Welcome to TLT’s busy lenders’ monthly round-up. Each month we summarise the latest news and developments in retail mortgage lending and regulation.
This month in summary:
Focus on Scotland
Duty advisors provide free and independent advice at possession hearings. There are over 100 different duty advisor schemes in place providing national coverage.
During 2018 the Government attempted to reform how advice was provided by consolidating the duty advisor schemes into larger units. The Law Centre Network, a charity which is a provider for many of the duty advisor schemes, launched successful court action to challenge the consolidation. The Law Centres Network argued consolidation may affect the ability to provide follow-up advice and assistance.
This month the Government has launched a new online survey asking duty advisor providers how best to deliver on advice schemes. The survey asks for views about whether court closures have led to changes in work volumes, how wrap-around care is provided after the hearing and whether consolidation would make the schemes more attractive for providers. The survey closes on 10 June 2019.
In addition to the duty advisor scheme, legal aid in relation to possession claims by lenders is available from the Civil Legal Advice telephone scheme which assesses whether face-to-face advice is needed. However, the Law Society has published research showing that 37% of the population live in areas which have no housing legal aid providers, meaning that face-to-face advice is increasingly difficult to obtain in relation to possession actions by either lenders or landlords.
Whilst face-to-face advice may not always be available, it is important that lenders continue to signpost their customers to sources of independent advice from experienced providers such as Shelter or the Citizens Advice Bureau.
The Competition and Markets Authority ('CMA') has set up an inquiry into the alleged miss-selling of leasehold properties.
The CMA's review is to include an examination of clauses in leases which allow for the escalation of ground rent and the charging of permission fees for leaseholders to make home improvements.
The inquiry has been set up following pressure from the Housing Minister, James Brokenshire and the Commons housing committee. The inquiry could deem certain clauses in leases to be unfair, leaving them open to legal challenge.
This inquiry is welcome news for lenders. In recent years, the inclusion of onerous terms in leases on new build flats and houses has resulted in some lenders refusing to offer mortgages on affected properties. The inquiry will send a message to developers and builders that the inclusion of these clauses will no longer be considered acceptable.
In future, leasehold properties should be offered on fairer terms to prospective buyers which could result in an increase in business for lenders offering mortgages on leasehold properties.
A number of high street banks have signed up to a voluntary safeguarding measure to combat transfer fraud. The new voluntary code came into force on 28 May 2019.
Confirmation of Payee contains additional checks to ensure that, when a customer enters payment details online, the name of the recipient matches the owner of the account into which the funds are to be transferred. If the account owner's name differs to the details inserted by the customer, they will receive a warning that the details do not match.
It is predicted that the safeguard will result in a reduction in the number of transfer frauds currently experienced in the UK.
The voluntary code allows for innocent victims of fraud to be reimbursed by the bank. Under the rules of the code, banks must make a decision on whether to reimburse customers within 15 days, or 35 days in exceptional circumstances.
This initiative has been introduced at a time when transfer fraud is at an all-time high as higher numbers of customers have become reliant upon online banking. The code is welcome news for consumers as it offers comfort to genuine victims of fraud that they will be reimbursed.
Lenders will be faced with a decision about whether to sign up to the code and, if they do, how they will finance the potential compensation. Questions arise around whether the benefits of the code will be paid for by customers through additional charges and fees or whether lenders will absorb the costs themselves.
A detailed report has been produced by MPs and peers after scrutinizing the draft Registration of Overseas Entities Bill. The main aspect of the bill sees the creation of a register for overseas entities which are trying to purchase property within the UK. The register will be held by Companies House and will require the entities to provide various details about any beneficial owners.
Lord Faulks Chairman of the Joint Committee noted 'The legislation is well drafted, but there are still some loopholes in the draft bill which, if unaddressed could jeopardise the effectiveness of this important piece of legislation'.
One of the main issues which has been highlighted in the report is the scope of the definition of 'entities'. The main reason that this has been raised is because trusts are not obliged to register due to the fact that they do not fall within the definition of 'entities'. This has sparked major concerns that owners may use this oversight in the draft legislation as a loophole to avoid having to register their beneficial owners' details by transferring the property into trusts, or setting up trusts to purchase the property to avoid being caught by the requirement.
The Fifth Anti-Money Laundering Directive in January 2020 will see the implementation of a requirement for some types of trusts to be registered. The report notes that although this is a requirement which will chiefly fill the current loophole in the draft Bill, it will not cover it completely with the effect that some trusts are still not covered by the requirement, and a high likelihood that loopholes will continue to be exploited. The report noted that great care will need to be exercised to ensure 'that trusts do not slip into any gaps between the two frameworks'.
Assuming that the loopholes are fixed, the success of the Bill will still rely on the effective implementation of the acting solicitors' enhanced due diligence processes.
In 2018/2019, 12,000 complaints were logged with the Financial Ombudsmen Service which relate purely to financial fraud. Experts say this amounts to a 40% increase from the previous year, and has more than doubled since three years ago. The cause of such a steep rise in complaints has been blamed on Push Payment Banking Scams (PPBS). PPBS take place where unsuspecting customers are tricked into authorising money transfers online. UK Finance claims that almost £145m has been lost by customers to push-payment fraud in the first half of 2018 alone. It is no surprise, the Ombudsmen has described PPBS as "one of the fastest-growing types of fraud" which has prompted campaigners to claim that financial fraud is "spiralling out of control".
Putting the matter into context, the FOS has reported that complaints about payday loans have risen by 5 per cent from the previous year, whereas bank IT failures have increased by 8 per cent from the previous year.
