Welcome to TLT’s busy lenders’ monthly round-up. Each month we summarise the latest news and developments in retail mortgage lending and regulation.
This month in summary:
- Treasury Select Committee inquiry into SME finance
- Update: Support for Mortgage Interest
- Banks to alert customers if overdraft looms
- Campaign for a specialised Housing Court
- Barton v Wright Hassall – should a litigant in person get special treatment?
- Retirement fraudsters target savers
- Anti-money laundering – watching the watchers
- ATM network sustainability
- Commonhold revisited
- The impact of tax changes in the buy-to-let market
- FCA report on interest only mortgages peaks
- Mortgage approval trends
- 1% rate rise would increase average mortgage cost by £930 p/a
- Small businesses look to specialist lenders
- Update: Cryptocurrency
Focus on Northern Ireland
- Bank’s evidence wins the day in recent NI Judgment
Focus on Scotland
- One Savings v Burns – one year on
Treasury Select Committee inquiry into SME finance
The Treasury Select Committee (TSC) has launched an inquiry into the financing of SMEs. This is in addition to an inquiry launched by the Business Select Committee into government support for small businesses.
The inquiry will focus on:
- funding options available to SMEs;
- the regulation of lending to SMEs, including whether SMEs are adequately protected when they borrow; and
- whether SMEs can access fair and reasonable compensation in respect of lending.
It is clear the government is closely scrutinising lending to small businesses and it is reasonable for lenders to expect to see tighter regulation of lending to SMEs in the future.
Update: Support for Mortgage Interest (SMI)
As of 5 April 2018, the SMI payment will no longer be paid as a benefit but will be provided in the form of a loan. The Department for Work and Pensions (DWP) has written to 98% of the 124,000 households in receipt of SMI to inform them of the change.
Figures obtained by the Observer newspaper suggest that, as of early February 2018, only 6,850 households had signed up to the new loan. Both lenders and borrowers should be alive to the fact that failure to engage with the DWP may result in mortgage default.
Lenders should engage with borrowers currently in receipt of the SMI benefit to alert them to the change and suggest independent advice.
Once the benefit has stopped, lenders may wish to make special provisions for borrowers who do not engage and subsequently fall into arrears. Again, they should be contacted and directed to sources of independent advice.
Banks to alert customers if overdraft looms
As of last month, new Competition and Markets Authority (CMA) rules require banks to establish a system of alerts to help customers avoid unarranged overdraft charges. The new rules follow the CMA's Retail Banking Investigation which ran from June 2013 to February 2017. The rules were rolled out to new customers at the start of February and implemented for existing customers during the month.
Increased use of online banking and banking apps accessed via mobile devices makes it easier, and cheaper, for banks to stay in touch with their customers and provide them with regular updates on their personal finances.
The CMA investigation identified overdraft charges as an issue because 45% of current account holders use their overdrafts. The resulting charges generate one third of the income banks receive from current accounts. The authority's aim is to increase customer awareness of overdraft usage and charges, with a view to reducing overdraft costs.
The rules require banks to enrol all of their overdraft customers into an unarranged overdraft alert system and to alert customers to grace periods during which they can take action to avoid or reduce unarranged overdraft charges. Some banks already provide this service and may not need to take any further steps in order to comply with the rules.
Campaign for a specialised Housing Court
Last April, the Residential Landlord's Association (RLA) called for the creation of a specialist housing court to hear landlord and tenant disputes. It was particularly concerned with the length of time it takes possession claims to proceed in county courts.
David Smith, policy director of the RLA, envisages such a specialised court hearing all possession claims (which we can only assume includes mortgage possession cases), tenancy deposit disputes, repairing obligations disputes and matters relating to defective premises.
The RLA's campaign may be gaining traction, with support from the Secretary of State for Housing, Sajid Javid. However, as yet, there is no firm proposal by the Government. We will report further as this develops.
Barton v Wright Hassall – should a litigant in person get special treatment?
The Supreme Court has considered the flexibility that a litigant in person should be afforded when complying with procedural rules.
The case provides a useful example of the type of rule that a litigant in person is expected to adhere to. The decision drives at creating a level playing field between represented and unrepresented litigants.
Read our insight for the details and impact of the case.
