisions applying to "consumer buy-to-let firms"). While this is not expected to have consequences for the vast majority of buy-to-let lending which is for business purposes, there will be some lenders (and borrowers) affected by this, and the proposal may face some pushback in the consultation responses (particularly as regards costs and possible market-exits if this regime appears to be too onerous).
To amend the definition of "regulated mortgage contract" since the UK definition is not aligned to that of the Directive, which does not distinguish between legal and equitable mortgages. The new definition (which also references the provision of credit, the obligation secured by a mortgage on land in the EEA, and the 40% dwelling threshold) would bring equitable mortgages within the regulatory regime (affecting only two UK lenders, according to the FCA). Lending secured on timeshares is also to be brought within the scope of the FCA regime, but secured lending to consumers by government (and relevant subsidiaries) will not be. The new definition will encompass both first-charge and second-charge lending. (Second-charge) lenders seeking to add a new mortgage permission to their existing regulated activities should contact the FCA at an early stage with details of their application for authorisation, permission or variation of permission. The FCA expects to accept applications after 1 April 2015, with detailed information on the application process to be made available on the FCA website.
A copy of the draft Regulations implementing the Directive (the draft Mortgage Credit Directive Order 2015) is also set out for comment. These show the required amendments to the Financial Services and Markets Act 2000 (FSMA) and to the FSMA (Regulated Activities) Order 2001 (as amended), to effect the changes outlined above, amend the grounds for varying and cancelling a mortgage broker's permission, set out the provisions on conducing cross-border activities within the EEA, and effect the requirements relating to the maintenance of national registers, the variation and withdrawal of permissions, and the regulatory regime for appointed persons carrying out mortgage-related activities. The draft legislation is to be laid before Parliament in early 2015. Draft FCA Handbook text showing amendments to the Glossary of Definitions, Training and Competence Sourcebook, MIPRU, MCOB, the Supervision Manual, Dispute Resolution: Complaints, the Compensation Sourcebook, and the Perimeter Guidance Manual, is also set out for comment. Responses to the HM Treasury Consultation Paper are requested by 31 October 2014, and to the FCA Consultation Paper by 29 December 2014, with the new rules not due to take effect until March 2016. However, please note that HM Treasury plans to finalise UK transposition of the Directive by March 2015 to allow UK lenders sufficient time to adapt to the changes, and plans to allow early adoption of the new UK rules from 21 December 2015.
Financial Conduct Authority Consultation Paper 14/20