Consultation outcome

Implementation of the EU Mortgage Credit Directive

Updated 26 January 2015

1. Introduction

1.1 The subject of this consultation

This consultation invites views on the proposed steps that the UK government will take in order to make sure the UK meets its obligation to transpose the European Mortgage Credit Directive (MCD). It also includes the consultation stage impact assessment for these proposed changes alongside a draft of the legislation required.

1.2 Who should read this?

This consultation should be read by those who will be affected by the changes proposed. This could be any individual, firm or group that is a stakeholder in the UK mortgage market including, though not limited to: banks, building societies, consumer groups, charities with an interest in housing, mortgage intermediaries, house builders and other interested parties.

1.3 Background to the directive

The European Commission proposed the directive on credit agreements for consumers relating to residential immovable property, more commonly referred to as the MCD, on 31 March 2011 for adoption through the co-decision procedure. After a first reading agreement on 22 April 2013, the directive was published in February 2014. The final text of the directive is available in full on the website of the European Commission.

Most of the MCD provisions are concerned with setting the minimum regulatory requirements that member states are required to meet in order to protect consumers taking out credit agreements relating to residential property. This captures residential mortgages secured against the borrower’s home and also any other lending where the purpose is to acquire or retain property rights. The MCD also imposes maximum standards on member states in a few areas, in particular the provision of pre-contractual information in a standardised format. The key areas in which the MCD places requirements on member states aim to ensure that:

  • mortgage firms act fairly and professionally, and that their staff have an appropriate level of knowledge and competence
  • advertising of products is fair and not misleading, with certain standard information included where specific rates are being quoted
  • certain information is provided 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
  • consumers are given a 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
  • it is easier for mortgage intermediaries to operate across borders
  • consumers have access to cross-border redress

The UK is required to implement the MCD requirements by 21 March 2016, in order to meet its Treaty obligations. This requires the UK government to make changes to the legislation that enables mortgage regulation in order to meet the requirements set out in the MCD.

1.4 Existing mortgage regulation in the UK

The UK already has in place a robust regulatory regime to protect consumers engaged in the first charge residential mortgage market. Under the Financial Services and Markets Act 2000 (FSMA), the independent regulator, the Financial Conduct Authority (FCA) has the authority to put in place, supervise and enforce a range of rules to ensure that firms act responsibly in their mortgage activities. The government sets out the FCA’s objectives in legislation as well as specifying what financial services activities are within their jurisdiction1.

This regulatory framework has been in place in the UK since 2004, and gives the FCA powers to regulate mortgage activity, and act upon poor practices where they emerge. Over this time the regulator has been able to develop a framework with strong consumer protections, but also tailored to the specifics of the UK market, which has a number of characteristics which distinguish it from mortgage markets in other member states.

The FCA has recently introduced a number of significant changes to its rules around mortgage regulation, known as the Mortgage Market Review (MMR). These changes are designed to tighten the rules on firms in a number of areas with the broad aim of ensuring that the tail of irresponsible lending practices that occurred before the financial crisis are not allowed to re-emerge.

1.5 UK approach to negotiations on the MCD

As explained above, the MCD sets the regulatory requirements that member states are required to meet in order to protect consumers taking out credit agreements relating to residential property. The UK government does not believe that the MCD offers many benefits to UK consumers beyond those already provided by the high level of protection offered by the existing FCA regime for mortgages. However, it does add a number of costs to UK industry.

A further aim of the MCD is to facilitate a better internal market in mortgage lending across Europe. The government does not believe that it offers much benefit in this area in practice because it does not address the primary obstacles for such a market. From a lender’s perspective, these include the relative difficulty in understanding credit risk in unfamiliar markets and the complexity in enforcing loans under foreign legal systems. For consumers, the scale and nature of a mortgage commitment drives a preference for dealing with well established, or local, brands.

The UK has therefore been sceptical about the value of the MCD. Throughout the negotiation of the MCD, the UK focused on aligning the directive requirements as far as possible with the existing UK regulations, with a view to minimising the impact on UK industry and consumers.

1.6 UK proposed approach to implementation of the MCD

The government’s proposed approach to the implementation of the MCD, as with the negotiations, is to minimise the impact on the UK market as far as possible. For this reason the government is proposing to build on the existing UK regulatory regime in our transposition of the MCD, rather than copy out the directive into UK legislation.

Although copy out is the UK government’s default approach for implementing EU legislation, the government does not believe it would be appropriate in this case. While it is likely that a copy out regime would be less costly for firms to comply with over the longer term, it would cause disruption in the near term, and most importantly would dismantle the robust consumer protections which have been developed specifically for the UK market over the last decade. Instead we are proposing an approach that is consistent with the government’s approach to financial services regulation, where regulators have clarity of responsibility, a focused remit, appropriate tools and the flexibility to use them as they see fit.

