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Busy lenders' monthly round-up - March 2016

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 

Mortgages

  • Will the Mortgage Credit Directive (MCD) create "mortgage prisoners"?
  • Gross mortgage lending sees 30% year on year increase
  • Changes to the mortgage process in Scotland
  • Changes to the Mortgage and Home Finance: Conduct of Business sourcebook (MCOB) following the implementation of the Mortgage Credit Directive (MCD)

Economic outlook

  • European Central Bank (ECB) to ramp up quantitative easing programme
  • Budget fall out for the property market

Other news

  • Help to Buy or the Lifetime ISA?
  • Buy to let boom or bust
  • Challengers encourage help from the Chancellor
  • Recommendations made to tackle access barriers to consumer advice
  • Restoring faith in LIBOR
  • Credit card provider NewDay to provide over £4 million

Mortgages

Will the Mortgage Credit Directive (MCD) create "mortgage prisoners"?

In April 2014 the mortgage market suffered a jolt with tougher affordability assessments. This prevented a raft of borrowers from moving away from their existing lenders.

Lenders could avoid the new regulations, provided the borrower's mortgage balance did not increase.

The MCD (the majority of which was implemented on 21 March 2016) scrapped the transitional rules.

Brokers have commented they do not anticipate change in the market as a result of the MCD. It seems as though the majority of lenders were unwilling/unable to underwrite mortgages on the basis of the transitional rules in any event.

The majority of lenders are expected to continue to offer rate switches, without the need to assess affordability, as the MCD rules take hold. These products are, currently, only generally available directly. This is an interesting limitation, given the MCD's requirement for brokers to share responsibility for ensuring affordability.

With an ageing population, the issue of affordability into retirement will be ongoing. This sharpens the FCA's focus on aging borrowers, which is fast becoming one of the hotter topics in retail lending.

Gross mortgage lending sees 30% year on year increase

The UK mortgage market continues to grow, with gross lending reaching £17.6 billion in February – the greatest amount of cumulative lending for a February since 2008.

The Council of Mortgage Lenders (CML), who provides data on gross mortgage lending, observed this increase represents growth of 30% when benchmarked against February 2015. 

Mohammad Jamei, economist at the CML, points to a variety of factors underpinning growth in the mortgage market, including ‘solid’ market fundamentals, falling unemployment and growth in real-term wages. Competitive mortgage deals and Government schemes have added further buoyancy. 

There is further cause for encouragement as the Royal Institute of Chartered Surveyors has indicated there has been a "modest increase" in the number of properties coming onto the market, easing a recent lack of supply.

However, the good news is not unfettered as Jamei cautions, "the market has limited upside potential over the near term."

Changes to the mortgage process in Scotland

To assist in completion of the Land Register, the General Register of Sasine in Scotland closed to standard securities on 1 April 2016.

The change will affect those property owners still on the Sasines register.  This means those wishing to remortgage with a new lender, or looking to secure an additional loan on their existing property, will have to voluntarily register onto the Land Register, thereby triggering a first registration.

There will be considerable cost implications arising from this new rule.  Whilst the fee for voluntary registration has been waived, the legal costs involved in preparing first registrations will remain. This is likely to impact mortgage lenders, particularly those who offer fee free remortgages. These products are generally advanced without the borrower requiring legal representation. The lender's solicitors usually complete all the legal work, thus bearing the legal costs. The requirement of first registration means the lender will have to make a decision on who will bear this additional cost – the customer or the lender. 

The rule has been implemented to consolidate all registers into one for all land and property ownership in Scotland. This will provide clarity and allow a greater security of land ownership.

Changes to the Mortgage and Home Finance: Conduct of Business sourcebook (MCOB) following the implementation of the Mortgage Credit Directive (MCD)

The MCD was implemented by the UK on 21 March 2016, and seeks to harmonise regulation of mortgage markets across the EU. It mainly applies to credit agreements secured against residential property and covers both first and subsequent residential charge mortgages. 

Transposition has resulted in some key changes to the FCA's Mortgages and Home Finance Conduct of Business sourcebook (MCOB). Lenders should ensure they are aware of the following key changes:

Second Charge Mortgages

The MCD brings certain subsequent charge mortgages under MCOB which previously fell under the consumer credit regime. Further changes will take place in 2017 for first charges regulated by the Consumer Credit Act 1974.

Product Disclosure

Lenders must provide pre-contractual information to borrowers through a European Standardised Information Sheet (ESIS), which is designed to help consumers compare products. The ESIS replaces the current 'key-facts illustration' (KFI) which UK lenders are required to supply to customers, and will require lenders to update their systems and processes.

