Guidance

The Mortgage Credit (Amendment) (EU Exit) Regulations 2019: explanatory information

Updated 29 October 2019

1. Context

The European Union (Withdrawal) Act 2018 (EUWA) repeals the European Communities Act 1972 on the day the UK leaves the EU, and converts into UK domestic law the existing body of directly applicable EU law. The purpose of the EUWA is to provide a functioning statute book on the day we leave the EU.

The EUWA also gives Ministers powers to make Statutory Instruments (SIs) to prevent, remedy or mitigate any failure of EU law to operate effectively, or any other deficiency in retained EU law. We refer to these contingency preparations for financial services legislation as ‘onshoring’.

HM Treasury is using these powers to ensure that the UK continues to have a functioning financial services regulatory regime in any scenario.

This SI is part of the wider work the government is undertaking to prepare for the UK’s withdrawal from the EU. It is not intended to make policy changes, other than to reflect the UK’s new position outside the EU, and to smooth the transition. The changes made in this SI would not take effect on 29 March 2019 if, as expected, we enter an implementation period.

2. Notice

The attached draft SI is intended to provide Parliament and stakeholders with further details on our approach to onshoring financial services legislation. The draft instrument is still in development. The drafting approach, and other technical aspects of the proposal, may change before the final instrument is laid before Parliament.

3. Policy background and purpose of the SI

3.1 What does the underlying EU regulation and UK law do?

The EU Mortgage Credit Directive (MCD) (Directive 2014/17/EU) sets out the EU’s framework of conduct rules for mortgage firms. The Mortgage Credit Directive Order 2015 (MCDO) is domestic secondary legislation which transposed the MCD into UK law. When implemented in 2016, the MCDO made several changes to existing UK legislation to ensure compliance with the requirements of the MCD, and provided the Financial Conduct Authority (FCA) with the necessary powers to supervise and enforce this framework.

The MCDO achieved three main policy intentions. Firstly, the MCDO expanded the territorial scope of the regulatory regime for mortgage lending to consumers so that it includes lending secured by a mortgage on residential property in other European Economic Area (EEA) states as well as in the UK. Secondly, prior to the MCDO coming into force, the scope of the FCA’s mortgage regulation was limited to first charge mortgage lending, with second charge lending falling under the FCA’s consumer credit regime. Second charge mortgages allow the borrower to use any equity they may have in their home as security against another loan. The MCDO moved second charge mortgage lending into the same regulatory regime as first charge mortgage lending. Thirdly, the MCD allows EU member states to exempt buy-to-let lending from the conduct rules of the Directive, however it requires that member states exercising this derogation put in place an appropriate regulatory framework at a national level regulating consumer buy-to-let lending. The MCDO sets out these rules and gives the FCA powers to register, supervise and enforce them.

3.2 Deficiencies this SI remedies

This SI addresses deficiencies in the Mortgage Credit Directive Order that arise as a result of the UK leaving the EU, and makes consequential amendments in line with other Brexit SIs that the government is making, so that mortgage regulation will continue to operate effectively in a no-deal scenario. The intention of this SI is not to make any substantial policy changes, other than to correct deficiencies that arise from the UK leaving the EU.

Amending the territorial scope of regulated consumer buy-to-let lending

Under current arrangements, the regulatory regime for consumer buy-to-let mortgages and similar property-related lending to consumers applies to land in EEA states. This SI makes amendments so that it only applies in relation to land in the UK to reflect the UK’s new position outside of the EU. FCA supervisory responsibility for such lending entered into post-Brexit will be confined to loans relating to UK property. Lending relating to land in the EEA outside the UK that was entered into after the implementation of the Mortgage Credit Directive but before exit day, and which is currently supervised under the consumer buy-to-let regime, will continue to be covered by FCA regulation under that regime. The regulatory status of post-exit lending to consumers relating to any property outside the UK will be decided under the regulatory regime for consumer credit, as is the case currently for lending relating to property outside the EEA. The regulatory perimeter for mortgages for owner-occupiers will continue to be governed by the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001, which is to be amended by another SI to be made under the EUWA.

Amending the rules for consumer buy-to-let foreign currency mortgages

The MCDO ensures that consumer buy-to-let loans protect the borrower from exchange rate risk where the loan is in a different currency from the borrower’s main income or assets. Under current arrangements, the lender may do this by allowing the borrower to convert the loan either into an EEA currency or into any other currency in which the borrower primarily receives income. As the UK will no longer be an EU member state after exit day, amendments introduced through this SI mean that lenders will be able to allow borrowers to convert a foreign currency loan into pounds sterling instead of an EEA currency. However, this SI maintains the option of the lender allowing the borrower to convert loans into the currency in which they primarily receive income or hold assets (which could include any non-UK currency). This approach ensures that EU currencies are treated equally to other third countries.

Amending the formula for the calculation for the annual percentage rate of charge for consumer buy-to-let mortgages

HM Treasury will also be conferred the power to make regulations modifying the remarks and assumptions which accompany the formula for the calculation for the annual percentage rate of charge (a standardised calculation of cost of credit), where they are out of date or do not create a uniform result. This in effect transfers to HM Treasury an existing power in the MCD for the European Commission to make such changes, which will not apply to the UK after exit.

3.3 Relevant Rulebook and Binding Technical Standard changes

The FCA will be updating their Handbook to reflect the changes introduced through this SI, and to address any deficiencies due to the UK leaving the EU. Details of the FCA’s approach can be found here. The FCA has confirmed its intention to consult on these changes in the autumn.

3.4 Stakeholders

This SI affects the market for lending relating to property, specifically mortgage lenders, mortgage intermediaries and consumers of mortgages. The impact of this SI will be relatively minor as the intention of the SI is not to make policy changes

We will be engaging with the relevant industry bodies to make them aware of changes being introduced through this SI to the regulation of mortgage lending.

As already noted, the intention of this SI is not to make policy changes, other than to reflect the UK’s new position outside the EU, and to smooth the transition to this position.

This SI does not include provisions that may be necessary to ensure Gibraltarian financial services firms’ continued access to UK markets in line with the UK Government’s Statements in March 2018, and other provisions dealing with Gibraltar more generally. Where necessary, provisions covering Gibraltar will be included in future SIs.

4. Next steps

HM Treasury plans to lay this instrument before Parliament before exit day.

5. Further information

Read HM Treasury’s approach to financial services legislation under the European Union (Withdrawal) Act 2018.

6. Enquiries

If you have queries regarding this instrument, email FSlegislationEUWA@hmtreasury.gov.uk.