Each month we summarise the latest news and developments in retail mortgage lending and regulation.
Focus on Scotland
Focus on Northern Ireland
In Kensington Mortgage Company Limited v Mallon, Mr and Mrs Zaman, the occupiers of the subject property, were second defendants in Kensington's possession proceedings against Mr Mallon, the sole registered owner. They defended the claim on the grounds that they were the true owners of the property. On the first day of trial, their barrister attempted to raise an additional argument that a trust existed between the Zamans and Mr Mallon. He argued that either the current pleaded facts were sufficient to raise that argument or that only a minor amendment was needed to include the trust argument.
The trial judge refused to allow amendments or consider any trust argument. Kensington won at trial, and the Zamans appealed.
The High Court rejected the appeal. In its judgment, it said that the whole point of pleadings is "to ensure that the essential elements of each party's case [are] known to the other side". The Zamans ought to have given specific details in the Defence of the trust they said existed in order that Kensington could properly respond. They had not done this, so they could not now raise this at trial.
This decision is very useful to those parties that are faced with opponents who attempt to raise new arguments at trial. It also provides clear direction to parties that want to raise additional arguments – these requests need to be done in good time ahead of trial and in the correct way.
As technology continues to develop, so do methods used by fraudsters. Cyber-fraud has now become a major industry, with lenders being targeted by sophisticated criminals who are well-versed in technology. As a society, we are using less physical cash, making the potential reward for criminals greater. Coupled with technological developments, the dynamic of fraud has changed; the focus is shifting from vulnerable consumers being targeted to lenders being infiltrated directly.
Artificial intelligence is becoming increasingly sophisticated. Cases have been reported where computers were used to analyse the voices of senior staff members of financial institutions from publicly available recordings and speeches. Technology was then implemented to impersonate the staff member to defraud employees.
The use of new technologies should be considered to match the developments being made in cyber-fraud. For example, behaviour analytics could be implemented to build a consumer profile and allow artificial intelligence to understand the context of a transaction. Information such as spending patterns, geolocation and devices used can assist in determining whether the transaction should be flagged as potentially fraudulent. Lenders have also experimented with fingerprint technology for card payments to add a further layer of protection.
Whatever action is taken, it is important for lenders to be more vigilant than ever to adapt to the changing dynamic of cyber-fraud.
There are some isolated provisions in the civil courts rules regarding vulnerabilities. These rules have been criticised as being passive and inadequate. The Civil Justice Council has launched a consultation aimed at improving how the courts handle vulnerabilities.
Some of the proposals being considered are:
MCOB places regulatory requirements on lenders to have clear policies for treatment of vulnerable customers. Lenders are used to this and will use models such as TEXAS to record vulnerabilities. If new court rules were to require the lender to disclose customer vulnerabilities lenders would need to make sure that 'explaining' how the information could be used under TEXAS included disclosure in court proceedings.
The consultation runs until 11 October 2019.
Following the rise of solar panel home installations, customers have claimed they were encouraged by persuasive sales techniques and advised to cover the cost of the panels and the installation by taking out finance agreements or a credit card on the advice that the panels would generate a surplus of electricity resulting in reduced bills. Effectively, customers were told that the savings they made in relation to their monthly utility bills would cover the monthly finance repayments. Many customers say that they have found this not to be the case and more often than not are finding that they are paying more because of the costs of repayments.
The Financial Ombudsman Service has had around 2,000 claims of mis-selling in the last year with more claims being received each week. In one instance, the Ombudsman found that had the customer had the full costs explained to him, he would not have entered into the agreement. As a result, the lender had to issue a new, interest-free loan for the panels.
In response to this trend, several firms of solicitors (and CMCs) are offering to take on claims of mis-selling on a 'No win, No fee' basis. Lenders who have provided finance agreements for solar panels and installation should therefore expect to see increased claims in relation to what some observers are labelling the next big financial mis-selling scandal of recent times.
The Bank of England's recent Mortgage Lenders and Administrators Statistics, which are sourced from data of 340 regulated mortgage lenders and administrators, confirms that loan balances with arrears is now at its lowest level since the series began 12 years' ago.
Mark Pilling, MD at Spicerhaart Corporate Sales noted that the value of outstanding balances with arrears fell by 1.7% on the past quarter, saying: "It is obviously great news that arrears are low and still falling, but that does not necessarily mean that people are not experiencing financial difficulties. Instead, what I think we can take from these figures is that lenders are continuing to do all they can to help borrowers who are struggling, to ensure that repossession is always the last option".
The report also identified that the number of mortgages with LTVs above 90% increased from 5.21% of all mortgages to 6.31% at the same time as borrowings at more than three times income has also risen. This may indicate that borrowers are stretching themselves and would be put under strain if interest rates were to rise.