Retirement fraudsters target savers
There has been a recent surge in fraudsters targeting retirement savings. Typically, fraudsters will approach retirees, offering investment opportunities in property or stocks and shares which turn out to be non-existent.
Around £200 million has been reported stolen by investment fraudsters over the last 12 months. However, UK Finance anticipates that the real figure is likely to be significantly higher as many of these crimes go unreported.
Fraudsters are targeting pensioners because the pension freedoms introduced in 2015 allow those over 55 to obtain early access to their retirement savings. Given the UK's aging population, we anticipate this fraud will continue to grow.
Banks regularly face claims from customers who have been defrauded and allege that their bank ought to have taken further steps to protect their interests. In addition, where banks hold accounts used by fraudsters, they can also expect claims from the victims focussed on their customer on-boarding and due diligence processes. We regularly deal with claims of this nature and assist our clients with their resolution.
Anti-money laundering – watching the watchers
At the beginning of the year, the Office for Professional Body Anti-money laundering Supervision (OPBRAS) came into effect. This is a division of the FCA which supervises other professional bodies, such as the Law Society and the Association of Chartered Accountants, on anti-money laundering practices. The aim is to provide overarching regulation of the various different regulators to ensure a consistent approach. It will also facilitate information sharing between regulators.
OPBRAS is planning to spend the next year visiting each of the 22 regulators in order to establish some best practice guidelines for all the stakeholders.
Some have criticised the new body's ability to add value. This is because, out of the 400,000 suspicious activity reports filed annually with the FCA, there have only been a handful of convictions under the anti-money laundering rules.
It remains to be seen whether this overarching supervision will help curb the £90 billion of criminal funds which are thought to pass through the UK each year.
ATM Network sustainability
There are currently around 70,000 ATMs in the UK, 80% of which are free to use. Link, which operates the network, proposes to reduce the interchange fee charged for each cash withdrawal from 25p to 20p. According to Link, the phased fee reduction will give operators time to make changes to ease the cost impact.
Independent ATM operators have been lobbying the Payment Systems Regulator about the issue, warning that, when coupled with bank and building branch closures, there is a real risk that some communities will not have access to cash.
According to UK Finance, people are less likely to rely on cash over the next 10 years, estimating cash payments will fall by 43%, as consumers migrate to contactless payment. Link also said, at present, 80% of ATMs are within 300 metres of another free to use ATM. The reduced interchange fee won't apply to machines more than 1000 metres away from another as part of Link's Financial Inclusion Programme.
Fewer than twenty commonholds have been created since their introduction in 2002. The Law Commission is looking for views and evidence to explore the reasons as to why commonhold is not more popular, particularly as it addresses many of the unfair practices which homeowners are raising with leaseholds.
Under commonhold the common parts of houses on an estate or flats in a building (individual properties known as units) will be owned by a commonhold association (CA). The CA is a limited company owned (in equal shares) and controlled by the unit holders. The unit holders are obliged to pay for the maintenance of the estate. Any disputes which arise should be resolved by negotiation, failing that, the matter can be referred to the County Court.
For leaseholds, the ultimate sanction is forfeiture of the lease. The seriousness of this remedy means that leaseholders, or their lenders, generally adhere to the terms (paying outstanding ground rents and service charges). Commonhold lacks such an effective remedy.
If unit holders fail to pay their share of the service charge and the CA subsequently becomes insolvent, the commonhold would come to an end. It is unclear what would then happen to the units. This uncertainty could have an adverse effect on the lender's security.
It appears, from the part 2 responses to the UK Finance handbook, that lenders are cautious about commonholds. The consultation aims to address this and runs until 19 April 2018. A further consultation about the technical details of any revised law is expected later in the year.
The impact of tax changes in the buy-to-let market
There have been a number of changes in the buy-to-let (BTL) market recently. In particular, the 3% additional stamp-duty surcharge on BTL properties and second homes (which has been in force since 1 April 2016) and the phasing out of the higher rate tax relief on mortgage interest payments (which began in April 2017 and will continue until 2020).
The effect is that many BTL landlords, particularly those with two-year fixed rate mortgages, who took out BTL mortgages in the months before the introduction of the 3% stamp-duty surcharge, will now struggle to refinance their debts or change lenders.
