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 Northern Ireland
Focus on Scotland
Since January 2018 current account providers have been required to conduct quarterly immigration checks on customers. Where the customers do not have the right to reside in the UK, they must be reported to the Home Office who may direct that the customer's accounts are closed.
From a lending perspective, whilst the initial checks are limited to current accounts, there is a wider range of accounts which may be affected, including mortgage products linked to current accounts.
In May, the Home Secretary announced that the government would be contacting banks and building societies seeking to suspend these immigration checks. This is likely motivated by political pressure on the government following the Windrush scandal. The Home Office intends to engage further with the banking sector to ensure that immigration checks carried out by financial providers do not inadvertently disadvantage migrants who are in the UK lawfully and that vulnerable people are protected by the use of effective safeguards.
The right to rent scheme also requires landlords to conduct immigration checks before letting a property. Campaign group, the Joint Council for Welfare of Immigrants, has launched a legal challenge to the scheme on the basis it encourages racial discrimination. The group is crowdfunding a High Court application and has currently raised £4,000 of their £15,000 target. The outcome of this campaign is likely to be of interest to receivers managing buy-to-let properties and lenders alike.
A new death notification service has been launched by Equiniti in partnership with UK Finance and 6 major financial institutions. The free service provides a way for family members to report a customer's death online. The service notifies up to ten participating banks and building societies of the death, preventing family members from having to explain the death to multiple organisations at a difficult time.
The organisations contacted by the service can then write to the family to advise them of next steps in relation to the account.
From a lender's perspective, the service should encourage and speed up notifications allowing for a more timely intervention. When the sole customer has died it is usual for lenders to allow the bereaved family a period of time to deal with the redemption of the mortgage, whether by sale or refinancing. In some instances, family members will not actively deal with the estate. We have seen an increased focus in this area particularly around whether the mortgage terms and conditions provide for the full debt to be called in on the customer's death. If there is no such provision a solicitor's letter can often trigger engagement from the family. In extreme cases it may take issuing proceedings for arrears to prompt the family to resolve the lending over the property. When the family does engage, a solution, such as voluntary surrender of the property, may be reached.
The European Central Bank and the Bank of England are set to convene a technical working group to deal with the period following 30 March 2019 when the UK formally leaves the EU. The group will focus on the risk of the City suddenly finding itself cut-off from the rest of Europe in the event of a 'cliff-edge Brexit' where current arrangements with the EU end overnight without any alternative arrangements in place. The group will be chaired by the President of the ECB and the Governor of the Bank of England.
Many financial institutions (particularly foreign investment banks that use the UK as their gateway to Europe) are increasing their budgets to deal with the re-organisation of their business. Larger lenders plan on spending between £100m-£200m this year, with a focus on a March 2019 deadline, despite the 21-month transition deal between the UK and the EU that ends in December 2020.
From 1 April 2019, the Financial Conduct Authority (FCA) will take over the regulation of claims management companies (CMCs) from the Ministry of Justice Claims Management Regulator. The 1,700 CMCs operating in England, Wales and Scotland will be required to comply with the strict standards of accountability which apply to all financial services providers. Scottish CMCs will also be brought within a regulatory regime for the first time.
CMCs have been focussing their work streams on high profile scandals such as PPI mis-selling. National Audit figures indicate between 2011-2015 CMCs accounted for £5 billion of the £22.2 billion compensation paid out in PPI compensation.
The new rules are intended to provide better protections for consumers at risk of falling victim to market misconduct such as poor service, hidden fees and inappropriate claims management.
As part of the regulations, CMCs will be required to:
Breaches of the rules could result in hefty fines or suspension from practicing.
Under FCA supervision, consumers should benefit from access to fairer redress services and have their claims progressed with their best interests at heart. However, banks can expect an influx of claims in the run up to the regulations coming into force.
In October 2017 the Government published a call for evidence on a breathing space scheme for individuals with serious problem debt. The proposed scheme includes a six week debt moratorium and a statutory repayment plan. The Government has recently published a note of the responses it received.
