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:
Brexit - property update
Focus on Scotland
Focus on Northern Ireland
Banks and building societies are cutting the length of time a home valuation report is valid. Kent Reliance was the first lender to do so. On 1 September it reduced its limit from six to four months, with other lenders likely to follow.
Kent Reliance's new rule will mean that some buyers may have to pay an additional £140 to £3,725 for a new valuation if their purchase is delayed.
The reason for the reduction is that lenders fear a sudden dip in property values, which could be Brexit related. Since the referendum, prices have remained steady, but RICS has warned that valuations could be less accurate if prices move quickly. Lenders do not want to be caught out lending too much for a property worth less a short time later. With the UK yet to trigger Article 50 (although the Prime Minister, Theresa May, has now indicated that this will happen in March next year), the full consequences and implications of Brexit are yet to be known. There is a risk to lenders that the market could change quickly depending on how Brexit unfolds.
In a landmark case which shone a light on the responsibility of auditors to detect fraud, PwC, the world's largest professional services firm by revenue, has recently agreed an out of court settlement in relation to one of the biggest bank collapses in history. Whilst the case itself related to operations in the US, the potential impact is global.
PwC was accused of failing to identify a multi-billion dollar conspiracy between executives at Taylor Bean & Whitaker (TBW), a now defunct mortgage lender, and their counterparts at Colonial Bank (CB), a lender operating on the wholesale market and which made loans available to TBW.
As part of the audit process, PwC gave CB's parent a clean audit opinion for six years, until it collapsed in 2009. At the point of its collapse, however, it was revealed that significant portions of the loans made to TBW were in fact secured against assets that simply did not exist.
With the above fraud now in the spotlight, the bankruptcy trustee of TBW claimed $5.5billion from PwC, plus punitive damages, for their negligence in failing to identify and report on the fraud that had taken place, making it the biggest accounting negligence claim in history to go to trial. This settlement came four weeks into that trial.
The claim is that PwC was in a position to identify, and ought to have identified, the fraud at an early stage, but that it negligently missed a variety of warning signs. However, PwC contended that well-organised, sophisticated and determined fraud went beyond the scope of what any auditor could reasonably detect.
The case highlights that, whilst regular audits are a helpful and necessary safety net, there must be additional checks and balances in place, as audits alone are not infallible. However, where audits take place and fail to identify issues that subsequently come to light, this case emphasises that the duty of care owed by those auditors can give rise to substantial recoveries, if pursued.
With banking relationships becoming increasingly remote and reliant upon technology, lenders are exposed to ever-evolving and increasing risk of fraud. To illustrate this, the Financial Ombudsman Service (FOS) estimates that in the last financial year alone, £775 million was lost to financial fraud.
Lenders are now finding themselves under increased regulatory and press scrutiny due to recent key developments:
There is a clear message that lenders will need to make every effort to prevent fraud claims from reaching a level which concerns the FCA and PRA, as consumer protection continues to strengthen.
Evidently, lenders will want to focus efforts on reviewing the suitability of existing systems and policies. Lenders also appear less content to write off debts resulting from frauds and are taking civil action to recover monies. Such action can mitigate a lender's losses and, importantly, serve as a deterrent to fraudsters.
On 30 September 2016 the Credit Services Association introduced its new Trace Code of Conduct and Principles of Trace. This code introduces more detailed standards expected of its members who carry out trace activities. This includes general conduct, such as:
The purpose of the new code is to reduce trace-related complaints (for instance due to mis-traces) and the promotion of best practice. There is an expectation on those instructing trace agents to provide as much relevant information as possible and for that information to be accurate.
In the April edition of this newsletter we reported on the government’s plans to privatise the Land Registry. These plans were widely criticised and a number of petitions were set up to prevent the privatisation. A particular concern was whether privatisation would devalue the state guarantee of title and lead to a loss of confidence in the housing market. Campaigners against the privatisation also pointed out that the Land Registry was fully funded by fees it generates and requires no contribution from taxpayers. As such, the only reason to sell would be to obtain a capital receipt for a service which was performing well.
The framework for Land Registry privatisation was supposed to be contained within the Neighbourhood Planning and Infrastructure Bill. However, a renamed Neighbourhood Planning Bill was introduced into parliament on 14 September 2016. There were no provisions in this new bill regarding Land Registry privatisation. This suggests that privatisation has fallen off the political agenda for the time being. This may be partly the result of Brexit, a change of leadership within the government as well as the severe criticisms the privatisation plans have generated.
