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:
Focus on Scotland
On 23 June 2016, the Government ended its consultation on a proposal to enable consumers to switch mortgage providers within seven working days.
Some within the industry suggest that a requirement to speed up the mortgage process could be a catalyst for technological innovation. For example, lenders could make greater use of automated valuation models (AVMs) when assessing an application.
But the proposals could leave lenders vulnerable to fraud. Lenders must comply with stringent regulatory requirements before agreeing and completing a remortgage.
It may prove difficult for lenders to complete these to a satisfactory standard in such a short timescale.
Seven days may not be sufficient time for lenders to fully assess affordability and, if obliged to rely heavily on AVMs or proceed without obtaining a valuation, they could place themselves at risk.
The Council of Mortgage Lenders has suggested that the seven day period will only begin after all due diligence has taken place. This will provide some comfort to lenders and reduce these risks, but it does raise the question of whether anything will change in practice. If this is the case, many lenders will already be operating to the seven day timescale.
We await the Government's response to the consultation to fully appreciate the implications of these proposals for both customers and lenders.
The Supreme Court recently ruled that the Human Rights Act does not apply in possession claims between private parties, preventing a major expansion of human rights into private contractual disputes.
The ruling in Mcdonald v Mcdonald and others  UKSC 28 centred on whether a possession order sought by a private landlord against an assured shorthold tenant would be incompatible with the tenant's right to a private and family life under Article 8 of the Human Rights Act 1993.
This was the first time that any court in the UK or Europe has been specifically asked to consider this issue. The Supreme Court ruled in favour of the receivers appointed by a mortgagee and who were seeking possession.
The judgment has been on the watch list across the property and financial services sectors and beyond because it raised for the first time the prospect of expanding the use of the Human Rights Act into litigation between private individuals.
Had the case succeeded, it would likely have been a deterrent to investment in the buy-to-let mortgage market and in property generally. It could have seen the role of the court significantly extended so as to alter the basic principle of freedom of contract.
However, the Supreme Court made it clear that provided a private landlord complies with the relevant regulations in the Housing Act, the court must order possession. It is not for the court to apply its discretion and decide whether granting the possession order is proportionate in the circumstances.
The decision is welcome news for landlords and lenders alike. Private rented accommodation is a rapidly growing sector. Obtaining possession quickly remains a procedural step giving private sector landlords certainty that as long as they comply with the law they will be able to obtain possession of the property.
There are a number of cases where appeals are on hold pending the outcome of this case. The human rights arguments in each of those cases will now fall away.
Justice Minister, Dominic Raab, indicated that the government is planning to publish a call to evidence later this year to modernise conveyancing and the home buying process.
In the resulting parliamentary debate several ideas were put forward to speed up the conveyancing process. For instance:
This final suggestion is reminiscent of the Home Information Pack (HIP) system, which was introduced by the Labour Government in 2007 and subsequently scrapped by the Coalition Government 2010. HIPs were abandoned for being unnecessary red tape, which was strangling the housing market. As a consequence, the current proposals are being dubbed as "Son of HIPs" and "Skinny HIPs" by many industry players.
It is difficult to see how standardising part 2 of the CML instructions will help the housing market. If each lender has the same lending criteria this may prevent buyers from purchasing properties with unusual titles that fall outside usual lending criteria.
Given the work created by Brexit it seems unlikely that modernising conveyancing will be top of the Governments agenda. We will report again if a formal consultation is started.
Historically, regulation of the mortgage market depended on whether a first or subsequent charge was obtained by the lender. From 31 October 2004, first charges were subject to the FCA’s Mortgages: Conduct of Business Rules (MCOB). But second (and later) charges were, until 31 March 2014, subject to the Consumer Credit Act 1974 (the CCA) and its various regulations plus, from 1 April 2014, relevant parts of the FCA Handbook (but not MCOB).
This system of dual regulation was brought to an end on 21 March 2016 when most second and subsequent charge lending was made subject to MCOB. However, certain limited provisions of the CCA, and its regulations, continue to apply, including, most importantly, the unfair relationship provisions in Sections 140A to 140C of the CCA.
These changes mean that lenders will no longer need to serve default notices on customers who breach a second or later charge mortgage. Instead, when a customer falls into arrears the lender must, within 15 days of becoming aware of this, provide the customer with:
TLT is making court agents aware of this development in case judges question the lack of default notice.
Recent analysis by us reveals concerns as to the length of time courts are taking to set eviction dates.
The central London hearing centres are particularly slow. This issue is compounded by the fact that these courts have a centralised bailiff team. This team can only be contacted by a single telephone number or by email. This makes it extremely difficult to speak to the team to chase an eviction date and move a matter forward. It creates uncertainty as to when requests for eviction dates will be dealt with.
