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Busy lenders' monthly round-up - February 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

  • Support for Mortgage Interest – rule changes
  • Three key ways lenders enable family and friends to assist first time buyers
  • London Help to Buy scheme launches

Economic outlook

  • Would Brexit impact on house prices?

News

  • Bank regulation less strict than anticipated
  • Has Help to Buy eased or worsened the housing crisis?
  • Foundations for compliance with the Individual Conduct Rules
  • Legal advice privilege and regulatory investigations
  • Supporting the aging population
  • Importance of limitation in financial claims
  • Supreme Court decision helps lenders who lose their security
  • Banks and police task force to tackle fraud
  • Northern Ireland: Slipping through the property ladder

Mortages

Support for Mortgage Interest – rule changes

Revised rules relating to Support for Mortgage Interest (SMI) come into force on 1 April 2016. The waiting period before SMI is paid has increased from 13 weeks to 39 weeks.

For someone who submitted a claim for this benefit before 31 March 2016, the 13 week period will continue to apply. The waiting period only applies to working age claimants.

The Mortgage Possession Pre-Action Protocol (MPAP) provides that a lender must not consider starting a possession claim for mortgage arrears where:

  • the borrower can demonstrate that they have submitted a claim to the Department for Work and Pensions (DWP) for SMI or Universal Credit;
  • have provided all the evidence required to process a claim, and;
  • have a reasonable expectation of eligibility for payment from the DWP, an insurer, support from the local authority, welfare, or charitable organisation (such as the Veterans Welfare Scheme or Royal British Legion).

Under the pre-April regime, if the customer was engaged, many lenders would postpone the start of a possession claim, in the knowledge that SMI would be payable within 13 weeks to a qualifying applicant.

With the period now 39 weeks, lenders should  consider each case individually. However, there will be circumstances where it is not a good customer outcome to postpone possession proceedings and allow 8-9 months of arrears to accumulate.

Under the MPAP, lenders must notify customers of the reasons why proceedings are not being postponed. Also, the MPAP checklist requires an explanation as to why proceedings are being taken where SMI has been applied for. The attitude of the Courts in ‘SMI pending’ cases will be interesting, and their approach may well depend upon how far into the 39 week period the claim is.

Lenders should be considering now their approach to dealing with these cases, particularly where it may be many months before the DWP decision is made.

Further changes to SMI are planned with the intention for it to become a loan secured against the property, as opposed to a benefit. We will report further on this as the proposals become clearer.

Three key ways lenders enable family and friends to assist first time buyers

With no one clear solution to the difficulties facing first time buyers, lenders have taken innovative steps to provide options to non/low deposit holders:

Savings:

  • Barclays' Family Springboard mortgage requires a deposit of just 5%, provided that the borrower's family members invest a further 10% in a linked savings account for three years.
  • Provided the borrower pays the mortgage for three years, the savings can be withdrawn, plus interest at 1.5% above the Bank of England's base rate. Conversely, if the borrower defaults, the lender has the option to extend the three year period or in the case of repossession, retain the balance on the account.

Offsetting:

  • Yorkshire Building Society is prepared to accept lower monthly repayments in return for family investment in up to three linked accounts.
  • Whilst the investment does not earn interest, it is deducted from the balance on the mortgage account before the level of the repayments are calculated. The current rate available is 3.88%.

Guarantors:

  • Whilst the popularity of this product has decreased over recent years, it remains available.
  • Family members are able to apply the equity in their own homes and their income to guarantee new borrower’s repayments.
  • For example, Aldermore Bank is prepared to lend up to 100% of the purchase price, pending receipt of a satisfactory guarantee. However, the product is expensive - interest is at 5.48% and fees of £1,000 are applied.

London Help to Buy scheme launches

On 1 February 2016, the government’s London Help to Buy scheme came into force to assist buyers in the capital purchase a property up to the price of £600,000.