As such, transposition of the MCD will be achieved primarily through FCA rules. The recent introduction of the MMR means that many of the directive’s requirements are already met as the FCA were able to anticipate some of the emerging EU proposals through the recent MMR changes. However, there are a number of areas in which the FCA will need to make adjustments to the rules in order for the UK to meet its MCD obligations.

The most significant area where FCA rules will change is to accommodate second charge mortgage lending within the wider mortgages regime, rather than the FCA consumer credit regime. This is an area of the MCD where its provisions are aligned with government policy. The government first announced its intention to regulate second charge mortgage lending alongside first charge mortgage lending in 2011, but decided to make this change alongside the implementation of the MCD, in order to avoid the industry having to make several significant regulatory changes in short succession.

Going forward, all lending secured on the borrower’s home will therefore be regulated under the FCA mortgages regime. However, the MCD covers 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 something other than residential property. The government is not aware of widespread use of this type of lending in the UK, but nonetheless needs to make provision for MCD compliance of such loans. It is the government’s intention that such lending would be treated as consumer credit for legislative purposes.

The government is aware of the challenges faced by industry in managing the transition to a regulatory regime that is MCD compliant, particularly as a result of the relatively long sales process for mortgages. This means that careful consideration needs to be given as to how to the legislation can best support lenders in managing this pipeline of loans to minimise disruption to both consumers and lenders. The government will use the consultation period to consider in more detail whether there are further steps it could take to smooth this process.

HM Treasury (HMT) has worked closely with the FCA both during the MCD negotiations and as thinking around implementation has developed. HMT supports an FCA approach to implementation that looks to minimise disruption and any adverse impact from the need to transpose the MCD.

Question 1

Do you agree with the government’s proposed approach to implementation of the MCD, building on the existing regulatory architecture where it exists?

1.7 Legislative changes required to implement the MCD

Although FCA rules will be the primary vehicle through which the UK transposes the directive, there are some areas where UK legislation will need to be changed. As discussed above, legislation determines what financial services activities are within the FCA’s remit. For example, the existing definition of a regulated mortgage contract within UK legislation is not completely aligned with the definition of a mortgage under the MCD. In order for the FCA to have the necessary authority to write and enforce rules across the full scope required by the MCD, the government will need to make a number of legislative amendments to adjust the FCA’s remit.

A further area of legislative change will be in meeting the MCD’s requirements for member states to put in place an appropriate framework for buy-to-let mortgage lending to consumers. In most cases, buy-to-let mortgage lending is not regulated by the FCA. The exceptions are where the loan is secured on the borrower’s home (as opposed to the property being let) or if the borrower or a relative occupies, or intends to occupy, at least 40% of the property at any time. However, the broking of buy-to-let mortgages does usually require a firm to be FCA authorised. This is because the broking of buy-to-let mortgages is included in the scope of consumer credit broking.

When mortgage regulation was introduced in 2004 the government drew a distinction between mortgage lending to owner-occupiers and to buy-to-let landlords, and decided not to bring buy-to-let mortgage lending within the scope of FCA regulation. This reflects the different characteristics of buy-to-let customers, most of whom are carrying out a business activity and so do not require the same protections, as well as the fact that the borrower’s own home is not at risk.

The MCD recognises the different characteristics of buy-to-let mortgage lending and provides member states with the option to exempt it from the detailed requirements of the directive. However, it also requires that member states using this option put in place an alternative appropriate framework to protect consumers engaged in buy-to-let borrowing. The government remains persuaded that it is right to treat buy-to-let mortgage lending differently, and so is proposing to use this option. This consultation sets out the government’s plans for an appropriate framework for buy-to-let mortgages, seeking to put in place the minimum requirements in order to comply with the MCD.

There are also a number of changes that will be required to the FSMA in order to implement the regime. These include amendments to: the grounds for varying or cancelling a mortgage broker’s permission; the provisions for cross-border activities within the EEA; and the regulatory regime for appointed representatives carrying out mortgage-related activities.

This consultation asks for views on the legislative changes proposed by the government in order to meet our obligations under the MCD.

1.8 Timeline for implementation

The MCD was adopted on 4 February 2014 and member states are required to transpose its provisions into national law by 21 March 2016. However, given the government’s aim of reducing the burden of implementing this directive on business where possible, the UK is aiming to finalise the measures needed to implement the directive by March 2015 in order to provide industry with time to adjust to any changes required.

The government will engage with stakeholders over their responses to this consultation. Any changes proposed as a result of this consultation will then be given due consideration and fed into the final legislative draft. In order to fulfil this timeline for implementation the government is aiming to lay this final legislation in Parliament in early 2015.

The legislation will include a statutory requirement for HMT to undertake a review of the implementing measures of this directive by September 2018. This will ensure the outcome of the review can feed into the European Commission’s review of the directive in 2019.

Question 2

Do you agree with the government’s proposed timeline for putting in place the legislation necessary for the implementation of the MCD?