By way of illustration, we have analysed the average number of days it has taken all London County Court hearing centres to process a request for an eviction date over the last twelve months. Unsurprisingly, the research showed the worst hearing centres are the Central London and Bow Hearing Centres which took an average of 70 days and 56 days retrospectively. This contrasts with the Wandsworth Hearing Centre which averaged 7.5 days to set an eviction date.
While we always take a proactive approach to obtaining an eviction date, enforcement through the County Court bailiff is not the only option. As an alternative, a case can be transferred to the High Court so that a High Court Enforcement Officer can be used. It usually takes between one and two weeks to transfer the case to the High Court and, typically, the eviction will take place within two to three weeks thereafter. This may still result in a quicker eviction date, when balanced against the potential 10 week wait in the County Court.
The cost for enforcement in the High Court is more expensive than the County Court with a bailiff fee of around £500 plus VAT. This is instead of £110, which needs to be balanced against the interest that is accruing on the mortgage account. Commercially, a transfer to the High Court may be a more attractive option than waiting for the County Court to process the application.
We are continuing to monitor delays and will continue to offer advice when instructions are received to enforce possession orders.
The news has been dominated by Brexit and although there is considerable uncertainty as to its medium and long term impact on the mortgage market there are some immediate consequences to note.
It now looks as though the Bank of England may reduce interest rates when the MPC reports on 14 July. This could be a relatively short term move with speculation that if Sterling continues to fall and inflation rises this could force the Bank to increase interest rates. Such a move would impact on mortgage arrears, repossessions and property prices.
The Brexit decision has already led to buyers pulling out of transactions and a reluctance by home owners to put their properties on the market. Foreign investors are pulling back from the UK property market with the London prime property market the hardest hit. If overseas companies relocate away from London and the UK then demand for both residential and commercial property is likely to fall.
However the long term shortage of housing stock is not going to change any time soon and this will help sustain prices generally.
More specifically some lenders particularly those reliant on the securitisation market are withdrawing certain "higher risk" products from the market. At least in the short term this will restrict availability of mortgage products. On a more positive note banks are well capitalised and the temporary reduction in the capital buffer required of banks means that according to the Financial Policy Committee there is an increase in credit supply available to households and businesses of £150bn. As developments flowing from the Brexit decision unfold we will report on these and their impact on lenders.
Deutsche Bank has released a report predicting that residential property prices in the UK could fall by as much as 20% as a result of the buy-to-let measures being phased in to the UK market. As a reminder, the main changes are:
1 Interest "stress test" and affordability restrictions;
2 Restrictions on tax deductions for higher-income landlords; and
3 A wider threshold for determining higher-income landlords.
The buy-to-let lending standards proposed by the Prudential Regulatory Authority has recommended lenders apply a stress test to affordability calculations. If implemented, lenders will have to underwrite loans assuming a minimum notional interest rate of 5.5% as well as factoring in the landlord's maintenance costs and tax liabilities into their affordability calculations.
In the last year, the government announced it would restrict tax deductions for mortgage interest payments for higher-income buy-to-let landlords. This scheme should be phased in from 2017 to 2021. On top of this, the threshold for being considered "higher-income" was also widened as landlords are now required to register their gross rental income rather than net income.
Deutsche Bank predicts that the impact of the above, coupled with the increase in stamp duty on buy-to-let property and second homes, could reduce the rental income affordability criteria of mortgages by as much as 25%. This is expected to reduce the appetite of new landlords entering the buy-to-let market and existing landlords expanding their portfolios.
The impact of Brexit has created uncertainty in the residential property market and the government may need to reconsider its current strategy to ensure the market remains buoyant and active.
The FCA has launched a paper with the aim of stimulating ideas and promoting a culture of inclusion within the financial services industry. It is thought UK consumers could lack access to services that would help them meet their needs and play a wider role in financial markets and the economy.
The report comes in line with recent reports from the Chartered Trading Standards Institute, which suggested more could be done to protect victims of scams.
Protecting customers from fraud is a key consideration for banks and there are a number of measures that have been taken in an attempt to engage with customers in light of this. Services which help to promote banking services to consumers provide accessibility. Many financial institutions show a commitment to this by operating dedicated customer support and money management units. The aim is to provide specialist help to customers with concerns over their financial situation. In turn, this builds and maintains trust – a key factor for the industry.
Nevertheless, the industry recognises the constant need for improvement in this area. We are committed to helping banks and financial institutions promote economic growth and financial stability whilst improving market integrity and driving competition. The FCA paper will be a welcome resource.