This is due to additional restrictions on lending rules imposed by regulators over the past few years, including the introduction of the affordability 'stress-test' by the Bank of England and higher restrictions on portfolio landlords.
A report by S&P Global Ratings shows BTL loans taken out between 2014 and 2016 are the most vulnerable (60% are expected to result in loss). This is because additional tax charges and higher interest rates weren't taken into account when the loans were underwritten. Pre-2007-8 loans are expected to fare better.
These changes triggered the exit of many BTL landlords from the market. Property sales subsequently increased which caused an upward trend in capital gains tax receipts (including gains from cryptocurrencies), reportedly more than double since 2012-13 and predicted to be £8.8 billion for 2017-18 and almost £10 billion in 2018-19.
FCA report on interest only mortgages peaks
The FCA has carried out a review into interest only mortgages and is concerned that many borrowers will face a shortfall on their repayment vehicle at term end.Given that there are currently 1.67 million full or partial interest only mortgages in the UK (i.e. 17.6% of the national, retail mortgage debt), this issue represents a significant risk.
Despite lenders writing to borrowers as term ends approach, the level of borrower engagement is relatively low (as with the SMI changes). The FCA has found that where lenders have tailored their approach to borrowers’ specific circumstances, the level of engagement has been higher. In addition, banks had more success engaging with borrowers with advisers, meaning borrowers were not asked to complete significant amounts of paperwork or make multiple phone calls.
The FCA has identified three interest-only mortgage maturity peaks, occurring this year and then forecast for 2027 and 2032. The regulator anticipates that the current peak will lead to more modest losses because the borrowers involved are typically approaching retirement and able to call on relatively high incomes and equity levels. The next two peaks are likely to involve less affluent borrowers, leading to increased shortfalls. We anticipate the FCA will seek further engagement with lenders with a view to putting processes in place to deal with future peaks.
For further analysis, click here.
Mortgage approval trends
There was a spike in remortgage approvals during October and November last year (19.6% and 27.5% respectively), according to the Bank of England's (BoE) recent figures. This isn't surprising given the BoE's base rate rise in November. A further remortgage spike is expected next month, ahead of the likely BoE base rate rise in May.
In November 2017, stamp duty was abolished for first time buyers of properties valued at less than £300,000 yet the housing market seems unaffected. One month after the change (December 2017) the lowest figure of mortgage approvals since January 2015 was recorded.
Approvals for purchases increased slightly in January and February this year, but they remain significantly lower than in the summer months of 2017. February 2018 also saw a 10.8% drop in purchase approvals compared to February 2017. The data suggests the housing market is losing its buoyancy. The Royal Institute of Chartered Surveyors highlighted its concerns following the 11% reduction in new buyer's enquiries in January 2018.
The North/South divide masks growth – in Wandsworth the average price has fallen from £805,000 to £685,000 (nearly 15%) in the last 12 months. Meanwhile, in Blackburn prices have increased by 10.3% over the same period.
Brexit and the potential of interest rate increases will undoubtedly impact the market.
1% rate rise would increase average mortgage cost by £930 p/a
Based on figures analysed by UK Finance and the Bank of England (BoE), the cost of UK mortgages would rise by £10 billion if the base rate increased by 1%. According to research by Savills, this would equate to additional costs of £930 per year, for the average retail borrower. The 4.5 million borrowers on variable rate deals linked to rate changes would feel the effect immediately, followed by the 59% of fixed-rate borrowers at their term end.
Speculation over the effect of interest rate increases is topical because the Deputy Governor of the BoE has backed swifter rate rises to keep pace with accelerating wage growth.
Lenders with large variable rate portfolios will be stress testing their books to determine the level of risk they face when rates increase.
Small businesses look to specialist lenders
On 20 February 2018, the British Business Bank (BBB) (the UK’s national economic development bank) published its 2018 Small Business Finance Markets report. The report shows that small businesses are diversifying their choice of finance providers.
Since 2008, over 50 institutions have been granted banking licences in the UK with 13 applications to the Prudential Regulatory Authority in 2016. The majority of these new market entrants are either focussed on or prepared to lend to SME customers, increasing supply in the market. This has also led to increased product diversity with many new market entrants focusing on asset finance as well as invoice and asset based lending.