2. Second charge mortgage lending

2.1 The second charge mortgage market

Second-charge mortgages are loans secured on property that is already acting as security for a first-charge mortgage. The terms first and second charge refer to the priority of securities held by the lenders. A second charge is subordinate to a first charge: in the event of default and the sale of a property a first-charge mortgage lender will recoup its money first and the second-charge mortgage lender’s interests in the property are only activated after all liabilities to the first-charge mortgage lender have been settled. The term second charge mortgage is used here to refer to second and subsequent charge loans. Typical uses for second charge mortgages include debt consolidation and home improvements.

The second charge mortgage market grew rapidly in the decade prior to 2007, representing around 2% of the total mortgage market in that year2. In 2009 it had dropped to around one quarter of 1% of gross mortgage lending, or around 18,000 new second charge mortgages3. This reduction was caused by a significant contraction in supply as second charge lenders struggled to secure funding in the wholesale markets and a reduction in homeowners’ equity dampening demand. The market has grown since, with an increase of 14% in the value of new business in 2012 and an increase in the number of new contracts of 2%4.

2.2 The existing regulation of second charge mortgage lending

The scope of FCA mortgage regulation is currently limited to first charge mortgage lending while second charge mortgage lending is regulated as part of the consumer credit regime. This has been the case since 2004, when the current regulatory framework for mortgage lending was introduced. At that time the decision was made to keep second charge lending regulated by the OFT alongside unsecured consumer credit. This remained the situation until April 2014 when responsibility for the regulation of consumer credit transferred to the FCA. Since April, second charge lenders and intermediaries have been operating within the FCA’s interim consumer credit regime.

However, the government has an existing policy commitment to move second charge mortgage lending into the regulatory regime for mortgage lending rather than the regime for consumer credit. This is on the basis that it is more appropriate to regulate lending secured on the borrower’s home consistently regardless of whether it is a first or subsequent charge. Moreover, a single regime would make the regulatory landscape simpler for those firms engaged in both the first and second charge markets.

The government originally announced its intention to make this change in 2011. However, in light of the MCD, the decision was made to postpone this transfer until the wider implementation of the directive. The MCD applies to all loans secured against residential property and so its provisions apply equally to first and second charge mortgages. The government wanted to avoid the disruption and additional cost to second charge firms of imposing two sets of regulatory changes in quick succession.

2.3 The transfer of second charge mortgage regulation to the mortgages regime

The government therefore propose that the implementation of the MCD in March 2016 should be the occasion at which the second charge regulatory regime is transferred to the same regime as first charge lending, in line with the government’s policy intention. This will involve a change to existing legislation to extend the scope of the FCA’s mortgage regime, so that it covers both first and second charge lending.

Moving second charge lending into the same regime as first charge lending will result in the loss of some consumer protections that exist in the current consumer credit regime, such as the ability to challenge unfair relationships. The FCA are designing appropriate consumer protection in their new mortgage regime that will mitigate against the loss of these protections. Other existing protections will remain, such as the use of Time Orders, which can be used for first or second charge mortgages.

The government also proposes to move the regulation of second charge loans already in existence before March 2016 to the mortgages regime, rather than keeping them within the consumer credit regime, so that existing and new loans can be managed and regulated coherently. However, the government recognises that changing consumer protections for loans already in existence is different to changing the regulation for future loans. Although consumers will receive robust protections under the new regime, the government proposes to put in place transitional provisions for existing loans so that some of the Consumer Credit Act protections in place when the loans were originally taken out are not removed retrospectively. A number of these preserved protections ensure that historic lender activity, that took place under the consumer credit regime, continues to be judged against the rules in place at the time, for example those requiring the correct disclosure of information when the loan was originally taken out. In addition, in some areas where FCA mortgage rules cannot replicate existing provisions or are significantly different, in particular around the ability to challenge unfair relationships and the rules around the early settlement of the loan, the government proposes that the Consumer Credit Act protections are maintained for these back book loans.

The existing consumer credit regime currently provides for a number of regulatory exemptions for second charge mortgage lending. The government’s proposed approach is to maintain these exemptions, where the MCD allows it. This means that some exemptions will exist for second charge lending that do not exist for first charge lending, for example in respect of some types of second charge bridging loans with four or fewer repayments, second charge business loans which exceed £25,000 and some second charge loans by credit unions. This reflects the government’s objective to minimise the impact of the directive where possible. However, it also introduces further complexity into the regime and government would welcome views on this proposal.

An alternative means to meeting the UK’s legal obligations under the MCD would be to create a specific regime for second charge by copying out the MCD into legislation. However, this approach would not achieve many of the policy objectives of the transfer as many of the benefits, for both business and consumers, are driven by having in place a set of regulations that are broadly aligned for first and second charge mortgage lending.

In recognition of the differences between first and second charge mortgages and the importance of ensuring a proportionate level of regulation, the FCA is considering how the rules that will apply to second charge lending can be appropriately tailored to the market. The FCA will consult on these rules in due course.

