The latest news and developments in retail mortgage lending and regulation
Government launch 60-day 'breathing space' for problem debtors
Following our update in September, in February the government formally launched their initiative to provide problem debtors with 60 days of 'breathing space'.
During the 60 day period, creditors will be unable to take enforcement action and all interest and fees on the debtor's debts will be frozen. Debtors will be required to engage with professional debt advisers during this period to seek advice on their financial circumstances. The breathing space period will be extended for debtors who are receiving mental health crisis treatment.
Phil Andrew, the CEO of StepChange Debt charity, commented:
'Breathing space will deliver much needed additional help in two important and connected ways. It will encourage more people to seek advice, and when they do, there will be better protections in place to stop further harm and help recovery.'
The regulations have yet to be passed but the government is still planning to introduce the initiative in early 2021. It is expected that this will be April or May 2021. From the draft regulations it looks as if it will apply to a range of debt including personal loans, credit cards, council tax, rent and mortgage arrears. This will have a significant impact and it is to be hoped that the government and regulator will cooperate to support the industry with the short implementation period.
Lenders should keep up to date with developments regarding the finalised legislation.
Horizon scanning with the Money and Pensions Service
The Money and Pensions Service (MaPS) has published a report identifying social or technological trends that will shape debt advice delivery over the next five years.
One social trend relates to changes in employment. MaPS reports that 13% of adults state their income varies a great deal to a fair amount. This creates issues with financial statements, which assume a continuous and fixed form of income. Self-employment models, such as the gig economy, can lead individuals to muddle the business and personal finances creating additional pressure.
Another trend is that mental health diagnoses are accelerating. There is a link between mental health and debt. Financial stress can affect mental health and mental health issues can make it difficult for individuals to manage their finances.
From a technology point of view, individuals have greater access to information than ever before. However, the quality of information has been diluted. MaPS highlights that search engines can prioritise fee-generating adverts over free-to-use debt advice services.
It is also predicted that voice recognition software could help identify vulnerable customers by listening to tone and tremors in speech.
The report sets out recommendations, such as introducing a Kitemark style standard to alert individuals to sources of trusted debt advice. It also suggests that MaPS works with other stakeholders to provide one-stop advice about debt, housing, employment and health.
The full report is available here and may be of interest to collections teams.
Updated Property Information Form and Conveyancing Protocol
The Property Information Form (TA6) and explanatory notes, which provide purchasers with important information about a property, has been updated by the Law Society. The changes were made in response to a recent report from the House of Commons Select Committee on Japanese knotweed. As a result, the form now includes questions about whether a treatment plan is in place, managing growth and adding an 'unknown' response for the many vendors who are unaware of the difficult-to-detect problem.
Other revisions to the form include questions in relation to flood risk, radon gas and septic tanks. The Law Society has also produced an updated practice note on flood risk, which they say is as a result of climate change with the Environment Agency estimating that over 5 million homes and business in the UK are at risk of flooding, with numbers set to rise.
The practice note includes additional information on flood risks, flood searches, flood maps and indicators, insurance and inspection, surveys and valuations, to encourage prospective purchasers to take steps to investigate issues and seek appropriate insurance cover before committing to a purchase. Related changes have been made to the Law Society's Conveyancing Protocol.
The updated TA6 was issued just days after the latest update on a draft form, which is intended as a replacement of the TA6 and has a working title of 'Buying and Selling Property Information'. Watch this space for further updates.
Revisiting the decision of the County Court in Dukeminster Ltd v West End Investments (Cowell Group) Ltd (2018)
In Dukeminster Ltd v West End Investments (Cowell Group) Ltd (2018) the County Court considered whether the service of a Section 25 Notice under the Landlord and Tenant Act 1954 was valid, despite the notice not being addressed to the tenant.
In the current economic climate, landlords may be considering alternative uses for their premises and the ruling in this case remains pertinent for landlords wishing to bring a lease to an end.
