Welcome to TLT’s busy lenders’ monthly round-up. Each month we summarise the latest news and developments in mortgage litigation and regulation.
This month in summary:
In July we reported on the government's plans to modernise the home buying process. After four months of silence, the Conveyancing Association (CA) has published its own paper.
The paper includes the following proposals, aimed at reducing the average conveyancing transaction time which has crept up to between 12 – 14 weeks:
It is hoped that centralising identity verification will reduce the risk of fraud and money laundering. The CA considers the verification process should be part of the Land Registry's ID check, which is already in place. If that happens, lenders will want Land Registry to be accountable where failures to correctly identify borrowers prejudice their security.
If completion monies are sent early, parties have certainty that the funds are where they need to be on the day of completion. However, lenders would need to agree to this and also consider when interest will start to accrue. Without industry agreement or a legislation change these proposals are unlikely to go ahead. But there is clearly an appetite for change so we will keep this topic under review.
Read the full report here.
In October the CML released data which indicated that homeowners, excluding first-time buyers, were spending on average 17.7% of their monthly income on mortgage repayments. This is a record low and a significant drop from 2008 when the average spend was 23.7%
However, whilst the CML notes that demand for mortgages is strong, with approvals increasing, the lack of private sellers continues to impact new lending. Gross lending remained steady in October 2016 at £20.6 billion; which is similar to the £20.5 billion figure the month before but 5% lower than the same period last year. As well as the housing shortage, this may be a reflection of the political and economic uncertainty following Brexit and the recent US election.
Some mortgage brokers have suggested that rates could rise very soon as a result of a spike in swap rates following the US election result. Accordingly, consumers may be wise to grab a fixed rate deal now. The CML's prediction is that we will see more lending activity in the form of re-mortgages with consumers spurred on by competitively priced, fixed rate deals.
Whilst generally the cost of a mortgage is at an all-time low, this may not continue for much longer as lenders respond to market movements as a result of political events.
The Treasury has confirmed plans to give the Bank of England further powers to regulate buy-to-let (BTL) lending, amid fears that growth in this sector represents a threat to the economy.
There is concern that landlords operating on fine margins are likely to sell if they run into financial difficulty. A pervasive economic shift (eg an increase in interest rates) could result in a saturated property market which could, in turn, drive down property values.
The bank will have the ability to regulate loan-to-value and interest coverage ratios, with a view to ensuring a more robust BTL sector.
These measures follow the bank requiring lenders to factor further letting costs into their underwriting procedures and the introduction of the new BTL tax regime, which was intended to reduce the sector by between 10% and 20%.
BTL loans, as a percentage of new mortgages, peaked in March 2016 at 27% but have since reduced to 14%. In addition, gross BTL borrowing is down year on year from £3.6 billion to £2.8 billion.
Research by the Residential Landlords Association shows that, as a result of the new BTL taxes, 25% of landlords have either sold properties or intend to do so. However, the impact of the new taxes continues to be tempered by cheap mortgage rates, high property values and steady demand for rented accommodation.
The government has launched a new scheme aimed at helping SMEs find alternative funding platforms and thus encouraging economic growth.
The scheme requires designated banks (RBS, Lloyds, HSBC, Barclays, Santander, Clydesdale, Yorkshire Bank, Bank of Ireland, Danske Bank and First Trust Bank) to refer SME customers, which they have rejected for finance, to finance platforms.
The designated platforms are: Funding Xchange, Business Finance Compared and Funding Options. These platforms will liaise with alternative finance providers and facilitate discussions between the customer and any provider who is interested in financing their business.
The 2016 case of Cardiff County Council v Lee (reported in early November) suggests lenders should obtain permission from the court before enforcing SPOs.
This case concerned a landlord and tenant dispute but may have implications for the enforcement of SPOs generally including in mortgage repossession cases.
Some courts are already interpreting this decision to mean that before a Request for a Warrant of possession of Land can be submitted to the court, a lender must first make an application for permission to do so. This is a procedural change requiring an additional step into the enforcement process. Some courts are also returning requests where permission has not already been granted.
At the time of writing (2 December), the Court Service is due to publish guidance imminently but it is understood that the requirement to apply for permission (a paper exercise rather than at a court hearing) will be formalised shortly. The longer term approach will then be considered at a future Rules Committee meeting.