2.4 Cost and benefits of proposed legislative changes to second charge mortgage lending

The legislative changes will mean that second charge firms (lenders and intermediaries) will need to obtain the same FCA permissions that currently apply to first charge firms. If they had stayed within the consumer credit regime under the FCA, they would instead have been required to obtain a full FCA consumer credit permission as they moved from the interim to the full regime. The current assumption in the government’s impact assessment is that the cost to second charge firms of mortgage permissions would be the same as the cost they would otherwise pay for full consumer credit permissions, although this is subject to final FCA decisions.

There may be some costs to firms in having to familiarise themselves with a new application and complete the necessary documents. The additional burden of this is likely to be marginal given that, were they to remain within the consumer credit regime, they would have to apply for a full FCA consumer credit permission anyway. The cost impact will be further mitigated by the fact that a number of second charge firms also undertake first charge mortgage activity and so may already have a mortgage permission. Indeed, if a firm conducting first charge activity does not intend to carry out consumer credit activities, the change could result in a saving as they would not need to apply for a full FCA consumer credit permission.

The government is seeking, as part of this consultation, to understand the potential additional costs to firms in more detail and would welcome views from respondents as to the likely additional burden of familiarising themselves with an application for a mortgages permission rather than a consumer credit permission, as well as more information about how many second charge firms may save some costs as they already have a mortgage permission. Here the government is not seeking to quantify the cost of adhering to the rules within such a regime, as this will be included in the FCA cost-benefit analysis.

While the cost to industry of legislative changes is expected to be relatively low, we expect firms will incur greater costs as a result of the application of the FCA’s rules. The impact on consumers will also be determined by the nature of the applicable FCA rules rather than the permission that firms hold. The FCA are currently engaging with stakeholders in designing the rules for second charge firms, and plan to consult on them later this year, including publishing a cost-benefit analysis of the changes.

Question 3(a)

Do you agree with the government’s proposal to amend the scope of FCA mortgages regulation to cover both first and second charge mortgage lending?

Question 3(b)

What will be the costs to second charge firms associated with the government’s proposal that they are required to secure a FCA mortgages permission rather than a FCA consumer credit permission?

3. Buy-to-let mortgage lending

3.1 The buy-to-let mortgage market

Buy-to-let lending accounts for a significant part of the UK mortgage market. In 2013, 151,000 buy-to-let mortgages were taken out for house purchase or remortgaging in the UK, making up 12% of total mortgage lending for these purposes. This number is significantly higher than the trough in buy-to-let lending that the UK experienced immediately after the financial crisis, but is still below the peak of buy-to-let lending in 2007 where 339,000 such mortgages were taken out representing 15% of the market at that time5.

As with mortgage lending to owner-occupiers, the market is dominated by a handful of major lenders with a long tail of smaller players. Most of these lenders also carry out regulated mortgage lending alongside offering buy-to-let products. However, there are some buy-to-let specialists who do not engage in lending to owner-occupiers at all. The market has a high degree of credit intermediation, with mortgage brokers involved in the majority of transactions.

Existing UK legislation sets out that one of the conditions that must be met in order for a mortgage to be conduct regulated is that at least 40% of the property is occupied, or intended to be occupied, by the mortgage borrower or their relative. This means that most buy-to-let mortgage lending is currently outside of the scope of FCA regulation. This condition was put in place in 2004 when mortgage regulation was introduced and is intended to draw a distinction between mortgage lending to owner-occupiers and to buy-to-let landlords to ensure that the latter are not brought within the scope of regulation.

This approach is driven by two key considerations. The first is that an owner-occupier’s own home is at risk, so there are potentially significant social policy implications if these borrowers are not adequately protected. Second is the acknowledgement that buy-to-let borrowers tend to be acting as a business. The government is committed to introducing FCA regulation only where there is a clear case for doing so, in order to avoid putting additional costs on firms that would ultimately lead to higher costs for borrowers. Businesses are expected to be better placed than consumers to judge whether contracts they make with other businesses are in their interest.

The scope of the MCD is wider than existing UK regulation and encompasses all mortgage lending to consumers. However, the directive does recognise that buy-to-let lending is not the same as lending to individuals who are buying their own home, and provides member states with the option to exempt buy-to-let from the detailed requirements of the directive, and instead put in place an alternative appropriate framework for the regulation of these mortgages. The government is proposing to use this option to put in place the minimum requirements to meet the UK’s legal obligations, as it is not persuaded of the case for the conduct regulation of buy-to-let. This chapter includes details of the government’s proposal to meet the MCD requirements for buy-to-let lending to consumers.

Alongside the legislative changes needed to introduce an appropriate framework for buy-to-let lending to consumers, a change is also needed to ensure that the distinction between buy-to-let mortgage lending and lending to owner-occupiers is drawn in the same way as it is in the MCD. This will ensure that the FCA has the appropriate authority to apply the detailed MCD requirements to the right mortgages. The proposed change is set out below.