Most respondents indicated that an individual's entire debts should be included within the moratorium with no exception for mortgage arrears. However, when considering the repayment plan, a number of respondents made a case for mortgage or rent arrears to be excluded.
Lenders are used to engaging with customers when agreeing payment plans. Lenders may have differing policies on what is acceptable as a repayment plan. There is a risk that if the breathing space scheme imposes a rigid framework for repayment plans, it would prevent lenders from tailoring plans to individual customers' risk profiles.
The Government has indicated that it will outline a policy on the scheme for consultation later this summer so that the scheme can be implemented during 2019.
Transferring purchase monies within conveyancing transactions at completion often causes delay and frustration. This problem becomes more pronounced where multiple buyers and sellers are involved in the chain.
Shieldpay's solution was to create a platform which provides a digital escrow facility. The buyers, and their lenders, in a chain pay the purchase monies into the escrow account and - once each party agrees - the monies are released simultaneously to the relevant sellers. This prevents the need for money to pass domino like through individual conveyancers' bank accounts.
Premier Property Lawyers announced completion of the first conveyancing transaction using the platform with the support of Barclays Bank.
Despite this initial success there remains work to do before widespread application of such a platform. For example more lenders will need to engage with the platform in relation to both advances and redemptions. In addition, lenders will need to be convinced that the system is not open to fraud or cyber-attack.
UK Finance has recently released figures showing that the number of interest-only mortgages has reduced by 46% to 1.7 million in just six years (with a reduction of 250,000 in 2017 alone). This sharp decrease is likely to be as a result of lenders and borrowers engaging more on the repayment of interest-only mortgages, following the FCA's 2013 thematic review.
Set against this decrease, the number of lenders (both start-ups and established lenders) now offering interest only mortgages has increased by 33% over the past year. Several factors, including the reintroduction of 'retirement interest only mortgages' in March 2018, will have contributed to the return to the interest-only market for many lenders. Therefore the drop in numbers may reduce or even be reversed as the new market entrants build their interest-only portfolios. No longer is it the case that interest only mortgage are 'bad'.
Over the past three years, there have been significant tax and regulatory changes implemented in the buy-to-let (BTL) sector. In particular:
However, in a survey by Shawbrook Bank, over half of landlords consider the most substantial change to be the phasing out of the higher rate tax relief on mortgage interest payments. The Intermediary Mortgage Lenders Association reported that BTL landlords in the higher rate tax band with high borrowings are unlikely to make a profit in the UK.
The effect of this is those who purchased BLT mortgages before the changes were implemented are unable to pass the new affordability tests and/or refinance their debts.
To avoid the ban placed on mortgage interest tax relief, BTL landlords are purchasing properties through limited companies. However, corporate landlords may be liable for capital gains charges, and usually attract higher interest rates, with the average rate for a two-year fixed rate BTL mortgage being 4.29%, according to Charlotte Nelson of Moneyfacts.
It is thought that the sector will improve over time as research by Kent Reliance found that landlords are likely to make profit of £265,000 per property over the next 25 years, despite the recent changes. However, the survey by Shawbrook Bank concluded that many landlords are planning on selling all or part of their portfolios as result of the above changes.
Guidance recently published regarding the licensing of Houses in Multiple Occupation (HMO) in England now imposes new minimum requirements for bedroom sizes. These are:
The new legislation also allows Local Authorities to set conditions on how the household waste of HMOs is stored and disposed of in a bid to reduce refuse problems.
The new legislation will come into force on 1 October 2018.
In addition, in legislation published in February and also coming into force on 1 October, the requirement for a HMO to be at least three storeys in height has been removed. According to the Residential Landlords Association this will result in 17,700 further people being protected under the HMO licensing regime.
Lenders permitting properties to be let as HMOs will need to ensure that their mortgage terms are sufficiently wide enough to ensure customers are obliged to comply with the new rules.
Technology is significantly improving customer experience and product efficacy in the financial services sector. However, new processes and systems come with new risks and challenges for regulators.
Cloud storage, blockchain, AI, machine learning and cryptocurrencies have all come into their own. However, these developments must be checked against an increasing risk of cybercrime and tech disruption.