It has been reported that the government is re-considering the position and no decision has yet been made on the Land Registry’s future. This is a familiar situation – the coalition government had similar privatisation plans back in 2014 which were also shelved. It seems unlikely that this will be the end of the topic. The government may raise the issue again in the future as a measure to help reduce the national debt.
Last month, the Welsh Assembly introduced the Land Transaction Tax and Anti-avoidance of Devolved Taxes (Wales) Bill. This is the second of three bills to establish new tax arrangements which apply only to Wales.
Stamp duty land tax is a tax which is levied against the purchase price of land in England and Wales. Scotland opted out of the stamp duty regime in 2015 replacing it with a Scottish equivalent called Land and Buildings Transaction Tax. Like Scotland, the Welsh Assembly wants to replace stamp duty with a Welsh only tax regime.
The new Welsh Land Transaction Tax (LTT) is expected to closely mirror the stamp duty scheme. The LTT is expected to be in place for April 2018. The exact rates will be set closer to this implementation date to reflect economic conditions at that time. The LTT will also contain provisions to prevent any artificial tax avoidance measures. This will be much stricter than English law and will be more akin to the Scottish system.
Whilst lenders will not need to make any changes to their CML handbook part 2 responses in respect of the new tax, the wording in the handbook will need to be revised slightly.
This new tax does mark an increasing trend whereby English and Welsh law are diverging. There are now a number of Welsh only laws which apply to housing in Wales. These include the Housing (Wales) Act 2014, which requires a system of regulation for landlords and letting agents operating within Wales, and the Renting Homes (Wales) Act 2016, which aims to simplify rent properties within Wales. Given these developments it is questionable how much longer Welsh law can be seen as an extension of English law rather than a jurisdiction in its own right. Further divergence may lead to a new Welsh version of the CML handbook to ensure application of Welsh law to transactions involving new Welsh mortgages.
The Homelessness Reduction Bill (Bill) was introduced into parliament as a private member bill on 29 June 2016. The parliamentary debate is scheduled for 28 October 2016.
One provision in the bill seeks to amend the definition of "homeless". At present tenants are not considered homeless until they are evicted. This means that tenants cannot get support from the Local Authority until they are physically evicted from the tenanted property.
If the bill is passed, local councils will have to accept a valid section 21 notice as evidence of homelessness. Tenants will benefit as they will be eligible for re-housing before they have been evicted. Landlords will benefit by avoiding the cost of court action against tenants who have not vacated after their tenancy has ended. The National Landlord Association suggests that this change will save landlords an average of £6,763 in lost rent and legal fees.
This change will be of interest to receivers and lenders involved in the buy-to-let market, particularly when the lender or receiver is seeking to gain possession of the property.
With owner occupied properties customers often need possession proceedings taken against them to qualify for housing support from their Local Authority. This makes it less attractive for customers to voluntarily surrender properties when they can no longer afford the mortgage payments. Unfortunately, there is nothing in the Bill which extends the same protection to owner occupiers and, as such, possession orders will still be required.
Landlords could once claim tax relief on mortgage interest at the rate they pay income tax, so higher rate taxpayers could claim up to 45% relief. However, that is being reduced to a maximum of 20% by 2020, meaning some landlords will have to find extra money each month to cover mortgage costs. As a result, they are setting up companies and then selling the property to that company. The company can then claim the costs of running the property as an allowable expense, writing off the cost of items such as mortgage payments, wear and tear, maintenance and letting agents' fees.
The company will still have to pay corporation tax on taxable profits, at the rate of 20%, but this will fall to 18% by 2020.
There are of course disadvantages in selling to a company - the seller may have to pay capital gains tax if there is a profit and may be subject to early redemption penalties in their mortgage. In addition, the purchasing company will also have to pay stamp duty (including the 3% surcharge for buy-to-let purchases). However, for many landlords, the long-term tax savings will outweigh these initial charges. Steve Olejnik, a broker from Mortgages for Business, recently said corporate purchasers now account for 63% of all buy-to-let applications that they see. As the tax changes are phased in, this trend is likely to continue and increase.
In recent years it has been common practice for high street banks to offer a flagship current account which attracts a wide range of benefits, albeit for a modest monthly fee.
However, with interest rates now at a 300 year low, the profitability and commerciality of these accounts for the banks has been thrust into sharp focus.