Dukeminster (UG) Limited was the tenant of commercial premises in Mayfair under a lease that expired in 2016. Dukeminster (UG) Limited's parent company was named "Dukeminster Limited". Upon expiry of the lease, the landlord's solicitors erroneously served a Section 25 Notice on Dukeminster Limited, as opposed to the tenant, Dukeminster (UG) Limited. Dukeminster (UG) Limited argued that the Section 25 Notice was invalid as it was not addressed to the correct party.
The Court ruled that the Section 25 Notice was valid. In reaching its decision the Court considered the "reasonable recipient" test, which asks whether the notice was "clear to a reasonable tenant receiving it" and whether the notice was "plain enough" that the tenant "cannot be misled by it".
As the directors of Dukeminster Limited and Dukeminster (UG) Limited were the same, the Court held that a reasonable tenant receiving the Section 25 Notice would have understood the intended recipient. Although the Court can correct errors in notices, in order to avoid reliance on the "reasonable recipient" test, landlords should ensure notices are drafted correctly.
Climate change related risk
According to a recent Oliver Wyman report, banks and financial services firms are at risk of losing up to $1 trillion globally if they do not address climate change and its regulatory impact. The report explores the potential effect of a carbon tax and makes recommendations for banks to get ahead of climate change related risk. The report also comments that regulators are beginning to take steps to ensure that domestic banks and firms are conducting climate risk measurement.
In December 2019 the Prudential Regulation Authority published a discussion paper setting out the BoE's proposed framework for the 2021 Biennial Exploratory Scenario (BES) or stress test. For the first time, the BES will include climate change related risks and scrutinise banks' and insurance firms' ability to cope. The risks envisaged include those of a physical nature such as more frequent weather events like storms and floods, which will cause damage to property and infrastructure as well as widespread disruption. It also includes risks involved in the transition to a carbon-neutral economy such as changes in asset values, energy prices and borrower credit worthiness.
The deadline for responses to the PRA discussion paper is 18 March 2020. The framework will be published later in 2020 and the results of the stress test released in 2021.
First Homes consultation
The introduction of the First Homes Scheme was a Conservative election pledge aimed at making home ownership more affordable. The Government have now published a consultation setting out the broad details of the scheme.
The scheme aims to provide a discount on new homes. The exact amount of this discount forms one of the consultation questions, though the government has suggested a minimum of 30%. A restrictive covenant will ensure that each time the property is sold the discount is passed on to new buyers. This will require an independent valuation on each sale to assess the market price and the level of discount.
The scheme is aimed at building local communities with priority being given to people who can establish a connection to the local area. The rules for qualifying is a topic to be discussed as part of the consultation.
In order to improve mortgage finance for the scheme, the government intends to introduce a model agreement to standardise the documentation. The government believes this will help lenders by reducing the need for them to consider a variety of local models.
The government also proposes that the model agreement contains a mortgagee protection clause whereby the discount would be waived if a lender takes possession. This would allow lenders to base their lending on the loan-to-value ratio of the full property value rather than the discounted value.
The consultation runs to 3 April 2020. We will provide further updates as this topic develops.
Confirmation of Payee – new exemptions approved for Payment Service Providers
Confirmation of Payee (CoP) is a 'name checking' service for electronic payments designed to combat fraud and reduce misdirected payments.
In August 2019, the Payment Systems Regulator (PSR) gave Specific Direction 10 (SP10), which required some of the UK's largest banks to implement CoP by 31 March 2020. The relevant Payment Service Providers (PSPs) can, however, be exempted from this deadline if there is an "exceptional circumstance" that reasonably prevents them from being able to comply.
The PSR has now published its response to a consultation to add a further exemption, in circumstances where it is "not reasonable or proportionate" to require the PSPs to comply with the current deadlines. The full PSR policy statement can be found here.
PSPs, the Building Societies Association and UK Finance were generally in favour of the change. However some groups like Which? and Northey Point have argued that the current exemptions should not be widened and that without complete coverage, fraudsters will simply target areas not covered by CoP.
