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Busy lenders' monthly round-up - April 2017

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:

News

Lending

Regulatory update

Fintech

Focus on Scotland

News

BOE demands regulator ends reliance on "mega-fines" 

Mark Carney has called on regulators to end their alleged "over reliance on mega-fines" as they seek to deter misconduct in the financial services sector.

Instead, the Governor suggests that greater responsibility is placed on individuals within the banking sector, in order to bring about a cultural change in the way banks are run.

Speaking at the Institute of International Finance's Washington Policy Summit, Mr Carney urged regulators across the world to shift their focus to forecast based incentives, as an alternative to the threat of significant fines imposed after the fact.  

Mr Carney also spoke of the need to avoid the fragmentation of global markets during the UK's Brexit negotiations.  His view is that the UK and the EU have a highly developed system for supervisory cooperation and there is an opportunity for this system to remain in place following the nation's exit from the European Union.

CML decries micro-management by regulator 

Paul Smee, director general of the CML, used the annual CML Scotland lunch to challenge the regulator to take a proportionate approach to the data it requests from lenders.  His position is that micro-management of markets is usually ineffectual and could detract from lenders' efforts to get on with business and put their customers first.

Mr Smee went on say that whilst the CML is due to merge with the British Bankers Association later this year, he did not anticipate any change to mortgage lenders' representation in the market place.

Carol Anderson, chair of the CML in Scotland, also used the event to challenge the Government to deal with the housing crisis, which she said needs to be resolved in order to meet the aspirations of first time buyers both north and south of the border.

UK Finance trade body launched and CEO named

UK Finance has announced that Stephen Jones will be its first CEO. Mr Jones has over 30 years' experience in the financial sector, having worked with Santander, Barclays, Citigroup and Cerberus.

As we reported last month, UK Finance is the new trade body for UK finance and banking and will incorporate six of the largest trade associations, namely: Asset Based Finance Association, British Bankers' Association, Council of Mortgage Lenders, Financial Fraud Action UK, Payments UK and the UK Cards Association.

The trade body is expected to play an important role in representing the interests of the UK financial industry during the Brexit negotiations. UK Finance will be based at Angel Court in the City and remains on course to launch later this Summer.

Will the 'Lisa' take off? 

The Government launched the Lifetime Isa (or Lisa) in early April to further assist first time buyers in getting onto the property ladder.

The product is designed to enable savers to put money aside towards their first house purchase or their retirement.  It is available to those under 40 who can save up to £4,000 per year until they reach 50, with the Government contributing a 25% bonus (which will be lost if funds are not used for a first time purchase or retirement).

Some concerns have been raised about matters that could make the Lisa less appealing than first anticipated, including:

  • Confusion arising from the product's disparate dual purposes
  • Rising prices making properties unaffordable even with the 25% bonus
  • The narrow range of products available as banks assess the regulatory burden of offering Lisas (at present sales do not have to be advised)
  • The number of products on the market for first time buyers, including shared ownership and Help-to-Buy
  • The risk that Lisas are seen as substitutes to employer-based pensions when they may not be fit for this purpose
  • The potential for a negative impact on a person's ability to claim benefits

As with all new financial products, the actual impact of Lisas remains to be seen.

Right to Buy of Social Housing in England

Last month, we reported the Welsh Assembly's intention to scrap the Right to Buy scheme in Wales.  This month, the Government published a response to extending the Right to Buy scheme in England from council tenants to housing association lessees.

The National Housing Federation (NHF) on behalf of the housing association sector has proposed a voluntary right to buy scheme.  This would enable the scheme to proceed without "unnecessary legislation".  It would operate broadly in the same way as the existing right to buy regime, although housing associations would have the discretion to decline to sell if a property was in a rural area with limited housing stock (when they would offer an alternative property for sale).

Discussions between the Government and the NHF are ongoing. However, given the snap general election and the forthcoming dissolution of Parliament it is unlikely that much progress will be made over the summer months. If and when the scheme does proceed this may expand the niche market for right to buy mortgage lending.

Government plan to curb high ground rents on leasehold houses 

The Department for Communities and Local Government has published data indicating that there are roughly 1.2 million leasehold houses in the country.

Communities Secretary, Sajid Javid, has criticised developers for selling leaseholds rather than freeholds.  Some developers have been known to put clauses in leases that double the ground rent every 10 years.  In one example given, annual rent starting at £250 will reach £2,000 thirty years into the term. The Government plans to tackle this practice but action will be delayed until after the June election.

In the meantime, conveyancers should report to lenders any lease that will substantially increase ground rent. Underwriters will need to assess how the rent review clauses affect the marketability and value of the property and also whether a high ground rent affects the customer's affordability.