According to the chief executive of the FOS, Caroline Wayman, it was suggested that banks weren't always treating fraud victims fairly – suggesting they must do better. In order to protect customers from such frauds and compensate them readily, banks were given until the end of May to sign up to a voluntary code of practice which will mean that victims will be reimbursed unless they are seen to have ignored their bank's warnings about the scam or are found to be "grossly negligent".
Only time will tell whether the new code of practice will in fact curb the increase of PPBS complaints.
Ministry of Justice figures show that mortgage possession claims have risen by 37% in Q1 from the same period last year.
We have seen a 3 year period of stability prior to this increase, which began in Q4 2018. Mortgage orders, warrants and repossessions have grown by 42%, 19% and 11% respectively relative to Q1 2018.
It is so far unclear what the underlying cause of this substantial increase is given the historically low interest rates, stricter approach to lending decisions and a tightly controlled arrears/repossessions framework.
The North West of England which includes Pendle, Blackpool, Hyndburn and Wyre, saw a substantial rise of mortgage possession claims compared to other regions. Luton, Liverpool, Croydon and Birmingham were also in the highest 25.
The Upper Land Tribunal case of Taurusbuild Limited v McQue 2019 centred around 2 The Hall which formed part of a larger property known as Dinsdale Hall. Both properties were owned by Mr and Mrs Ward.
There were two routes of access to 2 The Hall. Firstly, vehicular access to the front of the property. Secondly, non-vehicular access to the rear. Both accessways ran over land contained within the Wards' Dinsdale Hall title.
The Wards mortgaged 2 The Hall. Following default the lender took possession and sold the property. The question that arose was whether the vehicular access had been conveyed to buyers. The Court stated that without the rights to use the vehicular accessway the security would be significantly less valuable. The Court went on to say that the Wards would be derogating from the mortgage by not including this access right.
The Court held the access right had been implied into the mortgage deed and had also been implied into the transfer under the lender’s power of sale, meaning that buyers benefitted from the right.
This case offers welcome clarification that access rights can be implied into a mortgage deed. However, to avoid the uncertainty of relying on implied rights lenders who are taking a charge over only part of land owned by a customer should require express rights to be granted to them. This can be a complex area and TLT can provide assistance, if required.
Interest-only mortgage approvals have decreased by 9% over the last 6 years according to FCA and Bank of England figures. This is despite the number of available mortgage products almost doubling, according to data from Moneyfacts. This is set against an overall residential mortgage approvals increase of 76% in the same period.
Moneyfacts finance expert Darren Cook commented that "these figures suggest that although borrowers are still able to locate potential suitable interest-only mortgage products — with around a third of all residential mortgage products offering interest-only as a repayment method — tighter rules and stricter lending criteria following the aftermath of the financial crisis may be leading to a lack of appetite for this sector."
There are still a large proportion of homeowners, approximately 1.7million, with existing interest only mortgages and the FCA reported last year that nearly one in five mortgage customers were not repaying the capital on their mortgages.
Many interest-only borrowers are unable to remortgage due to the tougher affordability criteria following the Mortgage Market Review, something the industry is looking to tackle.
Earlier this month, a partnership was launched between Spicerhaart Corporate Sales, Excel and TLT to create a solution for lenders and customers with no plan in place to pay off their mortgage.
Having entered the mortgage market in 2012, Tesco Bank was viewed as one of many UK challenger banks that would shake up the industry. Such optimism would not last long following a recent announcement that it will sell its £3.7bn book. The buyer is yet to be announced but the reason for the decision has been blamed on plunging mortgage costs resulting in a reduction in Tesco's margins.
It was reported that Tesco saw 'limited profitable growth'. Whether this was down to the Brexit effect is not known but price competition from other lenders has been a factor in the final decision. Tesco's share in the mortgage market represents a 0.2 per cent market which is miniscule in comparison to the market share held by the big players such as Lloyds, Nationwide, Santander and Royal Bank of Scotland.
Although Tesco's exit may seem like an opportunity for new entrants, the squeeze on margins is not likely to ease, especially as Nationwide had warned that its net interest margins are likely to reduce in the next 12 months. Furthermore, the competitive advantage provided by Bank of England stimulus programmes is unlikely to assist now that they have closed.
It is thought that criminals successfully launder millions of pounds of criminal proceeds through Scotland's law firms every year. Despite this revelation experts have noted that the reporting of any suspicious transactions is worryingly low.
The Law Society of Scotland has released statistics that tell us that sixty-two percent of law firms in Scotland advise and carry out transactions for clients based out with the territory of the UK. Not only are these clients based out with the UK, there is a significant proportion from high money laundering risk countries. Of these law firms handling transactions for non-UK clients, thirty-two percent are reported to handle property sales where the property is worth in excess of one million pounds.
The Law Society has recently put a number of measures in place to improve the anti-money laundering framework implemented within the Scottish legal profession. It has set up a system for online and telephone reporting of suspicious activities to make the suspicious activity reporting system more accessible and user-friendly. The Law Society has noted that this new reporting system has been established to aid in the reporting of suspicious activities and not because of any problems with reporting. The new improvements have been made by the Law Society to ensure that professionals within the industry are aware of what is required from them when they become aware of a suspicious activity.
The Law Society is currently engaged in a review of the provision of services to trusts and companies, which is deemed to be one of the highest risk areas for money laundering. It will be interesting to see the results of this review and how they correspond with these newly released statistics on money laundering in the Scottish property sector.
This publication is intended for general guidance and represents our understanding of the relevant law and practice as at June 2019. Specific advice should be sought for specific cases. For more information see our terms and conditions.