The content of the ESIS and KFI are similar, but the ESIS contains some additional information, such as an illustration of the impact of changes in exchange rates for foreign currency loans. 

The triggers for providing an ESIS are the same as for a KFI. At the latest, the ESIS must be provided at the time a binding offer is made.

UK lenders have until 21 March 2019 to use the ESIS. To take advantage of this, "top-up" disclosures must be provided with the KFI to cover the additional requirements within the MCD.

Pre-sale disclosure obligations

Lenders must provide an adequate explanation of the essential features of the product, any ancillary products and the impact on the consumer. These requirements should not require major changes to advised sales but will have a greater impact for execution-only sales. Firms must also make general information about mortgages available to consumers. This can be done by publication on their website.

Conditional and binding offers

The MCD requires lenders to make a binding, unconditional mortgage offer. This will be a new step for most lenders, who will commonly make conditional offers.

In practice, lenders can still make a conditional offer and carry out checks. Once due diligence has been completed, the offer must be made binding.

Reflection period

The binding offer triggers a compulsory seven day pre-sale reflection period, during which the consumer can reflect on whether to enter into the mortgage. The consumer can accept the offer at any point during the consideration period.

Annual Percentage Rate of Charge (ARPC)

For all loans, the APRC must now be disclosed in the ESIS.

Where the borrowing rate is variable, the MCD introduces an additional ARPC which must be provided to consumers in a representative example within the ESIS. If the borrowing rate tracks an external reference rate, the second ARPC must use a 20 year high of that reference rate. In other circumstances the FCA will set a benchmark rate for a firm to use.

Financial promotions and advertising

The FCA has used the implementation of the MCD to simplify and strengthen its rules on advertising and financial promotions.

The MCD introduces a requirement for firms to provide a full representative example of mortgage costs if their advertising mentions an interest rate or anything to do with the cost of the loan (such as the monthly amount).

Economic Outlook

European Central Bank (ECB) to ramp up quantitative easing programme

At the beginning of 2015, the ECB announced a programme of quantitative easing (QE), aimed at stimulating the Eurozone economy and preventing deflation. On 10 March 2016, the ECB announced it will increase the value of assets it purchases from €60 billion to €80 billion per month.

With a view to increasing banks' lending, the ECB will provide long-term funding to banks at low or negative interest rates. This will help offset the move further towards negative rates the ECB will pay on deposits (currently -0.4%).

The ECB will also extend its QE programme to purchase corporate bonds in addition to government bonds. It is hoped this will improve access to funding for businesses through the bond market.

The resulting lending stimulus, without squeezing banks’ profits, should be welcome news.

The QE programme is currently due to run until March 2017.

Budget fall out for the property market

The key points are:

Offshore developers targeted

  • The Finance Bill 2016 will require both resident and non-resident property developers to pay UK tax on profits derived from dealing in UK property.  HMRC will establish a task-force to target offshore developers.  The Treasury anticipates revenues of £2.28 billion by 2020.

Capital Gains tax (CGT) cut, with an exception

  • CGT rates have been slashed, the higher rate from 28% to 20% and the basic rate from 18% to 10%. 
  • These new, lower rates, will not apply to gains derived from residential investment property.  However, those disposing of investment in residential property funds will benefit from the new rates.

Buy-to-let (BTL) stamp duty increase

  • Notwithstanding rumours the Chancellor would abandon or, at the very least, dilute the intended 3% surcharge on stamp duty rates for BTL properties, this went ahead as planned.
  • In addition, the proposed exemption for significant investors, purchasing 15 or more properties at once, was scrapped.

Commercial stamp duty reform

  • Stamp duty on commercial property will be brought into line with the residential property system.  The "income tax" based model means stamp duty rates will only apply to the portion of the property price falling into the applicable bands i.e. purchasers will pay 0% on the first £125,000 of the purchase price, 2% on the next £150,000 and 5% on the remainder. 
  • The highest bracket has been increased and the lower bracket cut.  The Treasury anticipates an additional £2.59 billion by 2020, with only 9% of purchasers paying increased tax. 

Help for home building

  • The government has pledged to relax the planning regime and clarify the law on compulsory purchase orders. This will enable local authorities to build new homes.  
  • Financial support will be provided for the establishment of "garden villages" (1,500 to 10,000 homes) on the outskirts of urban areas.
  • Investment in low cost social housing
  • £100 million will be invested in low cost, second-stage accommodation for the homeless and those moving on from hostels/refuges.