3.2 Mortgage lending where the borrower occupies less than 40% of the property

As mentioned above the existing definition of a regulated mortgage in UK legislation includes a requirement that at least 40% of the land is used by the borrower or a relative as their home. This definition excludes from regulation a mortgage where the borrower (or their relative, such as a child at university) occupies, or intends to occupy, less than 40% of the land, but rents out the remainder to others. Under existing UK regulation, this type of arrangement would be treated as a buy-to-let mortgage and is not FCA regulated.

The MCD does not include a threshold of this nature in its definition of what mortgages are within the scope of its provisions. It defines a buy-to-let mortgage as one which includes, as a term of the contract, a requirement that the property cannot be occupied at any time by the borrower or a family member. This means that, under the circumstances described above where the borrower is a consumer who occupies less than 40% of the property, the mortgage would need to be regulated by the FCA so that the detailed provisions of the directive could be applied.

The government is therefore proposing a change in legislation to bring mortgages within the scope of FCA regulation under these circumstances. This change will bring some additional lending under the FCA’s remit. However, informal discussions with industry suggest that many firms already tend to treat this type of lending as regulated and this change will therefore have a limited impact on the market.

The existing UK legislation also ensures the exclusion from regulation of properties that are mixed use, where the majority of the property is used for commercial rather than residential purposes. The directive does not apply where the contract is predominantly for the purposes of a person’s business, trade or profession so that the borrower is not acting as a consumer. For this reason, the government proposes to preserve this regulatory exemption.

Question 4(a)

Do you have any comments on the government’s proposed legislative changes to bring mortgages into FCA regulation if any part of the property is occupied by the borrower or their relative and the borrower is acting for purposes which are outside his trade, business or profession?

Question 4(b)

Do you agree with the government’s assessment that this change will have a limited impact on the market?

3.3 An appropriate framework for buy-to-let mortgage lending to consumers

The most substantial change for buy-to-let mortgage activity is likely to be the need to introduce an appropriate framework to protect consumers taking out a buy-to-let mortgage. As mentioned above, the government has not been persuaded of the case for introducing regulation in this area, so will be looking to meet the minimum MCD requirements in its transposition.

In general the government’s approach in implementing the MCD is to build on the existing regulatory framework. However, in approaching the requirements for buy-to-let this is less applicable as an existing framework is not present in the same way. For otherwise unregulated buy-to-let mortgage activity the government therefore proposes to copy out the relevant sections of the MCD into UK legislation.

Ensuring the appropriate framework only applies to consumers

The MCD requirements only apply to individuals who are consumers. This means that the UK is not obligated to put in place any requirements where the mortgage is being taken out by a company, or where it is taken out by an individual acting in the course of their trade, business or profession. As explained above, alongside the fact that the borrower’s own home is at risk, a key reason that the UK government has excluded buy-to-let from the scope of FCA regulation to date is that most buy-to-let transactions are carried out for business purposes, so that the consumer protections provided by FCA regulation are not appropriate. For that reason an important feature of the UK’s proposed approach to implementing the MCD is to provide a mechanism so that an appropriate framework does not need to be applied where the borrower is conducting a business activity.

For the majority of buy-to-let transactions, the borrower is making an active decision to become a landlord, an activity for which they will receive an income and for which they will be taxed as a business. In addition, they will have to comply with a number of legal obligations placed on landlords, for example around fire and electrical safety standards and the use of a government-backed tenancy deposit scheme. In the government’s view these are characteristics of a business rather than a consumer activity and therefore do not propose such borrowers need to be covered by an appropriate framework under the MCD.

There are some situations where borrowers do not seem to be acting in a business capacity. Examples of this may be where the property has been inherited or where a borrower has previously lived in a property, but is unable to sell it so resorts to a buy-to-let arrangement. In these cases, the borrower is a landlord as a result of circumstance rather than through their own active business decision. The government’s view is that such borrowers are consumers and would need to be covered by an appropriate framework. We would expect such instances to represent a small proportion of total buy-to-let transactions, but would value views from respondents as to how many transactions may be subject to the appropriate framework.

The draft legislation therefore provides that firms do not need to apply the government’s appropriate framework for buy-to-let mortgages where a borrower is acting wholly or predominantly for the purposes of a business. In many cases lenders will be able to establish this through their underwriting processes. But the draft legislation also allows firms to rely on a borrower declaration, confirming that they are acting as a business, as long as the lender does not have reasonable cause to suspect that the customer declaration is incorrect.

Question 5(a)

What are your views on the government’s proposed use of the provisions in the MCD which allow member states to limit the application of an appropriate framework to buy-to-let to consumers?

Question 5(b)

Under these proposals, how many transactions would you expect to be subject to an appropriate framework for buy-to-let mortgage lending to consumers?

