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The Mortgage Credit Directive (MCD) will be implemented on the 21st March 2016. The final rules for the MCD have been issued and can be read in full by clicking here:
The Mortgage Credit Directive Final Rules PS15/9
Buy to Let Mortgages – implementing the Mortgage Credit Directive PS15/11
Further to our first issue and now with greater clarification on the changes to Intermediary processes that will be brought about by the implementation of the Mortgage Credit Directive I am detailing below the main areas that you as a firm will need to consider and whether or not this will require a change in documentation and your sales processes:-
- Use of the word Independent or unlimited product range - 2nd charge loans post 21st March will become regulated. This means that 1st and 2nd charges will be one relevant market. If a firm is not going to give full advice on 2nd charges then they will not be able to say that they are independent or offer unlimited product ranges. Firms can still refer 2nd charges to third party master brokers but this master broker will be wholly responsible for giving the client advice in this area. Firms, if they refer to a third party broker, will not be able to say that they are independent or have access to unlimited product ranges. Firms that offer different services for different product types, should not disclose that they offer one type of service for their business as a whole. An example of this would be where a firm is independent for retail investment products but doesn’t offer advice on 2nd charge loans, or has a limited range of regulated mortgage products, they would have to disclose to the customer that the service is different for the different products. Lifetime mortgages are also affected by this rule, so if your firm does not include home reversion in your scope of services the same details apply and you will not be able to use the word independent or unlimited product range - even if you refer these clients to a third party who can give the advice on home reversion schemes. I have put my flowchart together based on this information to give you some examples and used the word “comprehensive”. Please click here to view the flowchart.
- Buy to Let - The majority of BTL business will now become non-regulated and move out from any regulation that includes consumer credit. It will be known as Business Buy To Let (BBTL). Under MCD some BTL business will become regulated and this is where a borrower or immediate family or related person has ever lived at the property or intends to in the future. Lenders will also consider Let to Buy and some inherited properties as regulated BTL transactions. These will be known as Consumer Buy To Let (CBTL). Where a borrower identifies themselves as purely borrowing for business purposes and can give a signed declaration to this fact this becomes as BBTL loan. Whilst BBTL is not regulated, Lenders will treat them no differently to regulated loans and Brokers will need to have the relevant FCA permissions to transact. Broker firms will need to make a decision whether they will want to be involved in giving advice on Consumer Buy to Let and the FCA will inform Intermediaries as to when they can apply for this permission via the Connect online service. The proposed application fee to register for CBTL will be around £100 and the proposed periodic fees for the permission is expected not to exceed £250 for intermediaries.
- Disclosure if client borrowing more – Firms are required to make an additional disclosure to the client if they wish to increase their borrowing. Firms must disclose that there may be alternative financial ways of raising funds such as further advance, second charge, unsecured loan or re-mortgage. There is no FCA requirement for a firm to give advice on the alternative options only to disclose that they are available.
- List of lenders and procuration fees – Firms will be required to give to their clients a list of lenders and the relevant procuration fees that they receive if requested by the client. Paradigm will produce something that can be used or adapted by firms to fulfill this requirement.
- Binding offers – Lenders will not be able to re-underwrite a case or withdraw an offer once made unless there has been a material change to the borrowers circumstances or inaccurate information has been provided.
- Reflection period – This is a new process introduced by the MCD and the client will have a 7 day reflection period. The trigger will be when the client receives a binding offer from the lender. The client can waive their rights to this period by signing the title deed and returning this.
- ESIS or KFI plus replaces KFI – There is a transitional period allowed for this process to be implemented and Lenders have until 2019 to change to using the ESIS. 2nd charge lenders will have to use an ESIS from 21st March 2016 and have no transitional period. Most lenders that we have been talking to will use a KFI plus document. Firms will need to familiarise themselves with the new documents and be able to explain to the client the new additions. These new additions will be mainly around the APRC of the recommended product. If the amount borrowed is variable there will be a second APRC illustrating the rate at its highest over the preceding 20yrs. If the amount is capped the second APRC will illustrate the highest amount at the earliest date it can rise. It will also detail the product rate before and after any initial benefit period.
- Issuing the KFI plus or ESIS - The document must be issued at the point of advice, before application, on request of the client, after the client has provided information on affordability and preference of product has been established or prior to a payment of a product fee.
- Simplified financial promotions - The FCA have made the promoting of financial service products easier for example removing the necessary risk warnings for regulated mortgages. They have also removed the need to include the APR for clients who may have restricted access to credit, eg first time buyers. They have introduced a new requirement to include a full example of the mortgage costs if the MCD advertising mentions an interest rate or any information in relation to the cost of any loan being promoted.
Other rules which will have an impact on certain areas of business:-
Foreign currency mortgages - These are defined as a mortgage in a different currency to that in which the customer receives income, or a mortgage in a different currency to the EEA state in which the customer is resident. The regulation imposes a rule on lenders to disclose to customers when there is a fluctuation in exchange rates of more than 20%. This may affect the ex-pat mortgage markets.
Tying or bundling of products - Unless a product forms a key part of a mortgage contract then firms are unable to tie or bundle other financial products to the mortgage where a client could obtain these separately. For example – Building Insurance may be integral to a mortgage contract but a firm cannot tie this to the contract as products are available from other providers. Where the sole purpose of a product is to provide the Lender with extra security this can be allowed, such as; savings accounts or shared equity agreements.
Removal of transitional arrangments – Under MMR the FCA granted some flexibility in the rules if a client was not borrowing any further money and wanted to move to a cheaper rate, but was trapped by the change in underwriting rules and were being forced to stay with their existing lender on high standard variable rates. These were known as transitional rules and certain Lenders accepted these clients without the new affordability checks. Under MCD rules this flexibility will no longer exist and will be withdrawn.
Disclosure of 3rd party commission - Due to several high profile cases being determined in the High Court around the non-disclosure of 3rd party commission within a financial transaction, Paradigm are recommending that a Broker Firm details in additional documentation, such as the suitability report or notes section within a client file, any commission being received by 3rd parties that is not disclosed in the KFI plus documentation or the ESIS. For example Mortgage Club/Network/Specialist Distributor override or kick back commission.
Action for Firms:-
- Review your disclosure documents
- Decide whether you are going to advise on 2nd charge loans
- Decide whether or not you will need Consumer Buy to Let permissions (CBTL)
- Apply via Connect for your CBTL permissions
- Familiarise yourself with the new ESIS/KFI plus document examples
- Understand the reflection period and binding offer and how that will fit in with your current sales processes
- Look out for further communications from Lenders on how they are going to change their processes - most recently Woolwich/Barclays have announced their intentions
- Look out for further communications from Paradigm on the Mortgage Credit Directive
You can view the previous issues of MCD regulation by clicking here - Mortgage Credit Directive
Best regards,
Christine Newell
Mortgages Technical Director
Paradigm Mortgage Services LLP
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