Whether you are for Brexit or against it, the UK is still a member of the EU (and there is a 50% chance that we will remain so, after 23rd June this year), and as a member of the EU we are obliged to implement the EU Mortgage Credit Directive requirements by the 21 March 2016.
Although these conduct rules are effective from 21 March 2016, firms could have elected to adopt the majority of the rules from 21 September 2015 – I can’t say I have come across many of these firms, if any.
In the UK we already have a pretty robust mortgage regulation due to the Mortgage Market Review (MMR) requirements. MMR is not the same as MCD but we, at least, can take comfort that the imposition placed by the MCD is not as onerous as some other EU member states.
You could, I believe, rightly argue that MCOB regulation already addresses two of the main objectives of the MCD:
- To prevent the repetition of irresponsible lending and borrowing practices
- To encourage consumer confidence.
It is the third and fourth main objectives where the influence of the EU has the biggest impact:
- To create a more efficient and competitive single market for mortgages
- To establish a level playing field and promote cross- border activity
MCD affects lenders, administrators, intermediaries, arrangers and advisers so in terms of TC:
- What have you got to ensure your firm has in place? And …..
- What do you need to train your staff appropriately to do?
Let’s start off by looking at what the EU has stated mortgage firms generally have to comply with:
- Act fairly and professionally, ensuring staff have an appropriate level of knowledge and competence.
- Advertise products fairly and not misleadingly, with certain standard information included where specific rates are being quoted.
- Provide certain information to the consumer ahead of a contract being concluded.
- (Lenders) conduct an affordability test, looking at customers’ income and expenditure, to determine whether they can afford the mortgage loan.
- Minimum standards are followed where advice is provided to consumers.
- (Lenders) put in place additional consumer safeguards where loans are in a foreign currency, to protect the customer against exchange rate risk.
- Give consumers the right to be able to exit a mortgage before it reaches the end of the term.
- (Lenders) exercise reasonable forbearance to customers in payment difficulties before initiating repossession proceedings.
- Make it is easier for mortgage intermediaries to operate across borders.
- Allow consumers to have access to cross-border redress.
Taking our lead from the above, the following key areas need to have been considered and addressed;
The customer must be provided with an adequate explanation of the proposed mortgage contract and any ancillary services. This must include pre-contract information, including the essential features of the product and potential impact on the customer, including the consequence of defaulting.
The European Standardised Information Sheet (ESIS) will replace the Key Facts Illustration (KFI).
Lenders are required to either implement the ESIS from 21 March 2016, or elect to provide a KFI + (a KFI with some additional supplementary information), before fully transitioning to the ESIS by March 2019.
Your “brokers” will need to be able to explain the contents of the ESIS and in particular, the rates that will need to be illustrated:
- The Annual Percentage Rate of Change, APRC of the product recommended.
- 2nd APRC – if the amount is variable, the ESIS will illustrate the rate at the highest of the preceding 20 years.
- 2nd APRC – if the amount is capped, the ESIS will illustrate the highest amount at the earliest date it can rise.
- The product rate before and after any initial benefit period.
The document must be issued at the point of advice, before application, on request, as soon as reasonably possible after the customer has provided information regarding affordability and preferences, or prior to payment of a product related fee.
For most elements of a mortgage interview the mandatory requirements are not time bound, but this is. If you haven’t already done so you will need to amend your observation documents to ensure competence in this area.
Disclosure regarding increased borrowings:
Where a customer is increasing their borrowing, the broker is required to inform them of alternative options of raising funds, e.g. further advance, unsecured loan, second charge or remortgage – another competency assessment requirement.
(Suitability of the alternatives does not need to be considered by the broker unless they form part of the scope of service offered to the customer).
Disclosure of lenders on panel and the range of procuration fees offered by each:
Brokers will be required, on request from the customer, to provide a list of lenders on panel and the range of procuration fees paid by them – another update for your competency requirements.
Introduction of a 7 day reflection period:
The MCD introduces an obligation on lenders to give customers the right to seven days of reflection. The trigger for this is likely to be the lender issuing a mortgage offer. Your brokers will need to explain this to the customer. As a firm you need to ensure they do this along with confirming they understand what the trigger point is.
The MCD requires lenders to issue ‘binding’ offers. This means that unless a material change occurs, post offer, or the customer has provided inaccurate information, the lender cannot re-underwrite the case.
(Binding Offers will only apply to MCD regulated mortgages, this will not include Business BTL or MCD exempt Lifetime Mortgages).
Buy to Let
For those of you that offer Buy to Let mortgages additional requirements come into play;
The vast majority of BTL lending will now become non-regulated, and will be called ‘Business Buy-to-let’ (BBTL) credit agreements.
Under the MCD Directive, some BTL mortgages become defined as regulated ‘Consumer Buy to let’ (CBTL) mortgages – when the borrower or related person (an immediate relative) has ever lived in the property or intends to live in the property in the future.