The proposed framework for buy-to-let mortgage lending to consumers

Consumers taking out buy-to-let mortgages will, however, need to be subject to an appropriate framework. As set out previously, most buy-to-let broking is already subject to consumer credit regulation while buy-to-let lending is largely unregulated by the FCA. In this context, government has considered the shape of the framework it will need to put in place in order to meet the MCD, taking the text of the MCD as a starting point. However, as the directive itself acknowledges through the provision of the exemption, it may not be appropriate to apply all the detailed MCD requirements due to the different characteristics of buy-to-let mortgages, while other elements may need to be adapted. The government has therefore reviewed the requirements of MCD, removing and adapting them as necessary, in order to develop a framework that is appropriate for buy-to-let lending to consumers.

As discussed above, the government has taken the approach of copying out those elements of the MCD that it judges are appropriate. The draft legislation setting out the details of this framework is set out in Annex C. At this stage it includes provisions for mortgage intermediaries undertaking these activities, despite the fact that their existing regulatory status is not the same as buy-to-let lenders’. However, we would welcome further engagement with stakeholders on the detailed content of this, including how buy-to-let mortgage intermediaries are best accommodated in the regime, before the legislation is finalised.

The framework will be supervised and enforced by the FCA. In order to enable effective supervision, lenders and intermediaries carrying out this activity will need to be registered to do so. For firms with an existing FCA authorisation the government proposes to work with the FCA to ensure that this is a straightforward process. For other firms wishing to participate in this market, they will need to meet certain minimum requirements before being accepted onto the FCA register. However, the government does not envisage these requirements being as burdensome as full FCA authorisation.

The register will allow the FCA to identify which firms it should be supervising. But mechanisms also need to be in place to ensure that firms that are engaging in this activity without being on the register can be appropriately sanctioned. It is the government’s intention that firms with an existing authorisation for another activity should be subject to regulatory action, but firms which do not have an existing authorisation for another activity, and which do not register, should be treated in the same way as a firm that carries on a regulated activity without FCA authorisation, with the potential for prosecution for a criminal offence.

Question 6(a)

What are your views on the proposed content of the appropriate framework for buy-to-let mortgage lending to consumers?

Question 6(b)

What are your views on the proposed approach to the supervision and enforcement of the appropriate framework for buy-to-let mortgage lending to consumers?

3.4 Cost and benefits of the introduction of an appropriate framework for buy-to-let lending to consumers

The government’s intention in designing this framework is to minimise the impact on firms. It proposes to do this by:

  • excluding those elements of the MCD which are not appropriate for buy-to-let
  • aligning the requirements with existing market practice as far as possible
  • making it straightforward for firms to register to carry out this activity

At this stage the government has not been able to make an estimate of the costs to firms of the proposed approach. There may also be some benefits to buy-to-let consumers from the introduction of this framework, although in as far as the requirements reflect good practice in much of the market anyway, the incremental benefit may be marginal.

One of the purposes of this consultation is to seek more information about the likely impact which can then be used to assess the policy approach and provide an estimate of costs and benefits for the government’s final impact assessment. As such the government would welcome any information from respondents that will help establish:

  • the number of UK mortgage firms engaged in buy-to-let lending to consumers
  • the number of UK mortgage firms, if any, that will no longer engage in such activity following the introduction of an appropriate framework
  • the proportion of total UK buy-to-let lending that is to consumers rather than business, and will therefore need to be subject to an appropriate framework
  • the cost to firms of setting up the systems and processes to meet the appropriate framework
  • the ongoing compliance costs to firms associated with the appropriate framework
  • the additional costs of setting up and supervising a regime to enforce the appropriate framework (these costs would be charged to industry)
  • the benefit to an individual buy-to-let consumer from the introduction of the appropriate framework

Question 7

What would you expect the costs and benefits to be of the introduction of an appropriate framework for buy-to-let mortgage lending to consumers?

4. Further changes to the scope of FCA mortgage regulation

There are a number of further legislative adjustments required the definition of a ‘regulated mortgage contract’ to ensure the scope of FCA regulation is aligned with that of the MCD. This chapter asks for views on the government’s proposed approach to these changes.

4.1 Equitable mortgages

Legal mortgages are the standard type of mortgage, with over 11 million outstanding in the UK. These mortgages are regulated by the FCA. Equitable mortgages have similar characteristics to standard legal mortgages, but arise where the formalities to create a legal mortgage have not been completed or where the borrower only has an equitable interest and not a legal interest in the property to be used as security. For example, an equitable mortgage might arise where the parties to the loan agreement do not enter into a mortgage deed, either deliberately or inadvertently (a legal mortgage must be created by deed).

Equitable mortgages are currently not included in the scope of FCA mortgage regulation. The MCD does not, however, draw such a distinction. The government is therefore proposing a change to the legislation to bring equitable mortgage lending into the FCA mortgage regime. The market impact of this change is estimated to be very small; HM Treasury is aware of just 2 providers of equitable mortgages, both of which carry out low levels of lending.

4.2 Secured lending on timeshare properties

Lending secured on timeshare accommodation is currently excluded from the scope of UK mortgages regulation. In a timeshare arrangement the customer buys the right to right to reside in a property for a certain proportion of the year. The MCD does not allow for such an exemption.