For buyers with a 5% deposit the scheme provides a 40% equity loan, interest free, for the first five years. After that, there is a fee of 1.75%, rising annually by the increase (if any) in the Retail Price Index (RPI) plus 1%. This fee is on top of the monthly mortgage repayment that makes up the remaining 55% of the purchase price.

Eligibility criteria include:

  • first time buyers or homeowners looking to move (sub-letting is not permitted);
  • the property must be the applicant’s only residence;
  • the property has to be a new build, and advertised as Help to Buy, by a Help to Buy registered developer (most of the big name developers have signed up);
  • the property must be located within one of London’s 32 boroughs; and
  • the first charge mortgage must be from a qualifying lending institution. Aldermore, Bank of Scotland, Barclays, Halifax, Leeds, Lloyds, Nationwide, Natwest, Royal Bank of Scotland and Teachers will offer London Help to Buy. The government expects other lenders to join soon.

The government loan is repayable when the property is sold, at the same percent as the loan is provided.

Economic outlook

Would Brexit impact on house prices?

The date for the In/Out EU referendum has been set for 23 June 2016. So, what impact would Brexit have on the UK’s housing market?

Following a survey of over 1,000 homeowners, online estate agent eMoov found that 21% anticipated that Brexit would decrease the value of their property. Similarly, KPMG found that 66% of real estate experts believe that Britain's departure from the EU would lead to a significant reduction in overseas investment in the UK property market.

eMoov has speculated that whilst leaving the EU may not have a direct impact on UK House prices, the risk of uncertain economic times following a decision to leave may have a detrimental impact on the market. This concern is borne out by the stuttering periods that the market goes through in the build-up to a general election, when government policy is at its most difficult to predict.

Estate agent Winkworth has noted that whilst there may be more formalities for British investors in European property markets, the UK's investment has traditionally proved too valuable to ignore and so an EU exit is unlikely to have a material impact on investment flowing out of the country.

News

Bank regulation less strict than anticipated

The Bank of England's Financial Policy Committee (FPC) faces the challenge of setting the equity buffer for the UK's major high street banks.

The FPC's aim must be to strike a balance between the paper thin buffer that provided negligible protection in 2008, and a swing too far towards the conservative, tying excessive resource into the buffer unnecessarily.

International standards are extremely liberal, requiring banks to retain an equity buffer of just 3.3%, providing very little margin for error. In 2011, the Independent Commission on Banking recommended substantially stronger standards for UK banks.

Historically, banks and their regulators have only discussed this issue in high level terms. However, in December Bank of England Governor Mark Carney gave an indication that the equity buffer is likely to be set, "a little above the basic international standards".

Commentators have speculated that the FPC may consider today's more diverse suite of regulatory controls to provide increased protection to the banking sector, taking the pressure off of the equity buffer and reducing its importance. However, they have raised questions regarding the FPC's reliance on the banks' contingency modelling and called for our central bankers to take a conservative approach to this regulatory lynch pin.

Whether this commentary will translate into pressure on the FPC to review the position remains to be seen. However, the decision does indicate that the Bank of England may be prepared to take a more relaxed position on regulation going forward.

Has Help to Buy eased or worsened the housing crisis?

In 2013, the Office for Budget Responsibility warned that the Help to Buy scheme might drive up house prices across the UK, exacerbating, rather than assisting, the housing crisis.

Fast forward to the present day and the Department for Communities and Local Government has published an independent evaluation.  The report concludes that the Help to Buy scheme has:

  • helped tens of thousands of people get on the housing ladder;
  • resulted in more homes being built; and
  • has not contributed materially to increasing house prices.

That said, the evaluation only covers the State's contribution towards first-time-buyers' deposits to purchase newly built houses. It does not deal with second element of the scheme that guarantees mortgage payments for borrowers providing a 5% deposit. There do not appear to be any plans to evaluate the second element of the scheme.

Experts consider that Help to Buy has in fact contributed to rising house prices. Looking at the data provided, housing charity Shelter has concluded that if a 1% increase in mortgage credit leads to a 0.36% increases in house prices, then Help to Buy has assisted in pushing house prices up by 3%, over the last three years.