The PSR has responded and explained that it considers the current "exceptional circumstances" exemption to be too narrow and that it risks requiring the PSPs to expend resources in a disproportionate way. The PSR stressed that no decisions have been made on the granting of exemptions and that it will consider any requests on a case-by-case basis.
Where an exemption is granted, the PSR will also now always impose a revised deadline as a condition of approval
SP10 (as varied) can be found here.
FCA guidance for dealing with persistent credit card debt customers
The FCA has outlined specific areas credit card firms need to review with the intention of aligning a fair and consistent approach to persistent debtors. It has asked credit card providers to take specific steps with customers who have been in persistent debt for three years in order to propose and agree plans with these customers to resolve their situations.
Key concerns for the FCA are that customers may not respond to their credit card provider's communications; firms are proposing unreasonable or unsustainable repayment options; and firms may suspend facilities for all persistent debt customers without attempting to reach any agreement on repayment in the first instance.
The FCA has reminded credit card firms that (under persistent debt rules in force from 1 March 2018) they must help customers reduce debt more quickly and offer forbearance if their proposals are not affordable by the customers. Firms will not be allowed to suspend credit cards without objectively justifiable reasons, as there is no regulatory requirement to suspend a card where the customer is in persistent debt. The FCA threatens "swift action" if it identifies poor practice by firms in this regard.
In December 2016 the court forms for requesting the issue and re-issue of warrants were updated. These changes were made in light of the Cardiff County Council v Lee (Flowers) case, which highlighted the need for the court's permission to enforce a suspended possession order. The new forms required that a statement be attached showing the payments due and payments made on the mortgage account.
The court rules were changed in October 2018 and this negated the need for lenders to seek the court's permission to enforce a possession order suspended on payment terms. The requirement to provide a statement with an application to enforce a suspend order was removed from the warrant request form. However, it appears that the re-issue of warrant form was overlooked and, consequently, this form still makes reference to a statement being attached.
TLT has raised this issue with the Civil Procedure Rules Committee, which has agreed that a statement is no longer needed if a warrant is to be re-issued. The Committee has also stated that it believes that both the warrant request form and the request form for a warrant to be re-issued could be improved. New forms are now being drafted. This is a welcome result and will provide greater clarity in this area.
Update on FCA action against firms breaching lending rules
The FCA has taken action after it discovered Bristol-based P F International Limited (PFI)breached its lending rules by using door-to-door cold call visits and high pressured sales techniques to broker and sell credit agreements to vulnerable consumers for the purchase of its vacuum cleaners. PFI failed to carry out affordability checks and entered into credit agreements even though it was told that customers could not afford them. It also misled the FCA and sold off-site credit when it was not authorised to do so.
First and second supervisory notices were issued against PFI in 2018, severely restricting PFI's ability to carry out regulated activities. PFI challenged these notices by way of appeal to the upper tribunal. PFI's permissions in respect of regulated activities were later cancelled by the FCA (for separate failings) and the FCA has recently been successful in its application to strike out the appeal.
The FCA intervened early following its collaboration with Bristol Trading Standards and the National Trading Standards South-West Regional Investigation Team. Its message to firms is that it will take action to prevent harm to vulnerable customers and that firms should look to ensure they are treating customers fairly.
FCA – final rules and guidance on mortgage advice and selling standards
In 2014 the Mortgage Market Review (MMR) brought in big changes as to how lenders operate. The MMR has not been without criticism, and we have already seen changes following the impact on so called mortgage prisoners. The FCA has now completed a consultation and published guidance following concerns that barriers had been put in place that were stopping customers from obtaining the best deal for them.