SMEs are increasingly turning to asset-backed lenders, peer-to-peer finance sites, private equity and venture capital investors in order to obtain the most suitable and advantageous borrowings.
The report concludes that SMEs are generally pessimistic when it comes to the prospects of obtaining more traditional secured lending – 57% of businesses surveyed lack confidence in their ability to secure bank loans. The BBB has called for improvements to the information available to SMEs regarding funding, with a view to increasing confidence.
Trading and purchasing cryptocurrency has increased in global popularity over the past six months. However, banks and financial regulatory authorities in Europe (including Bank of England Governor, Mark Carney, as reported last month) and other parts of the world are becoming growingly concerned about the lack of protection to investors in the "high risk" market.
Lloyds Banking Group and Virgin Money have already banned customers from purchasing cryptocurrency using credit cards due to the volatile nature of the cryptocurrency market.
Due to anonymity of investors, questions also arise in relation to anti-money laundering and the potential for it to fund terrorist activities.
As a result, many banks now prevent companies which handle cryptocurrency from opening bank accounts. Lenders are also refusing mortgages to customers who have funded their deposit with cryptocurrency.
Further concerns for consumers come from claims that a number of cryptocurrency exchange systems have been hacked, causing losses to investors. This caused a dramatic decrease in the value of some cryptocurrencies and a sharp increase in investors getting out of cryptocurrencies.
In response to these concerns, a number of cryptocurrency companies have now joined forces to form a trade association designed to increase the legitimacy surrounding cryptocurrency. CryptoUK say that the sector is misunderstood. It intends to create a code of conduct, including guidelines for due diligence and increased security.
Whilst the position remains uncertain, Facebook is one company which has imposed a ban on all cryptocurrency advertising until it has fully reviewed the pros and cons.
The only major departure from this was Barclays who opened an account for coinbase, said to be one of the World's biggest cryptocurrency exchanges and wallets.
Focus on Northern Ireland
Bank’s evidence wins the day in recent NI Judgment
Mr Justice Colton recently gave Judgment, in the Northern Ireland High Court, in two connected actions concerning defended repossession proceedings, Ulster Bank Ltd v Farzam Esmaili and Ulster Bank Ltd v Parie Dokht Esmaeili and Amir Ali Esmaily  NiCh 14.
The first defendant (the customer) argued that his bank loan was for both the purchase and re-development of premises. The bank contended the loan was for the purchase only. The customer claimed the bank made representations that further monies would be advanced for development and that the bank could not pursue him for loss when these further funds had not materialised.
The bank's evidence, when considered in conjunction with the facility letters, satisfied the court that the clear purpose of the loan was to purchase the premises. Furthermore, the customer presented himself to the bank as a ‘property developer’ and clearly had access to professional advisors.
This is a positive result for lenders, which was achieved thanks to the bank’s policies in relation to loan applications and the contents of the facility letters, together with the evidence of a senior bank official. It flags the dangers for lenders when meeting with customers and the need to ensure that what is agreed is always followed up in writing and all transactions are approved within appropriate channels.
Focus on Scotland
Update: One Savings v Burns – one year on
In One Savings v Burns (March 2017) the Sheriff held that a standard security could not be enforced as the assignation did not specify the sums outstanding for each of the securities being assigned and therefore did not conform to the style specified in the legislation.
This decision was not binding on other courts. However, it caused uncertainty in the legal sector as the assignation was in a style widely used by solicitors acting in the purchase/sale of loan books.
In Shear v Clipper Holdings the pursuer sought to rely on Burns, contending that Clipper Holdings did not have title to enforce the security. This argument was unsuccessful. The Sheriff noted that the legislation dates back to 1970 and the court must consider it in a way that makes commercial sense. Again, the decision was not binding on other courts.
Recently, in Promontora (Henrico) Limited v The firm of Portico Holdings (Scotland) and Linda Arthur, the defenders again sought to rely on the Burns argument. This was rejected by the Sheriff who commented that adaptions to the statutory style were understandable and reasonable; therefore the assignation complied with legislation. The Sheriff also commented that the sums were due and the purely technical argument was a delaying tactic in relation to repayment of the debt.
The courts appear to be taking a practical approach, disregarding the Burns argument. However, until legislative change, or a binding judgment, the position remains uncertain.