Non-regulated ‘Business Buy to let (BBTL):
- When a customer is deemed to be, or has identified themselves, as acting by way of a business in taking out a BTL mortgage, or:
- A BTL loan is on a property that has been bought for business purposes for the sole purpose of letting it out
- If the borrower has never lived in it and has a portfolio of properties
As a lending firm you require a signed declaration from the borrower to confirm the borrower is acting wholly for business purposes.
Just because the FCA will not regulate these loans, lenders will still be expected to treat them the same as regulated mortgages, and they should expect brokers to apply the same scrutiny prior to submitting applications to them.
As a firm if you offer both regulated and non regulated mortgage lending, is it not easier to apply the same processes for both?
Second Charge lending
Second charge lending now comes under MCOB regulation.
If you think about what a second charge mortgage is – an alternative to remortgaging by which the borrower is able to use the equity in their home as security for another loan, on top of their main mortgage, it’s understandable.
If you have been operating in this market only, you should be reading this having by now:
- Made any relevant applications to the FCA in relation to permissions.
- Invested in staff training and qualifications.
- Undertaken a complete overhaul of processes, policies, systems and controls.
- Designed documents to be able to demonstrate competence including performing higher standards of affordability.
- Put systems and controls in place to comply with the reporting obligations.
- Built and delivering enhanced compliance oversight.
Providers of second charge mortgages are now subject to the same MCD obligations regarding the provision of advice and disclosure of information as first charge mortgages. This includes advisers of Second Charge mortgages being level 3 qualified. Those already in the role by 21st March 2016 have until 21st Sept 2018 and those new to the role after MCD have 30 months from starting to achieve the qualification.
How are you supporting your staff to achieve this?
What other activities will you implement to ensure advisers of second charge mortgages are providing the required level of advice and disclosures- both initially and on an ongoing basis?
Foreign Currency Mortgages
A Foreign Currency mortgage is a mortgage in a different currency to that which a customer receives income, or a mortgage in a different currency to the EEA state in which the customer is resident.
Lenders must disclose to customers where there is a fluctuation in exchange rates of more than 20%.
This will mean firms need to monitor their currency mortgages a lot closer than before. So again policies and procedures need to be updated, staff trained and perhaps investment in new technology solutions.
For firms who were dealing with first charge mortgages prior to MCD and therefore adhering to MCOB requirements, the following should already be a “fait accompli”
Recommend a suitable product
The FCA requires an adviser to recommend a product or products that are suitable for the customer, based on an assessment of their needs and circumstances. If you do not have a suitable product then you cannot recommend the “least worst” product to the customer.
Mortgage advisers must consider a range of factors in arriving at their recommendation, including whether it is appropriate for a customer in relation to, the ongoing cost, the term and if they want to make any early repayments.
Although the lender is still responsible for assessing affordability, the adviser is still expected to consider the lenders eligibility criteria.
For second charge mortgages, where the main purpose is for debt consolidation, then this has to be an advised sale.
Knowledge and competency
We have already discussed the qualification requirements for advisers of second charge mortgages., and hopefully initiated some thoughts on additional activities to both maintain and enhance competence on an ongoing basis.
The MCD has also extended knowledge and competence requirements to include:
- Those involved in the manufacturing of mortgages (product design)
- Individuals involved in mortgage underwriting
The FCA have made it clear they are allowing firms the flexibility to identify which individuals are involved in the above, and how to ensure their knowledge and competency is in line with the requirements as specified in the FCA TC sourcebook.
Where there is a deadline date for implementation, a firm is easy pickings for the regulator. If the firm has not understood the changes required within their business and has not made sure the appropriate resource has been allocated to address the requirements, they could be acting outside of their permissions.
Firms paid by commission must tell consumers that they have the right to ask for information on the commissions paid by different lenders and must be able to provide this information to the customer.
Firms will need to ensure that they have a policy in place to deal with customers who get into financial difficulties, in relation to their payments to the arranged contract.
I hope as you are reading this you are mentally ticking off the MCD requirements your firm has put in place, but just incase you are having trouble doing this for whatever reasons, be it senior management sponsorship, lack of resource, financially or otherwise, here are a few of the consequences;
Where there is a deadline date for implementation, a firm is easy pickings for the regulator. If the firm has not understood the changes required within their business and has not made sure the appropriate resource has been allocated to address the requirements, they could be acting outside of their permissions. Therefore they may not be able to demonstrate that they have the appropriate systems and controls in place to meet their regulatory obligations.
This could result in:
- The FCA taking action against the firm – increased supervision and scrutiny perhaps resulting in fines for individuals or the firm.
- Negative media attention – reduced profits and potential issues with staff morale.
- Increased number of customer complaints due to unsuitable advice. This can increase the number of claims against the firm, which can again affect profitability and reputation with the regulator.
I will end this article as I started – with a thought and a couple of reflective questions:
The easiest way for the FCA to check that you have implemented the MCD requirements competently is to undertake Mystery Shopping.
- Have you provided enough relevant training to your front line staff?
Have you assessed whether your front line staff are competent in their understanding and delivery of the MCD requirements?