Connaught Income Fund v Hewetts Solicitors 2016
A recent solicitors' negligence case is a good reminder of the importance of ensuring that professionals assuming a duty of care to lenders are properly instructed. The solicitors in this case were found to only owe a very limited duty of care to the ultimate lender. This can have serious consequences for lenders, for example in relation to the solicitor's obligation to report certain information, as the lender's ability to recover losses may be impacted.
This case will be of particular interest to firms within the alternative finance space where more novel lending arrangements may be in place.
Read our update here to find out more about the potential impact.
Under the Immigration Acts 2014 and 2016 UK banks and building societies must not provide current accounts for illegal immigrants.
A bank/building society which establishes that a customer is not in the UK lawfully must report it to the Home Office (HO). The HO has a variety of options at their disposal, including the closure of any accounts and statutory authority to obtain a freezing order.
Regulations setting out further detail about the new rules will be introduced on 30 October next year and contain three new obligations:
The FCA has published a guidance consultation paper (GC16/6) setting out its proposed remediation framework for firms which may have included a contribution towards arrears in mortgage customers’ contractual monthly instalment (CMI) without first considering customers' individual circumstances. This approach to CMI calculation may in some instances be due to historical calculation systems and mortgage terms and conditions that sought to ensure the whole mortgage balance would be repaid within term. It is believed that lenders representing around two-thirds of the market may have been operating on this basis.
The CML has said that lenders: “were always fully transparent with the regulator on their arrears calculation and charging methods, which were in line with longstanding industry practice”.
However, the FCA has suggested that there may have been unfair outcomes for some customers. It is proposed that firms which have been calculating customers’ CMI on this basis should review whether any harm may have been caused and, if so, provide appropriate remediation. Firms are also expected to move away from this method of calculation.
It is currently proposed that firms will have until 30 June 2017 to notify customers, with any remediation being completed by 30 June 2018.
Firms have until 18 January 2017 to respond to the consultation paper.
The full consultation paper can be accessed here.
At a recent CML conference Tony Moroney of Berkeley Research Group spoke of the rise of innovative mortgage providers around the world and the potential use of new digital technology in the UK including:
Mr Moroney believes that large UK lenders are more focussed on efficiency (cost) and compliance (regulatory) rather than the ‘customer journey’, which is at the forefront of modern lending techniques. He is encouraging lenders to catch up with the rest of the world in order to avoid losing market share to the emerging breed of mortgage providers.
The world's first peer to peer lender, Zopa, has applied to the PRA and FCA for a banking licence.
Zopa has announced that it is set to launch a new challenger digital bank (without any physical branches) in addition to its marketplace lending activities. It will offer deposit accounts and overdrafts with the benefit of FSCS protection. The application is expected to take 15 – 24 months according to Zopa.
This development - a FinTech company moving into more mainstream banking - is likely to attract considerable attention.
As mentioned in last month's round-up, various peer-to-peer lenders (including Zopa) are currently operating with interim permissions from the FCA whilst awaiting full authorisation from the FCA in relation to their peer-to-peer lending activities. Full FCA authorisation is necessary before peer-to-peer lenders can offer Innovative Finance ISAs.
In other related news, Funding Circle had a record month in October 2016, as it lent over £95 million of funds, according to AltFi. Funding Circle is considered to be the largest marketplace lender for small businesses in the world.
As many round-up readers will know, the FOS periodically releases (anonymised) case studies of its decisions. It has now published case studies on complaints made in relation to peer-to-peer and investment crowdfunding platforms.
The FOS notes that they have seen relatively few complaints within this sector so far, and few of the complaints were upheld. The FOS' observations and early case studies nevertheless provide useful insight into areas for platforms to be alive to.
For example, the FOS recognises that the Consumer Credit Act 1974 (CCA) might only have limited impact on peer-to-peer lending arrangements (depending on the nature of the borrower and the lender investor). That said, they remind platforms of the FCA rules which apply to peer-to-peer platforms (such as assessing the borrower’s creditworthiness and providing an adequate pre-contractual explanation of the credit agreement).
The FOS covered six case studies, ranging from CCA-linked matters through to complaints about fees and interest rates. A link to the FOS newsletter can be found here.
As well the potential for reputational issues arising from FOS complaints, platforms should be alive to the possibility that the FCA may take an interest in future FOS case studies and data to watch for any emerging trends. TLT is well placed to provide advice on any concerns that platforms might have.
Sussanah Lopez Bernal
This publication is intended for general guidance and represents our understanding of the relevant law and practice as at December 2016. Specific advice should be sought for specific cases. For more information see our terms & conditions.