In a previous edition we discussed Tesco's intention to exit the mortgage market. Accordingly things have developed very quickly with Lloyds announcing it will be purchasing Tesco Bank's mortgage arm in a deal said to be worth £3.8 billion.
It is reported that Lloyds will be paying a 2.5% premium in comparison with the Bank's outstanding book value. Vim Maru, Lloyds Director for Retail, commented that this was a good deal for the Bank, its shareholders and of course, Tesco's customers. Furthermore although Lloyds would be paying a premium, the deal would produce a better return than if Lloyds were to engage in new lending in current market conditions.
Tesco's desire to exit the mortgage market is thought to have derived from challenging market conditions brought about by recent legislation requiring banks to 'ringfence' their UK activities from their international investments. As a result banks have been left with huge deposits that can only be used in the UK market. Banks such as Lloyds and HSBC have used these to invest in further mortgage lending.
With news that Sainsburys are expected to exit the mortgage lending market it remains to be seen who will swoop in and capitalise on this opportunity.
Online mortgage broker Habito have published new mortgage terms and conditions which it says can be understood by someone with the reading age of 11. Habito say that most financial documents usually require the average reader to have a reading age of 19, however the mortgage brokers research showed that 58% of home owners are put off switching to a better deal by over-complicated documents and that 95% wanted the government to ensure providers provided clearer terms and conditions. This led Habito to work with Fairer Finance to produce its 'clear and simple' terms and conditions – the first of its kind to be awarded this mark.
On top of Habito's clearer terms and conditions, it has also entered the buy-to-let mortgage market. Habito now allow landlord's to secure their mortgage for up to 10 years fixed term, with 2-year fixed rate prices starting at 2.59% for a 60% loan to value (LTV) product and a 75% LTV price of 2.84%. Habito require just a 20% deposit and also provide customers with £250 cash back as the brokers aim is to provide competitive rates and value for money.
Nationwide Building Society has invested in Bristol-based online letting agency Bunk. Bunk's mission is to make renting a less stressful process for landlords and tenants at a time where landlords are facing reduced margins and increased regulation. Bunk aims, through Open Banking, to make the process of renting a property smoother for all involved. This is something which Nationwide, who represents both landlords and tenants, has campaigned on in recent years. The partnership with Bunk was therefore seen as natural fit.
The investment is the most recent deal to come out of the £50 million Venturing Fund which was set up by Nationwide in 2018 to foster partnerships with start-ups that are focused on making people's lives easier through smart insight and fair practice.
The deal will include the sharing of knowledge and expertise which will benefit not only the start-ups but Nationwide as they explore new innovative products of services which could provide real benefits for its members in the future.
Bluestone Mortgages, a specialist lender, has undertaken research which indicates customers' lack of understanding of options once a mortgage application had been rejected by a high street lender.
Their research suggested that:
The above indicates that potential customers may not able to secure their necessary lending as they are unclear what other assistance can be obtained once an initial application has been rejected.
The industry needs to work to incite customer confidence that the right mortgage may be out there for them, and they should be steered towards using mortgage advisors for this particular purpose. This ensures that both customers and lenders do not lose out on potential business.
A recent report from the Public Accounts Committee has questioned the value of Help to Buy (HTB), aiming criticism at its failure to increase the provision of affordable housing. The report also identified that over two thirds of HTB users did not need assistance through the scheme and could have purchased through their own means. This had led to calls that the public money could have been better spent addressing more pressing problems such as planning, homelessness and supporting those in most need.
A more concerning find is the notable lack of consumer protection offered by HTB. According to the report, many buyers are unaware of the interest charges that will be implemented after the initial five-year interest free period in addition to mortgage payments. As and when the interest free periods come to an end, buyers will be faced with increased interest costs on the HTB equity loan, which could be as much as £240,000. Buyers will therefore need to consider their options as to whether they pay interest under HTB, remortgage the equity loan or look to sell the property and repay both the mortgage and the HTB loan.
This may present significant problems for some buyers if interest rates increase or property prices fall. Due to HTB only being available on new-build homes and because new-builds are typically 15%-20% more expensive than like-for-like second hand homes, some buyers may find themselves in a negative equity situation. This presents a significant risk to both consumers and lenders alike who may find that the mortgage payments are unaffordable.
The interest-free periods under HTB started coming to an end in mid-2018 and will continue to do so until 2028. The lack of consumer protection offered up until now is of concern and is something that the government has noted needs to be developed into HTB going forward. It is entirely possible that lenders, the FOS and the courts see complaints brought by users of the scheme that allege that the risks of the HTB scheme were not fully explained to them at the time. Whether these risks materialise is very much dependent upon the market but is something that will need to be kept under close review by lenders and the government alike.