One of the areas the FCA has changed is execution-only sales where at the moment the guidance does not make it clear enough that options can be put to a customer without being considered to be advice. The Perimeter Guidance (PERG) on mortgage advice is being finalised and this, coupled with developments in technology used by lenders, should lead to lenders being able to present tools to customers that helps them to choose products on an execution-only basis without it falling into the category of being an advised sale. Customers will also be able to interact more with firms before this is considered to be advice. The aim of the changes is to make it easier for customers who can afford a mortgage to choose suitable products and to remove barriers the MMR may have put in place. The new rules and guidance came into force on 31 January 2020 but there are transitional provisions that will run to 30 July 2020 to allow firms to adapt their processes to changes made in MCOB 4.4A.1R(1A) and MCOB 4.7A.23AR. Through firm supervision, regulatory reporting and research, the FCA will monitor how successful the changes are. No doubt there will be further consultations in the future as the market continues to evolve.
For more information see our article ‘Execution-only rule changes provide boost for digital transformation’.
FCA recognition for Lending Standards Board updated Standards of Lending Practice for business customers
In July 2019 the Lending Standards Board (LSB) published an update to its Standards of Lending Practice for business customers which took effect in November 2019. The key changes were:
- The LSB has increased the threshold so that the standards will apply to businesses with a turnover of up to £25 million.
- The section on financial difficulty now includes a separate set of standards for customer treatment in business support units.
- The LSB has increased its oversight around sale of debt.
Following only one response to the relevant question in September 2019's Quarterly Consultation, the FCA has published a Feedback Statement and recognised the Standards of Lending Practice for business customers as an industry code. This recognition only extends to unregulated activities and will last for a three-year period, after which it may be extended.
Second charges: New mortgages on the up but repossessions are down
Recent research has shown that, although there has been an increase in consumers securing second charges on their properties, actual enforcement of second charges has reduced.
In 2019, there were c. 28,000 new agreements for second charges worth around £1.25bn. This was an increase of 19% from the year before and is also the highest volume of new second charges recorded since 2008.
Figures show, however, that enforcement of existing second charges actually fell during the same period. Total repossessions under second charges fell to a record low of 98 for the whole of 2019 – this was a fall of 34% from the 149 in 2018. The repossessions count for just 0.06% of outstanding agreements for the 2019 period.
Fiona Hoyle, head of consumer and mortgage finance at the Finance & Leasing Association summarised the position as follows: "Second charge mortgage providers are committed to helping consumers in financial difficulty, which is borne out by the low number of repossessions last year".
Housing (Wales) Act 2014 – who is the landlord once receivers are appointed?
In a recent decision, HHJ Jarman QC provided useful clarification on the interpretation of the Housing (Wales) Act 2014 (the 2014 Act) where fixed charge receivers have been appointed over a property. Although not binding, it will no doubt have persuasive effect upon other judges in the Welsh circuit.
Jarman determined that, due to the nature of the agency and its relationship to mortgagors, receivers may be deemed to be landlord for the purposes of seeking possession under the Housing Act 1988 and complying with registration and licencing requirements under the 2014 Act. However, he suggests that certain procedural requirements must be adhered to in order to permit this.
In this case note we detail Jarman's decision and explain its impact upon receivers.
Focus on Northern Ireland
Mortgage claims rise by 9% in Northern Ireland year on year
NI Department of Justice figures show that mortgage claims have risen in October to December 2019 by 9% compared with the same period in 2018. This is the highest number of mortgage cases received during this quarter since 2014.
The statistics show there were 300 mortgage cases disposed of between October and December 2019, a 140% increase from the same period in 2018. Again, this was the highest number of mortgage cases disposed during this quarter since 2014.
We have seen a significant uplift on possession claims in the last few years as lenders have remediated and progressed accounts to comply with the FCA guidance on automatic capitalisation. The impact of this issue between 2013 and 2015 is quite pronounced, as the number of claims being issued fell by 21% and 58% in 2014 and 2015 respectively.
The level of claims will also have been affected by the fact that lenders have been working through a backlog of cases impacted by the changes to affidavit evidence in March 2018, which required lenders to make witness statements directly. We saw a sharp drop in the number of mortgage cases disposed of following these requirements, falling by 39% between Quarter 1 and 2 of 2018. The number of cases disposed of has steadily increased since this quarter, however it will remain to be seen whether figures stabilise over the next 6-12 months as these issues work out.