Lending

Fair treatment of mortgage customers in payment shortfall: impact of automatic capitalisation

In October 2016, the FCA published its Guidance consultation paper (GC16/6) regarding a proposed remediation process relating to arrears that have been automatically included in the calculation of mortgage payments. On 24 April 2017 the FCA published its Final Guidance (FG17/4), concluding that this practice amounts to "automatic capitalisation" which can lead to unfair customer outcomes thus firms will be required to put a stop to it.

A "possible framework" is set out for use when providing customer remediation. Firms are not required to adopt it but should determine an approach that gives fair outcomes. As the guidance was prepared in conjunction with the CML and various lenders, we expect most lenders will follow the framework.

FG17/4 does not differ significantly from GC16/6 but there are some differences:

GC16/6 proposed all customers in scope for remediation should be contacted before 30 June 2017 with remediation then concluding within 12 months. The contact requirement has been removed by FG17/4 but all remediation is expected to be concluded by 30 June 2018 - if a firm foresees difficulties they should contact their FCA supervisor or the Contact Centre.

GC16/6 proposed that Credit Reference Agency (CRA) records be updated where the reconstitution of the account showed the customer exited arrears sooner than recorded by the lender, a proportionate measure reflecting the complexities of such changes. FG17/4 will now require CRA updating in all cases where reconstitution shows a different payment shortfall history to that previously recorded. This appears to require updating to many more accounts. Lenders should liaise with their CRA contacts - we understand that this will also be taken forward by the CML.

GC16/6 set out the information to be communicated to a customer who is being remediated. FG17/4 adds to this details of how customers can access help from free debt advice agencies.      

Where a possession order has been granted but not exercised on an account where the possession process would not have been triggered under the reconstituted figures, GC16/6 required the Court to be made aware of the reconstituted position when enforcing. FG17/4 goes further: the Court must be made aware of how the corrected position has been calculated.

With the Final Guidance now published, lenders can conclude their plans with a view to completing the remediation process on time. TLT is supporting a number of clients with their remediation exercise, customer communications and BAU processes.

CML urges FPC to re-assess 3% affordability testing 

Currently, the Financial Policy Committee (FPC) has a ‘stress test’ requirement – affordability should be assessed on an interest rate increase of 3% during the first five years of the mortgage.  The CML has called for this to be reassessed due to the slower-than-expected growth in the housing market since 2014 (when interest rate expectations were different).

In its response, the FPC was keen to reinforce its affordability requirements to create greater resilience in the market.

It remains to be seen whether the slowing market activity in the first quarter of 2017 and unknown impact of Brexit will have any impact on the FPC’s view going forward.

The state of the market – update 

The first quarter of 2017 has seen some notable developments in the state and growth of the housing and mortgage market, reflecting an uncertain and changing economic climate:

  • Lending of £21.4 billion in March was down 19% on the year before, substantially due to landlords withdrawing from the market as a result of tax changes.  However, this was still 19% higher than February’s lending.
  • The buy-to-let market has slowed considerably.  The CML expects a drop of 42%  in BTL purchases in the 12 months following the stamp duty change.
  • The first time buyer market is becoming the lifeblood of the market, with 342,000 first time buyers in the year to March 2017 – the highest for nine years. February alone saw an increase of 11% from the previous year.
  • The lettings market is slowing down across the country.  A 13.8% drop in new listings from January to February was the largest month-on-month decline since records began in 2012.
  • In an effort to steal a march on its competitors, the Yorkshire Building Society has introduced a mortgage at 0.89% - the lowest rate ever seen in the UK.  Other lenders may follow.

Tax changes have caused a seismic shift in market activity, which is likely to continue as landlords withdraw and first time buyers take advantage of the more leveled playing field.  The question remains, however, whether first time buyers will struggle when rates increase.

Ageing mortgage customers – the changing market

The CML will shortly publish a research report on the provision of advice for older borrowers.  This is in response to an aging mortgage market and changes in trends of property ownership. In their interim findings, the CML has noted that at present, 37% of adults are aged 55+ and this is due to rise to 44% by 2039.

The current trends of home ownership see adults buying later in life, rather than as early as possible as in the late 20th century. This means more borrowers will retire before paying off their mortgage and thus, requiring lending facilities beyond retirement age.

This trend is not predicted to change, especially as house prices hold back younger people from buying.

Some lenders are adapting their offering to widen the choices for older borrowers. However, there are inherent risks with this lending, including increased chance of vulnerability and the likelihood of sudden and significant changes in circumstances, factors that may also impact reputational concerns if lending criteria suggests discrimination.