In an interview with the Financial Times on 31 August 2019, John McDonnell announced the Labour Party's intention to offer private tenants the 'right to buy' their rental properties. The idea was first mooted in 2015 as part of Jeremy Corbyn's leadership bid, but did not immediately become Labour Party policy.
Mr McDonnell explained that the proposed scheme would involve private tenants being given the right to purchase their rental property at a price established by the government. When discussing the proposal, Mr McDonnell was critical of landlords who failed to maintain their rental properties which was 'causing overcrowding and problems.'
While the announcement may be welcome news for renters who are struggling to get a foot on the property ladder, it immediately came under fire with critics claiming it would result in a shortage of rental properties, an increase in homelessness and a house price crash.
Landbay, the specialist buy to let lender, claim only 42% of private tenants want to purchase a property, with 25% of those not wishing to buy citing the flexibility of renting as being beneficial over home ownership. However, these statistics were based on a survey of only 2,000 private renters in the UK. The chief executive of Landbay, John Goodall, has stated that 'the government must focus on encouraging purpose-built rental properties and cease its penalisation of landlords.'
Should Labour's policy be implemented, lenders can expect increased business from tenants utilising the option to purchase. However, critics argue that a surge in sales by landlords who will not wish to have the value of their properties dictated by the government may result in a house price crash. With a potential election on the cards for the not too distant future, lenders will benefit from keeping tabs on all major parties policies on property ownership.
Oxford has the highest proportion of rented accommodation in the country. Oxford Council is concerned that rogue landlords are exploiting this market and tenants by letting substandard, dangerous or overcrowded properties. Increasingly, outbuildings and sheds are being let as residential accommodation without providing the tenant with facilities such as hot water, heating and basic sanitation.
To tackle this issue the council have being using a plane with thermal imaging technology to seek out unusual heat signatures in residential properties. In the last 18 months the thermal imagining technology has allowed the Council to identify and shut down 21 sheds which had been illegally rented as residential accommodation. The Council has also served 31 further enforcement notices in that same period.
These types of lettings often don`t meet fire safety or electrical regulations and, if the property was mortgaged, there may be a risk to the lender's security. The letting arrangements are likely to be contrary to the mortgage conditions and, when alerted to these situations, the lender may wish to consider exercising either its right to appoint receivers to manage to the property or exercise its right of possession in order to safeguard its security.
The UK House Price Index (UKHPI) is an index that captures the change in value of residential properties by using sales data collated from the various land registers operating in the UK.
The latest statistics from the UKHPI show that house prices in Scotland continue to rise at a rate above the UK average.
The average price of a property in Scotland in July 2019 was £153,968, an increase of 1.4% from last year. This is particularly significant when compared with the position in the UK as a whole. In July 2019, the average price of a property in the UK was £232,710 – an increase of only 0.7%.
In July 2019, the highest-priced area to purchase a property was Edinburgh, where the average price was £263,894. This is a rise of £7,895, or 3%, from the previous year. Glasgow also saw an increase of 2.3%, where the average price rose from £132,094 in July 2018 to £135,121 in July 2019.
In contrast, the average price of residential property in Aberdeen fell by £10,039
This is generally encouraging growth for the housing market in Scotland as prices rise at a rate twice that of the UK average. The volume of residential sales in Scotland in May 2019 was 9,540, increasing from 8,135 from the previous year. By contrast, residential sales for the UK fell from 85,713 in May 2018 to 77,898 in May 2019, a drop of 9.1%.
In 2016 the Northern Ireland Courts and Tribunal Service consulted on proposals to increase Court fees. As a result, the decision was made to increase its fees on a phased basis over a 3 year period. In April 2017 the fees were first increased by 10%. In April 2018, the fees were increased by 7.5% and on 1 April 2019 the Court fees increased by 5%.
Following a recent consultation whose findings were published in September 2019, The NI Court Service will increase Court fees once again by 5% on 1 October 2019. The fee increase takes place at both County Court and High Court level and will have an impact on secured and unsecured proceedings.
This is something that we wish to highlight to all of our lender and financial service clients, as it will be a factor which will affect the cost of all litigation proceedings in the jurisdiction. An example of the fee increase is the cost of issuing an Originating Summons which will increase from £249.00 to £261.00.
If you require any further information on this, please contact a member of our Financial Services Disputes and Investigations team in Northern Ireland, who would be happy to discuss this in further detail.
This publication is intended for general guidance and represents our understanding of the relevant law and practice as at October 2019. Specific advice should be sought for specific cases. For more information see our terms and conditions