Other news

Help to Buy or the Lifetime ISA (LISA)?

The Chancellor's new LISA, which will come into force next April, has two purposes. Firstly, to assist first time buyers to save for ownership deposit (the same purpose as the Help to buy ISA). Secondly, the ISA may be used in retirement.  

For every £4 invested in a LISA, the government will contribute £1.  The maximum investment of £4,000 per year would result in the state contributing £1,000. The LISA is limited to one person aged between 18 and 40, so two first time buyers buying together can each receive the bonus. In a five year period, two people saving for their first home together could supplement their savings by up to £10,000. 

Whilst it is not impossible to beat the return (data shows investment in the UK stock market provides an average return of 5%), the LISA eradicates market risk and the additional 25% government bonus makes it potentially attractive. Savers will also be able to contribute the remainder of their allowance (£16,000 from April 2017) in other ISAs.  

In addition, the LISA offers increased flexibility as it can be applied to purchases up to £450,000, whereas the Help to buy ISA is restricted to purchases of £450,000 in London and £250,000 elsewhere.

One downside is the 5% exit fee, applied if the LISA is not used for either of the intended purposes (home ownership or retirement).  

By comparison, the maximum you can save in a Help to buy ISA is £2,400 per year (£3,400 in the first year). For every £200 (the maximum monthly investment) saved into a Help to buy ISA, the government will contribute £50. However, the state's contribution is limited to £3,000. Consequently, the maximum annual bonus is £850, compared with the LISA's £1,000. 

However, unlike the LISA, there are no exit fees if the savings are not put towards a first home.

Housing demand already outstrips supply in many parts of the UK, so this initiative could exacerbate this. The Help to Buy ISA is considered to have increased house prices. It is thought the LISA could increase house prices by 0.3%. Given the average house price last month was £190,275 (according the Land Registry), a 0.3% increase would only add an additional £570.83. For the moment, it appears as though the LISA bonus will exceed any house price rises it causes.

Buy-to-Let boom or bust? 

The most recent Budget has, amongst other things, been referred to as an "outright assault" on the buy-to-let (BTL) sector. All non-corporate buyers of additional residential property, beyond a main residence, are now subject to significant increases to stamp duty. 

To compound this, from 2017, there will be limits to mortgage interest tax relief, meaning property developers/investors face increasing costs.  Is this the end of the BTL market as we know it? Many commentators think not. 

Long term investment in the sector should remain attractive, as the revenues and capital gains ought still to outweigh the additional costs. The impact of sustained demand for property and a well documented lack of supply, will also work to maintain momentum.  

So what of the boom? The Council of Mortgage Lenders recorded an eight year high in mortgage borrowing for February 2016, topping £17.6billion. However, this is underpinned, not only by changes to stamp duty and tax relief, but also rising wages, the availability of more competitive mortgage products, as well as the age-old interplay between supply and demand. 

That being said, the general consensus is BTL activity will fall after 1 April 2016. Some see this as a catalyst for banks to adapt their products in the BTL sector. Investors could increase use of special purpose vehicles (ie the use of registered companies specifically for the purpose of buying property).

Scanning the horizon, the Bank of England's Financial Policy Committee remains vigilant and continues to review borrowing limits within the BTL market. This will, inevitably, be a challenge to lenders when trying to create competitive mortgage products.

Challengers encourage help from the Chancellor  

Smaller lenders are looking to the Chancellor to help promote competition in the banking sector.

The 2016 Budget contained a welcome development for challenger banks, with confirmation the Government will “pursue more proportionate capital requirements for small banks and building societies in the European Union”. 

Competitor banks have argued the current capital adequacy regime, which applies to both small and large banks alike, is unfairly prohibitive to smaller lenders.

“It was good to hear George Osborne saying he would push Europe for a more proportionate treatment for the capital required for smaller banks,” said Paul Lynam, chief executive of Secure Trust Bank.

This news follows remarks in January by Andrew Bailey, chief executive of the Prudential Regulatory Authority, who said the regulator is “very focused” on helping challenger banks manage onerous capital adequacy requirements.  

Following the divestiture of TSB from Lloyds Banking Group, the anticipation of the Williams & Glyn spin-out from the Royal Bank of Scotland, and with the Competition and Market Authority’s ongoing investigation into the retail banking sector, focus is sure to remain on challengers’ ability to get a foothold in the market.