Exposure to cyber risk is already a factor in deciding the level of capital a financial institution must hold. Growing reliance on technology is only likely to increase the importance of this factor going forward.
The FCA has identified phishing, malware attacks and identity theft as the most rapidly increasing threats facing the financial service sector and has challenged banks to apply technology in innovative ways in order to reduce these risks. UK Finance and KPMG recently published a joint report calling for greater collaboration between financial institutions, law enforcement and government to tackle the growing threat of cybercrime.
Given the shift in attitudes to compensation signposted by the PSR's proposal for a contingent reimbursement model for APP fraud, financial services providers should see investment in technology as an increasingly worthwhile spend.
Regulators are also focusing attention on the increasing use of cloud storage, with a view to ensuring that sufficient oversight and security is in place. The Bank of England is due to consider what would happen if access to cloud storage was compromised. In addition, the PRA has suggested that it may look into cloud storage in more detail, with a view to considering the regulatory position.
The relationships between banks and their tech providers could be a source of tension because large tech companies have the scale to rival the established financial institutions and the expertise to target lucrative business streams following the introduction of Open Banking. Facebook recently obtained an electronic money licence in the Republic of Ireland and Amazon is offering payment services and loans.
All of this (unsurprisingly) gives rise to concerns that regulation is not keeping pace with advances. For instance, how will the current requirement to regulate cloud storage by visiting data centres apply to the servers Microsoft intends to sink to the bottom of the Pacific to control their temperature?
Recent years have seen a step change in the volume and application of regulation to the financial services sector and this approach is likely to continue given the recent and forecast leaps forward in technology.
The Financial Conduct Authority released a report on 20 June 2018 which reveals the extent of debt across the UK. The 2017 survey figures show that the highest levels of unsecured debt in the UK are in Northern Ireland.
Excluding Student Loan Company loans, adults in Northern Ireland owe personal debts of £3,990 on average. This compares to the UK average of £3,320. Household income in Northern Ireland is one of the likely causes of the higher levels of debt. Savings and investments in Northern Ireland are also lower than the UK average.
According to the FCA's survey, 24% of people in Northern Ireland feel they have low financial capability compared with the UK average of 17% and only 26% describe themselves as highly confident managing their money (UK average 37%). The percentage of adults in Northern Ireland who showed characteristics of potential vulnerability was the UK's highest at 56%, with the UK average being 50%.
The survey reveals the downbeat attitudes of Northern Irish adults in relation to their finances.
The results do show a strong secured lending market in Northern Ireland with an average of 37% of adults purchasing a home with the help of a mortgage or loan. This is compared with the UK average of 33%. Furthermore, the survey indicates that more adults in Northern Ireland are currently employed with 70% working compared to the UK average of 62%.
The full report of the Financial Conduct Authority can be viewed here.
The Scottish Law Commission (SLC) has recently commenced its review of the enforcement of heritable securities in Scotland, having set up a Heritable Securities Advisory Group.
The review will be split into two parts: the first dealing with conveyancing aspects, and the second with enforcement. Although a discussion paper will be produced for each part, the SLC will ultimately produce a single report and draft Bill.
At present, the Conveyancing and Feudal Reform (Scotland) Act 1970 is the key piece of legislation governing this area, but this has been long due an overhaul following the Supreme Court decision of RBS v Wilson in 2010. As a brief reminder, in its decision the Supreme Court, reversing established practice, held that a calling-up notice was necessary in every case before a lender took action to have a defaulting borrower removed from the mortgaged property.
This was contentious as, up until the decision in Wilson, practitioners had believed that the calling-up procedure was not essential.
It is evident from Wilson that the law concerning enforcement is complex and not without its difficulties. As such, the SLC's review of this area is likely to be radical, comprising of an overhaul that will simplify the enforcement process and bring it in line with the approach adopted in other jurisdictions. It is therefore doubtful that the calling-up process will survive the review.
Any new law is still several years away, with the projected timeline for publication of the report and draft Bill being December 2022.
This publication is intended for general guidance and represents our understanding of the relevant law and practice as at July 2018. Specific advice should be sought for specific cases. For more information see our terms & conditions.