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Busy lenders round-up - September 2018

This month in summary

News

  • Landmark decision on legal privilege
  • Bank customer satisfaction at record high
  • FCA blamed for overwhelming the FOS

Lending

  • Arrears/repossessions, house price movement and mortgage activity update
  • BTL Stamp Duty Rumours
  • FCA publishes consultation paper on peer to peer lending

Fintech/Cryptocurrency

  • Lenders open to crypto-funded mortgages

Focus on Scotland

  • The Rise of Energy Friendly Lending

Focus on Northern Ireland

  • Northern Ireland House Prices Fall 1% Since January 2018

News

Landmark decision on Legal Privilege

The Court of Appeal has overturned a previous judgment allowing the Serious Fraud Office access to documents shared between the Eurasian Natural Resources Corporation (ENRC) and its former legal adviser Dechert in relation to ENRC's findings during a criminal investigation into alleged bribery and financial malpractices.

The earlier High Court Judgment sought to narrow the scope of legal professional privilege by ruling that the documents - including evidence obtained by ENRC's legal advisers from employees regarding the events surrounding the allegations made - were not protected as they were likely to be of significant public interest.

ENRC appealed the decision. The original ruling would have had a significant effect on any business carrying out internal investigations into alleged wrongdoing by denying them the ability to use lawyers when investigating, without the risk of such work being made public in the future.

The highly anticipated judgment has upheld legal professional privilege.

The Court of Appeal's ruling on protecting privilege will be a welcome decision for those involved in investigations, although it is unclear whether that decision will now be appealed.

See our legal insight on SFO v ENRC for more information.

Bank customer satisfaction at record high

Customer satisfaction in the banking and building societies sector is at a record high since the UK Customer Satisfaction Index (UKCSI) began in 2008. The Institute of Customer Service's figures for July 2018 show a UKCSI score of 80.4 (out of 100).

The satisfaction index showed mortgage satisfaction scored 75.2. Nick Morrey, product technical manager at John Charcol, considers this a result of:

(i) The cost of mortgages being the lowest for decades; and
(ii) Lenders focusing on their underwriting processes in order to reduce administration issues and delays.

The satisfaction index also showed the following:

  • In-person interaction is the most used channel in the sector, accounting for 43.3% of customer experiences and staff attitude in dealing with complaints;
  • Customer experience through use of apps increased to 5.7%; and
  • The use of apps scored 83.4, being the highest satisfaction of any channel.

FCA blamed for overwhelming the FOS

Mr Richard Lloyd, the previous Executive Director of consumer giant Which?, has criticised the Financial Conduct Authority (FCA) over the handling of widespread consumer harms which have consequentially had a deteriorative effect on the running of the Financial Ombudsman Service (FOS). 

Mr Lloyd's comments were made at a Treasury select committee meeting on 18 July 2018, where he drew upon the results of an independent review of the FOS, published earlier that month. 

Whilst acknowledging that the reorganisation of the FOS towards a more non-specialist, responsive structure had resulted in a "top-down" approach affecting morale, Mr Lloyd indicated that the FOS had become "completely distorted" as a result of the influx of complaints surrounding the mis-selling of PPI. The amount of complaints had, as a result, led the FOS to consider efficiency, as opposed to quality, as the overriding priority. 

Mr Lloyd advocates that rather than a victim being required to seek redress for the ramifications of a mass-consumer issue, the FCA should, as the regulator of the sector, impose an onus on the firms and companies which have caused the issue to actively address and compensate their customers.

Lending

Arrears/repossessions, house price movement and mortgage activity update

UK Finance has reported that mortgage arrears and repossessions have fallen to their lowest level since records began over 24 years ago. 76,750 mortgages have arrears of over 2.5% of the outstanding balance, 8% down on the same time last year. The number of mortgages with arrears of over 10% of the outstanding balance also reduced from 2017 levels. Correspondingly, repossession levels have declined to 1,060 home owner mortgaged properties and 520 buy-to-let mortgages – reductions of 5% and 24% respectively on 2017 levels.

Average house prices across England and Wales have declined for a fourth straight month, reducing by 0.2% in June to £303,960. That said, the reductions have slowed to their lowest level since February, and overall house prices have still increased by 2.1% from June 2017 to June 2018.

With regard to mortgage activity, UK Finance has reported that 390,200 homeowners (representing £53.7bn of mortgage debt) refinanced with their existing lender through product switching. A little under £30bn of this was on an advised basis. These figures, which do not form part of market data on remortgages, demonstrate that lenders are engaging well with their customers who are being given suitable advice and a swift transfer process to make product switching an attractive option.

Link: UK Finance's latest mortgage transfer figures

Buy to let Stamp Duty Rumours

In November Phillip Hammond will be delivering another budget.  Whilst the date of the budget has not been set and it is too early to speculate on what the budget will contain, rumours have started to circulate that the Chancellor will increase the stamp duty payable by an investor purchasing a buy to let property.

These rumoured plans have already been criticised by two former cabinet ministers. John Redwood, former trade secretary, advocated a cut in stamp duty to raise more money for the Treasury whilst Lord Lilley, former social security secretary, suggested more house building rather than increased taxes.