The Department for Business, Innovation and Skills is responsible for policy relating to UK timeshares. Their analysis of these markets suggests that this type of lending does not exist in the UK. Where it exists, timeshare lending tends to be unsecured due to the difficulty of realising the security where the ownership arrangements are more complex. The government is therefore proposing a change to the legislation to bring lending secured on timeshares within the scope of FCA regulation. While this change will not have any market impact, it will ensure compliance with the directive, particularly were such lending to emerge in the future.

4.3 Secured lending to consumers by government

Currently, mortgage lending undertaken by the government (including local government and housing authorities) is generally exempt from the scope of FCA regulation, as is mortgage intermediation for such activity. This is on the basis that it is not appropriate to regulate the government as it is not subject to the same commercial pressures that tend to give rise to consumer detriment.

The MCD does not have such a wide exemption for government lending. It does provide member states with an option to exempt this type of lending from the detailed requirements of the MCD as long as the loan is free of interest or at lower borrowing rates than those available on the market, or on other terms more favourable to the consumer than the market would be able to provide and there are eligibility criteria to access the loan. Where member states use this option they must ensure that consumers still receive timely information about the features, risks and costs of such loans and that advertising is fair, clear and not misleading.

The government is proposing changes to the legislation that only limit the current exemption as far as this is required by the directive. In principle this could capture some government schemes, either now or in the future. However, the terms of the exemption in the MCD are such that this is unlikely, because it only seeks to limit the exemption where there is no benefit to the consumer over what is provided by the market, either through the terms or the cost of the loan.

The implementation of the MCD has also given the government the opportunity to review the existing exemptions for local government and housing authorities more widely. Currently the exemptions only extend to the specific types of body named in the legislation, but not to their wholly-owned subsidiaries. However, in many cases it may be more efficient for such schemes to be administered through wholly-owned subsidiaries. The government is therefore proposing changes to extend the exemption, albeit now more limited due to the MCD, to wholly owned subsidiaries of the relevant bodies.

4.4 Location of the property

The existing scope of FCA regulation is limited to mortgages secured on property located in the UK. While the MCD is not specific about the location of the property, this approach does not seem consistent with a number of the directive’s provisions, for example setting out how mortgage intermediaries ‘passporting’ to other jurisdictions should be regulated. For that reason the government is proposing some changes to the scope of FCA regulations so that it is aligned more closely with the mechanics of the MCD provisions. We do not, however, expect this to have a significant impact on UK firms, as it is relatively rare for a UK lender to provide mortgages on properties located outside the UK.

4.5 Changes to activity of arranging a regulated mortgage contract

The government also proposes adding further detail to the definition of the activity of ‘arranging regulated mortgage contracts’. It is not anticipated that this change will bring existing activity into regulation. Rather it is intended to ensure that the UK’s definition of arranging a regulated mortgage contract is more closely aligned with that of the MCD and ensure that the regulatory status of such activities, were they to emerge in future, would be clear.

4.6 Limiting the application of some existing regulatory exemptions for mortgage firms

Government legislation provides a number of exemptions from FCA mortgage regulation for certain activities by mortgage lenders and intermediaries. However, these exemptions are not mirrored by the MCD, and so in some circumstances the MCD may require a reduction in the scope of an exemption as it currently stands.

The 3 existing regulatory exemptions where this may be an issue apply to:

  • a person without FCA authorisation who makes arrangements for a borrower to enter into a mortgage through an FCA authorised person
  • a person undertaking mortgage-related activities without receiving remuneration, in the course of acting as a trustee or personal representative
  • mortgage-related activities carried out in the course of a profession or non-investment business, where these activities are incidental to the course of the professional activity

Therefore, the government is proposing a change to the legislation so that it is clear that these exemptions can only be applied where they are consistent with the MCD. The government does not anticipate a significant market impact as a result of this change, as the exemptions would apply in relatively few circumstances.

Question 8(a)

What are your views on the number of further changes the government is proposing to align the scope of FCA regulation with the MCD?

Question 8(b)

What is your assessment of the impact of these changes on the UK mortgage market?

5. Amendments to the Financial Services and Markets Act 2000

There are a number of legislative changes required to the FSMA. The most important are to address the MCD requirements around the maintenance of national registers for mortgage intermediaries and appointed representatives, to give the FCA the powers to vary or cancel a mortgage intermediary’s permission under certain circumstances and to provide the necessary regulatory infrastructure for credit intermediaries to passport in and out of the UK.

The MCD includes a number of requirements around the supervision of credit intermediaries and appointed representatives. These include the requirement for a publicly available national register for both credit intermediaries and appointed representatives. FSMA provides the legislative framework for such registers, and so there are a number of changes required to ensure that its provisions are MCD compliant, and only those correctly registered are allowed to operate. The MCD also sets out a number of circumstances under which the permission of a credit intermediary can be varied or withdrawn. The government’s proposed legislative changes give the FCA the appropriate powers to do this.