The CML are due to publish their full findings later this month (May 2017).

Regulatory update

FCA to investigate the interest-only market 

As part of its 2017/18 business plan the FCA will investigate lenders with interest-only books to ensure they are treating customers fairly.

This follows a review in 2013 in which the regulator asked lenders to approach customers whose mortgages were due to mature before 2020 to ask about their repayment plans.  With 1.8 million such customers nationwide, many of whom do not have an appropriate strategy to repay, there looms a risk of a ‘ticking time bomb’.

Currently, only twenty-seven lenders offer interest-only mortgages (around 1% of lending).  Most, if not all, of those lenders ought to have good systems in place as a result of the 2013 review so this latest review may have limited impact.  However, the market has responded by urging the FCA not to stifle fresh interest-only lending as it did in 2013 when many lenders withdrew ahead of the Mortgage Market Review’s tougher repayment rules.

FCA consultation on Credit Cards 

The FCA has published a further consultation paper as part of its Credit Card Market Study.  It set out measures to help customers in persistent debt, proposes a range of early intervention remedies, and looks at the treatment of unsolicited credit limit increases. The FCA hope measures will address concerns over credit cards identified in the Study.

The FCA's suggested remedies (to cover the full life-cycle of a credit card) include:

  • Shopping around and switching: easier access for customers to credit card usage data, clearer standards for price comparison websites, promote/facilitate access to quotation searches.
  • Notifying customers when their promotional offer is coming to an end.
  • Greater control over credit limits: new customers given more choice on credit limits.
  • Everyday use: encourage customers to consider how much they are borrowing.
  • Earlier intervention: customers at risk of financial difficulty identified earlier.
  • Persistent debt help.  

A customer will be in persistent debt if they have paid more in interest and charges than they have repaid of their borrowing over an 18-month period.  Under the proposals, firms will have to take steps to help such customers at 18 months, 27-28 months and 36 months.

The FCA intends to build on the current regulatory requirement that firms monitor a customer’s repayment record for signs of actual or potential difficulties.

Fintech

Monzo granted full banking licence

Monzo, the online-only challenger bank, has been granted a full banking licence by the Prudential Regulation Authority and the Financial Conduct Authority.

Prior to this, Monzo had been operating with a restricted licence and so its product range was limited to pre-paid Mastercards and iOS and Android apps. As we reported in February, Monzo raised fresh investment from investors, taking its value to £65 million.  As a result of this, the firm now fulfils the Bank of England’s capital requirements to hold deposits.

Monzo is planning to introduce current accounts to its existing users during the summer months, which will also include overdraft facilities. It has not yet been confirmed whether current accounts will be offered to new customers.

CAB to advise via Whatsapp 

Manchester Citizens Advice Bureau (CAB) has launched a new Whatsapp service.  Customers will be able to send messages and receive advice using the app.  Whatsapp uses the internet rather than SMS, which enables longer messages.  The application uses the customer's mobile data allowance (or free wifi) which can may make it cheaper for customers.

Files can also be added to Whatsapp messages, making it easier for customers to send photos of documents, such as eviction notices.  

The use of Whatsapp is likely to enable Manchester CAB to connect and engage with a younger generation of customer who may prefer to use the app.  Further advice can be given to the customer by phone if necessary.

Focus on Scotland

Expenses & Litigation Funding Bill in Scotland imminent

It is expected that the Scottish Government will publish the Expenses and Funding of Civil Litigation Bill this month as part of its commitment to make the civil justice system more accessible, affordable and equitable.

If passed, the legislation is likely to increase litigation funding options and make it easier to predict legal costs.  It is anticipated that the Bill will:

  • introduce sliding caps for success fee agreements, e.g. no win no fee, fee as a percentage of court award
  • allow damages-based agreements
  • allow for the introduction of a multi-party action procedure in Scotland

While the legislation will cover civil litigation generally, it is expected to have a focus on cases where it is perceived there is inequality between Pursuers and Defenders, for example in personal injury cases.  Nevertheless, greater predictability of litigation costs could help lenders deciding whether to pursue professional negligence actions.

The Bill ties in with the recently introduced rules for Pursuers' offers, whereby a 50% uplift on costs is possible where a Defender fails to accept an offer timeously and the court awards the offer amount or more.

Contributors

Duncan Martin

Sam McCollum

Ben Hanham

Graham Walters

Michael Seddon

Alanna Tregear

Luke Austin

Emma Hutchison

Catherine Zakarias-Welch

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at May 2017. Specific advice should be sought for specific cases. For more information see our terms & conditions



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