Currently, investors have to pay a 3% surcharge on stamp duty. This rule was introduced in April 2016. This caused a surge in buy-to-let mortgage applications in early 2016 as investors tried to complete their acquisitions before the stamp duty rise came into place.

The latest data from UK Finance has shown that mortgage lending rose by 7.6% in July.  However, the buy-to-let sector has remained largely static. Rumours of a further stamp duty increase could change this and cause some investors to accelerate any plans to purchase additional properties. However, it is unlikely that lenders will see a further surge in buy-to-let applications until any rule change has been confirmed.

FCA publishes consultation paper on peer to peer lending

On 27 July 2018, the FCA published its long-awaited consultation paper on peer to peer (P2P) lending (and investment based crowdfunding). This follows feedback received after the FCA’s post-implementation review in 2016. The consultation period runs until 27 October 2018. 

Points of interest in relation to P2P firms:

  • P2P platforms can vary in complexity. As well as facilitating lending, many will price loans and often manage investors’ portfolios to achieve a target return. They therefore require sophisticated risk management and controls.
  • The FCA proposes to introduce marketing restrictions when communicating to ‘retail investors’. Specifically, P2P firms would only be able to communicate direct offer financial promotions to sophisticated or high net worth investors, or those who receive regulated advice from an authorised person or who certify they will not invest more than 10% of their net investable portfolio in P2P. This is the most controversial proposal and has been criticised by some within the P2P industry.
  • The FCA also proposes to apply Mortgage and Home Finance Conduct of Business sourcebook (MCOB) to P2P firms. This is to cover situations where home finance would otherwise be unregulated (eg if one of the investors is not authorised). There is currently no UK P2P market for regulated home finance, but some P2P firms are considering offering secured residential lending.
  • There are various further proposals relating to risk management, disclosure, pricing, and wind down arrangements, amongst other things.

We will soon be circulating a more detailed note. If you would like to discuss these proposals in the meantime, please contact Sam McCollum.

Fintech/Cryptocurrency

Lenders open to crypto-funded mortgages

UK lenders appear to be open to accepting proceeds from cryptocurrency investments to fund mortgage deposits.

According to the Building Societies Association, the trading of cryptocurrencies to fund deposits is relatively new and considered rare. However, some building societies will consider accepting Sterling funds from crypto sources, subject to the customer satisfying money laundering due diligence.

Lenders are less willing to accept mortgage deposits in the form of cryptocurrency because it poses a significant money laundering risk as locating the original source of funds can be challenging. However, Dale Jannels, managing director at All Types of Mortgages, believes that the use of crypto sourced funds is likely to increase and that the industry needs to adjust to these changes.

Mr Jannels argues that lenders should accept funds of this nature on the basis that it is similar to the procurement of funds from stocks and shares.

However, many lenders remain unconvinced and are not yet prepared to accept funds from crypto sources to procure a mortgage.

Focus on Scotland

The Rise of Energy Friendly Lending

Lending to projects that are not environmentally friendly may be a thing of the past. It was announced in May of this year that the Royal Bank of Scotland has updated its energy policy. RBS has confirmed that it has now moved away from funding projects such as Arctic oil projects and cut lending to firms which predominantly profit from coal in an effort take a tougher stand on climate change, which is a growing issue across Scotland.

RBS has also decided to tighten restrictions on general lending to mining firms which receive 40% of their revenues from thermal coal or electricity from coal. Formerly the threshold for this was 65% so this is quite a change for the bank.

ShareAction, a responsible investment group, has praised RBS's efforts to ramp up its environmental sustainability policies. ShareAction further states that out of the top 5 UK banks, these new strong energy section policies push RBS to the forefront. It is their hope that RBS's changes will encourage other big banks to be more aggressive in their approach to energy policies.

We expect to see an increase in these types of lending decisions in the future.

Focus on Northern Ireland

Northern Ireland House Prices Fall 1% Since January 2018

Since the start of the year, house prices in Northern Ireland have fallen by 1%. This is according to figures released in August 2018 by the Department of Finance in conjunction with the Northern Ireland House Price Index. 

The Northern Ireland Residential Property Price Index considers nearly all property sales in Northern Ireland and suggests that the average residential property currently costs around £132,795.

According to the Department of Finance figures, 5,308 residential properties have sold between April – June 2018 with this figure likely to increase as a result of late returns. 

Only three of the eleven district council areas in Northern Ireland showed any increase in property values between April 2018 – June 2018, being Derry City and Strabane, Causeway Coast and Glens, and Fermanagh and Omagh.

Detached properties are performing relatively poorly with a decline in value of -3.7% across Northern Ireland, whilst the value of apartments has increased by 1.6%.

Even with the recent drop in prices, the property price in Northern Ireland is still, on average, 4.4% higher than during the same period last year.

Contributors:

Richard Hall
Lynsey Robinson
Michael Seddon
Brendan Logue
Jennifer Whitwell-Claydon
Emily Symes
Georgina James
Sam McCollum

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at September 2018. Specific advice should be sought for specific cases. For more information see our terms & conditions.

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