Recommendations made to tackle access barriers to consumer advice

On 14 March 2016 the HM Treasury and FCA published the final report on the Financial Advice Market Review (FAMR). The aim of the report is to improve the affordability and access to advice and guidance to people at all stages of their lives.

The recommendations are, in part, directed at the FCA, but some are directed towards service providers and consumers, and focus on three key areas:

Affordability

The recommendations outline provisions for making advice to the mass market more cost effective and include:

Allowing firms to develop more streamlined advisory services.

  • The FCA setting up a dedicated team to help firms develop large scale automated advice mode.
  • Supporting firms developing guidance services that help consumers make their own investment decisions. 

Accessibility

Consumer engagement and lack of demand were seen to be holding back the development of the advice market. In order to tackle this, the following provisions have been recommended:

  • Steps to help consumers, and those who advise them, to access their own information more easily.
  • Develop nudges to encourage consumers to seek support at key stages, such as retirement.

Liability and consumer redress

Many advisers have concerns about future liability, preventing them from providing advice.

Recognising this, and the need to maintain consumer confidence and provide access to redress, the report outlines the following provisions:

  • A review of the Financial Services Compensation Scheme to provide greater certainty for advisers. Suggestions include risk-based levies and reforming funding classes.
  • An increase in clarity and transparency on how the Financial Ombudsman Service deals with consumer complaints.
  • A provision for a long stop date of 15 years for financial advice has been decided against.  If was felt this was not in the interest of consumers, given the risks which arise with long-term products.

The report also calls for an amendment to legislation to narrow the definition of regulated advice, so it is based on personal recommendation. This would create a single definition for regulated financial advice and remove some of the barriers to providing guidance services.

Will these measures remove barriers to financial advice? Will lenders re-build their advisory team? We will have to wait and see.

Restoring the faith in LIBOR

The misconduct affecting LIBOR in the past has been well documented. Since then, significant measures have been put in place to restore the integrity of the benchmark. 

One such measure is the consultation undertaken by ICE Benchmark Administration Ltd (IBA) and the subsequent publication of the roadmap on 18 March 2016. 

The roadmap sets out reforms to reduce the risk profile of LIBOR, including:

  • Implementation of a uniform submission methodology for LIBOR panel banks. Including, the incorporation of transaction data to the greatest extent possible and a waterfall of methodologies (consisting of three levels: transactions, transaction derived data and expert judgement). 
  • Publishing a single, clear, comprehensive and robust LIBOR definition.
  • Implementation of a construct to ensure LIBOR can adapt to changing market conditions with appropriate consideration for the interests of stakeholders. One such consideration is that LIBOR is published every day, IBA commits to doing this.
  • Conducting a feasibility study of further evolving LIBOR to a centralised calculation using an appropriate algorithm to enable banks to provide raw transaction data to IBA, which would be used to calculate LIBOR. This is to reduce the need for subjective decisions and expert judgment by panel banks and reduce the cost and responsibility in submitting to LIBOR.

It is believed the above measures will make it more difficult to manipulate LIBOR. This will, hopefully, reduce the risk to panel banks and attract more banks to the panel. 

Whether the above measures will restore the faith in LIBOR, reduce the risk to panel banks and increase participation in the panel remains to be seen.

Credit card provider NewDay to provide over £4 million in redress to 3% of its customers

The credit card provider, NewDay, has announced it will refund over £4 million to 3% of its customers. The announcement follows disclosures made by NewDay to the Financial Conduct Authority (FCA) showing NewDay had imposed unfair charges.

In 2014, ahead of the FCA's Mortgage Market Review, NewDay conducted an independent business review looking at the fairness of its charging model.  In some circumstances, default fees and other charges triggered unfair additional charges for consumers. For example, customers could incur additional fees as a result of delays in posting transactions.

NewDay disclosed this to the FCA and have proposed to make a series of changes to their charging model. As well as providing financial redress to affected customers, these changes include the removal of some circumstances in which default fees may be charged, and setting up tailored alerts to enable customers to make prompt payments. NewDay will be writing to affected customers within the next three months and in most cases customers will receive a credit on their account. The scheme will not cover customers who were charged before 1 April 2014, but any complaints made relating to events prior to this date will be considered on a case-by-case basis. NewDay will also be taking steps to contact historic customers.

The FCA has welcomed NewDay's approach and encouraged other firms to follow similar initiatives if they identify unfair overcharging policies.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at April 2016. Specific advice should be sought for specific cases. For more information see our terms & conditions.

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