There are also a number of changes to FSMA to allow credit intermediaries to passport into and out of the UK market. The MCD’s passporting provisions are designed to support more cross-border activity, so that it is much easier for UK credit intermediaries with an FCA permission to operate in another member state. Legislative changes are needed to set out how credit intermediaries can passport into and out of the UK, and to give the FCA the appropriate authority to supervise them effectively.

In drafting these changes the government has sought to use copy out where possible, although this is not always appropriate as the proposed changes largely amend existing legislation, which is structured differently to the MCD.

Question 9

Do you have any comments or concerns with the government’s proposed changes to FSMA?

6. Annex A: Consultation questions and how to respond

6.1 How to respond

The Treasury invites responses on the specific questions raised. The questions can be found throughout the document and are also listed in full below.

This consultation will run from 5 September 2014 to 30 October 2014. However, responses on the costs and benefits of the proposals, needed to help us prepare the final stage impact assessment, are requested by the slightly earlier date of 16 October. Annex B provides further details on this.

Responses can be sent by email to mcdconsultation@hmtreasury.gsi.gov.uk. Alternatively they can be posted to:

EU mortgage credit directive consultation
Banking and credit team
HM Treasury
1 Horse Guards Road
London
SW1A 2HQ

When responding please say if you are a business, individual or representative body. In the case of representative bodies, please provide information on the number and nature of people you represent.

6.2 Consultation questions

Question 1

Do you agree with the government’s proposed approach to implementation of the MCD, building on the existing regulatory architecture where it exists?

Question 2

Do you agree with the government’s proposed timeline for putting in place the legislation necessary for the implementation of the MCD?

Question 3(a)

Do you agree with the government’s proposal to amend the scope of FCA mortgages regulation to cover both first and second charge mortgage lending?

Question 3(b)

What will be the costs to second charge firms associated with the government’s proposal that they are required to secure a FCA mortgages permission rather than a FCA consumer credit permission?

Question 4(a)

Do you have any comments on the government’s proposed legislative changes to bring mortgages into FCA regulation if any part of the property is occupied by the borrower or their relative and the borrower is acting for purposes which are outside his trade, business or profession?

Question 4(b)

Do you agree with the government’s assessment that this change will have a limited impact on the market?

Question 5(a)

What are your views on the government’s proposed use of the provisions in the MCD which allow member states to limit the application of an appropriate framework to buy-to-let to consumers?

Question 5(b)

Under these proposals, how many transactions would you expect to be subject to an appropriate framework for buy-to-let mortgage lending to consumers?

Question 6(a)

What are your views on the proposed content of the appropriate framework for buy-to-let mortgage lending to consumers?

Question 6(b)

What are your views on the proposed approach to the supervision and enforcement of the appropriate framework for buy-to-let mortgage lending to consumers?

Question 7

What would you expect the costs and benefits to be of the introduction of an appropriate framework for buy-to-let mortgage lending to consumers?

Question 8(a)

What are your views on the number of further changes the government is proposing to align the scope of FCA regulation with the MCD?

Question 8(b)

What is your assessment of the impact of these changes on the UK mortgage market?

Question 9

Do you have any comments or concerns with the government’s proposed changes to FSMA?

6.3 Confidentiality

Information provided in response to this consultation, including personal information, may be published on disclosed in accordance with the access to information regimes. These are primarily the Freedom of Information Act 2000 (FOIA), the Data Protection Act 1988 (DPA) and the Environmental Information Regulations 2004.

If you want the information that you provide to be treated as confidential, please be aware that, under the FOIA, there is a statutory code of practice with which public authorities must comply and which deals with, amongst other things, obligations of confidence. In view of this it would be helpful if you could explain to us why you regard the information you have provided as confidential. If we receive a request for disclosure of the information we will take full account of your explanation, but we cannot give an assurance that confidentiality can be maintained in all circumstances. An automatic confidentiality disclaimer generated by your IT system will not, of itself, be regarded as binding on HM Treasury.

HM Treasury will process your personal data in accordance with the DPA and in the majority of circumstances this will mean that your personal data will not be disclosed to third parties.

6.4 Consultation principles

This consultation is being run in accordance with the government’s consultation principles. The government will be consulting for 8 weeks. This is in order to give stakeholders adequate time to respond while also ensuring that government is able to meet industry’s concern to have the UK approach to the implementation of this directive finalised as soon as possible.

  1. The Prudential Regulation Authority (PRA) also plays an important role in the wider regulatory framework, prudentially regulating banks, building societies, credit unions, insurers and major investment firms.

  2. Based on data from Mintel, ‘Secured Lending Products’ (2009). This may overestimate the size of the market as the data covers a wider suite of secured products than just second charge.

  3. Based on data from the Finance and Leasing Association (FLA). FLA membership does not cover all of the market, so this may be an underestimate.

  4. Based on FLA data.

  5. Council for Mortgage Lenders.