The Court of Appeal has listed the appeal in Brookman & Brookman v Welcome Financial Services Limited (2015) to take place on either 11 or 12 October 2016. The question for the Court of Appeal is whether non-disclosure of sizeable commissions from the premium for a PPI policy creates an extortionate credit bargain under the Consumer Credit Act 1974 (CCA).
In November 2014, the UK Supreme Court handed down judgment in Plevin v Paragon Personal Finance (1) Limited  UKSC 61 (Plevin). In that case, the court decided there was an unfair relationship under Sections 140A to 140C of the CCA because the lender did not disclose to the customer the fact that 71.8% of the PPI premium would be kept by the lender and the broker as a commission.
However, Plevin did not consider the position for credit agreements which were "completed" (meaning, in broad terms, paid off or where a judgment was obtained for the balance due) before 6 April 2008. Following Barnes & Barnes v Black Horse Limited  EWHC 1950 those agreements could not be challenged under the unfair relationship provisions. But they could be challenged under the extortionate credit bargain provisions, which the unfair relationship provisions replaced.
In Brookman, the County Court dismissed part of the borrowers' claim which argued that the non-disclosure of a sizeable commission for the sale of PPI created an extortionate credit bargain under Sections 137 to 139 of the CCA. The issue for the County Court was whether the agreement was extortionate (not the agreement taken with the PPI policy). The County Court decided it was not. The Court of Appeal has now given permission to appeal on whether this conclusion is right. If the Court of Appeal decides in the borrowers' favour, it may open up further avenues of claim for those agreements which "completed" before 6 April 2008.
In the recent case of Qadir v Barclays Bank Plc  EWHC 1092, the High Court granted a bank's application to strike out a claim for mis-selling an interest rate hedging product (IRHP).
The bank sought to show that the claim was out of time and could not be extended using section 14A of the Limitation Act 1980. A claim in negligence is usually time barred six years after suffering loss. If the claimant has no knowledge of the claim until later, section 14A may allow a further three years to issue a claim.
The court held there was no real prospect of the claimants succeeding with their extended limitation case on the grounds that:
1. The claimants must have known "the essence of the claim" more than three years before they brought the claim. As this claim related to the suitability of the IRHP, the court said that the relevant "building blocks" of knowledge were that the IRHPs were loss making and that alternatives were available.
2 The Claimants had no real prospect of showing that the bank made "clear and unequivocal" representations that it would not rely on its right to raise a limitation defence.
This decision should be welcomed by all lenders who are engaged in mis-selling litigation across the range of investment products. It reiterated:
Time starts running on extended limitation when a claimant has knowledge, which would justify them investigating potential wrongdoing on the part of the lender (here, that was knowledge of the losses and the availability of alternatives).
Focus on Scotland
Reports of growth in financial and business services over the last three months painted a stronger and healthier picture for the Scottish economy going through 2016.
Research conducted in the sector showed that more firms expected growth in sales, business volumes and repeat business over the next six months.
Reports confirm that businesses in the Central Belt have seen the most improvement in turnover. However, businesses in the North-East have reported a decline, mainly due to the downturn in the oil and gas industry.
Additionally, exports have continued to prove challenging for businesses with little seeing any real growth in this area.
The Scottish Economy Secretary, Keith Brown, said "despite facing subdued global demand and the impact of the oil price on our offshore industry, Scotland's economy has proven resilient and continued to grow…across the world people are still choosing Scotland as a good place to do business, with record inward investment in 2015".
The Brexit vote may hinder the anticipated growth. To what extent remains to be seen.
The Land and Buildings Transaction Tax (LBTT) was introduced earlier this year to help first time buyers get on the property ladder. Since LBTT was introduced house sales in Scotland have increased by 11%.
Reports suggest that the tax has also contributed to a drop in house prices, with the average house now priced at around £170,667 (compared to £185,080 in April 2015).
Sale prices in Aberdeen and East Lothian have reportedly seen the biggest drop in sale prices, whereas sale prices in Midlothian and Falkirk have increased.
While the lower purchase tax is beneficial to first time buyers looking to join the property ladder this has come at a cost for property at the top end of the market which has become more expensive.
It appears first time buyers are currently the main beneficiary from the LBTT. The future impact of this tax on the rest of the market will unfold in due course.
Contributors: Louise McAlister, Heff Heathcote, Amy Difford, Ben Hanham, Nina Napier, Russell Kelsall, James Tithecott, Paul Barry, Mark Routley, Catherine Zakarias-Welch.
This publication is intended for general guidance and represents our understanding of the relevant law and practice as at June 2016. Specific advice should be sought for specific cases. For more information see our terms & conditions.