Looking forward, with central banking policies now being passed on directly to customers, high street lenders may have to find ever more creative ways to attract and retain new customers. However, the danger is that this may lead to an increased tolerance of risk in an effort to remain competitive in an increasingly diverse market.
Peer-to-peer lending platform Zopa is embarking on its first securitisation of loans originated through its online platform. The loans forming part of the securitisation total £138 million and were initially funded by P2P Global Investments.
The securitisation portfolio comprises over 27,000 unsecured consumer loans to private borrowers within the UK and was arranged by Deutsche Bank AG. It is understood that these loans mainly relate to car finance, debt consolidation and home improvements, with a maximum loan term of five years. The securitisation was led by P2PGI, a UK listed investment trust which invests in loans originated via market place platforms.
Four classes of notes have been rated. The £114 million most senior tranche of Class A notes have been given a provisional rating of Aa3 by Moody's and AA by Fitch. Fitch's rating is the highest it has assigned to a marketplace lending transaction.
This securitisation follows in the wake of the first European marketplace lending securitisation earlier this year by Funding Circle. Funding Circle's £130 million securitisation was also rated Aa3 by Moody's, although it was not rated by Fitch. The loans in that securitisation were made to small and medium sized British enterprises and were originated by KLS Diversified Asset Management LP, a US asset manager.
A family run fruit farm, Newmafruit Farms Limited (Newmafruit), made a series of loans to a property developer, Mr Pither and associated companies. The loans remained unpaid and Newmafruit applied for summary judgment to dispose of the case without going to a full trial.
On 9 September 2016, the High Court handed down judgment (in the context of a summary judgment application) in Newmafruit Farms Limited & Others v Alan Pither & Others  EWHC 205 (QB) on an important issue: whether occasional lending by a fruit farm needed authorisation from the FCA under the Financial Services and Markets Act 2000 (FSMA).
Mr Pither argued that the loans were "regulated credit agreements". He claimed these were unenforceable as Newmafruit loaned monies by way of business without a licence from the (now abolished) OFT under the Consumer Credit Act 1974 (CCA) and without authorisation from the FCA. Mr Pither also argued the loans were unenforceable as Newmafruit failed to comply with sections 55, 61 and 65 of the CCA (if they were regulated credit agreements).
Did Newmafruit need an OFT licence or FCA authorisation?
The court decided some loans "were or arguably were lent pursuant to regulated agreements". The Court therefore needed to decide whether Newmafruit was carrying on by way of business the activity of exercising, or having the right to exercise, lender's rights and duties under a regulated agreement.
After applying Lord Neuberger MR's reasoning in Helden v Strathmore Limited , the Court decided that all Mr Pither had to do was show Newmafruit was carrying on the activity "by way of business". This broader test applied because the activity of exercising, or having the right to exercise, lender's rights and duties under a regulated credit agreement was not one of the activities specifically mentioned under the Financial Services and Markets Act 2000 (Carrying on Regulated Activities by Way of Business Order) 2001.
Were the regulated agreements unenforceable because of non-compliance with CCA?
The parties agreed that Newmafuit did not comply (for the regulated credit agreements) with Sections 55, 61 and 65 of the CCA. Those agreements were therefore unenforceable without the Court's permission under section 127(1) of the CCA. Newmafruit argued it was "obvious" that the Court would make an enforcement order under section 127(1). The Court did not agree: it decided that it could not "form a clear view on either the prejudice caused to Mr Pither by enforcement or the degree of culpability on Newmafruit's part for the various contraventions of the regulations" on an application for summary judgment.
What are the implications for occasional lenders?
It is often considered that lending by non-financial services firms is not caught by consumer credit provisions but, as this decision shows, such a bold assumption is clearly wrong. The Court specifically accepted that even those lending on an occasional or one-off basis, without a regular pattern or frequency, may breach the general prohibition in FSMA. If they do, the agreement may be unenforceable against the borrower and they may commit a criminal offence.
The Court's decision that it could not consider Newmafruit's application for an enforcement order at the summary judgment hearing is somewhat curious. There is a presumption an enforcement order should be made unless, and only unless, it is just to refuse an application having regard to:
the prejudice "caused to any person by the contravention in question, and the degree of culpability for it"; and
the powers given to the court under sections 127(2), 135 and 136.
The burden is on the borrower to prove prejudice. The Court did not appear to engage in these issues. If it had, it could have decided those issues now rather than deciding they raised a triable issue.
It is still early to quantify what impact Brexit has really had on the property market in the UK, with hard economic data only starting to come through. Nevertheless, figures reported last week by the Council of Mortgage Lenders (CML) suggests that confidence continues to improve in the market after the initial shock of the EU referendum result.
The CML has estimated that mortgage lending for August 2016 reached £22.5 billion. This is a 7% increase on July's lending figures. The year on year lending has also risen to its highest level since 2007. As the CML's senior economist Mohammed Jamei comments:
"Widely voiced fears in recent months about the housing market have proved to be wide of the mark. Prospects for house purchase activity post-referendum look slightly subdued, when compared to late 2015 and early 2016. However, sentiment in the market recovered in August. This is reflected in stronger-than-expected transaction figures, and in our gross lending estimate."
The position is therefore more positive than was first feared, although the CML cautions that the relatively low number of properties on the market is a concern because it may lead to a reduction in the number of transactions.
The Financial Conduct Authority (FCA) has agreed payday lender, CFO Lending Limited (CFO), will pay £34 million of redress to customers following "unfair" lending practices.
Almost 100,000 customers are understood to be affected by what the FCA described as "serious failings", in what is the latest of a series of adverse findings relating to payday lenders.
The issues identified were:
Balance restatement – due to IT system errors, some customer balances could not be relied upon.
Misuse of banking information – CFO acquired card details from customers with an outstanding balance and then used these details to collect overdue payments without fully explaining this to customers.
Excessive use of continuous payment authority – at times payments were taken when it may reasonably have been believed a customer was in financial difficulty.
Mishandling of complaints – CFO complaints handling fell below the required regulatory standard. In particular, at times, CFO failed to deal appropriately with vulnerable customers and those alleging fraud.
Misleading and threatening communications – relating to some collections activity.
Inaccurate reporting to credit reference agencies – at times including overstating overdue balances and failing to report cleared balances.
Interest rates on rollovers – interest rates were charged at prevailing market rates rather than the rate specified in the consumer credit agreement.
Periodic statements not provided – under the Consumer Credit Act 1974, a borrower under a fixed-sum credit agreement should be given a periodic statement. If it is not given in time, during the period of non-compliance: (a) the agreement is unenforceable; and (b) the borrower has no responsibility to pay interest and fees.
CFO, which also traded as Payday First, Flexible First, Money Resolve, Paycfo, Payday Advance and Payday Credit, has been banned from offering new lending and must contact all affected customers before March 2017.
The Scottish Government has launched a consultation on civil court fees, in line with its commitment to ensuring a fully funded civil justice system. It wants to ensure that, “the courts are funded to deliver a civil justice system that is accessible, affordable and which provides a high quality service to those who have cause to use it.”
Successive governments have wanted full-cost recovery, whereby 100% of the costs of the civil justice system are met by fees paid by litigants. The Scottish Government is therefore proposing to raise court fees. The two proposed options are:
a flat rise of 24% in all court fees; or
a targeted increase across a number of key fees.
The consultation is open until 12 October 2016. The Scottish Government aims to introduce a new table of fees by 28 November 2016. This will coincide with the introduction of the new ‘Simple Procedure’ for claims of up to £5,000 in the Sheriff Court.
The Scottish Government goes on to say in its consultation paper that:
“Opportunities to be further explored would be to offer discounts for on-line submission of court documents and a simpler structure of single ‘front-loaded‘ fees to replace a complex system of staged, small fees being triggered throughout a case.”
The Scottish Government’s plans have been criticised by some members of the legal profession in Scotland, citing the creation of possible barriers to justice which would result from the proposed increases. It remains to be seen what changes, if any, will be made to civil court fees; and its subsequent effect on court business.
One possible positive consequence would be the reduction of speculative and/or unsubstantiated claims. An increase in fees could lead to parties taking a more commercial view on earlier settlements.
The Credit Unions and Co-operative and Community Benefit Societies Act (Northern Ireland) 2016 (Act) recently came into force.
The Act updates the Industrial and Provident Societies Act (NI) 1969 and seeks to put industrial and provident societies (registered societies), the most common example being housing associations, on a more equal footing with other forms of business.
The Act permits greater operational flexibility and Ed Mayo, the General Secretary of Co-operatives UK, welcomed the Act. He advised it would "make it easier for people running co-operatives … and provide new opportunities for innovation and growth".
Significant changes include:
The Act also includes provisions about credit unions in Northern Ireland and, in keeping with reforms already introduced in Great Britain, credit unions now have the ability to open accounts for corporate members. This includes partnerships and unincorporated associations such as sports clubs.