Given the apparent pros and cons of the scheme, and with its success hanging in the balance, sceptics are starting to ask whether the £6 billion spent on the scheme could have been more appropriately spent elsewhere. They are calling for a longer term solution to the housing supply crisis, which they say cannot be even marginally reduced by government grants alone.

Foundations for compliance with the Individual Conduct Rules

On 1 February 2016, the Chartered Banker Professional Standards Board published revised versions of its 2011 Code of Professional Conduct (the Code) and Foundation Standard for Professional Bankers (the Foundation Standard).

The Code sets out the ethical and professional values, attitudes and behaviours expected of bankers. It has been revised to be consistent with the terminology in the FCA Individual Conduct Rules. The amendments exceed regulatory requirements and set out how individuals should follow best practice to ensure they are maintaining the appropriate standards of conduct.

The Foundation Standard sets out the basic professional conduct and professional expertise requirements for all those working in the banking industry. Gaining a professional standard is not a one off achievement, but is re-validated on an annual basis. The revised Foundation Standard replaces the previous version published in July 2012 and ensures the Code is applied on a day to day basis.

Individuals subject to either the Senior Management Regime or the Certification Regime will be subject to the Conduct Rules from 7 March 2016. Firms will have a further year to prepare for the wider application of the Individual Conduct Rules to other staff.

Legal advice privilege and regulatory investigations

There have been a number of decisions in relation to disclosure of documents pertaining to regulatory investigations in the case of Property Alliance Group Limited v The Royal Bank of Scotland PLC [2015]. We focus on the decision in November 2015, which extended legal advice privilege.

The underlying claim was in relation to the sale of interest rate hedging products, which used three month GBP LIBOR as a reference rate. The November 2015 decision was in relation to the disclosure of internal reports, reviews and summaries relating to the allegation of LIBOR misconduct. An order for inspection by the Court was made in order to establish whether RBS' claim to legal advice privilege had been correctly applied.

It was held that legal advice privilege may be extended to factual information provided for the object of seeking and giving legal advice, despite the fact the documents did not exclusively contain legal advice. Importantly, the Court rejected the argument  that part of the documents would not be privileged, as the remit of the committee (set up by RBS to conduct the internal review) was wider than simply receiving legal advice. All documents forming part of the continuum of communications between lawyer and client for obtaining legal advice would be privileged, provided they were for the object of seeking and giving legal advice.

This decision will be welcomed by lenders called upon to disclose details of internal investigations as part of civil proceedings.

Supporting the aging population

With increasing life expectancy and number of over 65's, the FCA is encouraging the financial industry to invest in new products and services to provide the aging population access to financial products. In February 2016, the FCA published a discussion paper on this issue, inviting responses by 15 April 2016.

Part of the reason is the introduction of 'pension freedoms'. In particular, access to innovative products, at an affordable price, and advice in respect of cash flow management and longevity risk. In November 2015, The Personal Finance Society launched a specialist register of 'later life advisers'.

The paper also discusses ways in which financial institutions can make adjustments to make it easier for the older generation to access products and information. These include an assessment of the age risk factor, which can often make pricing of products higher, particularly in the insurance industry. In order not to exclude older customers, given the increased use of digital communication, there is a need to make high street branches more user friendly to the older customer.

The FCA is currently undertaking a more in depth analysis of this, with a view to forming a regulatory strategy for the ageing population. What this will mean for older consumers and/ or regulatory reforms remains to be seen.

Importance of limitation in financial claims

The High Court has found in favour of Royal Bank of Scotland (RBS), striking out a mis-selling claim for being out of time.

Property holding company, CGL Group Ltd (CGL), purchased two interest rate hedging products from RBS in 2006. Both were terminated early after interest rates fell. RBS accepted that CGL fell within the 2012 FCA redress scheme (to compensate investors for mis-selling) for one product.

CGL issued mis-selling proceedings more than six years after purchase (and would therefore have been out of time for limitation purposes). CGL instead relied on the three year (extension) secondary limitation period which runs from the date of knowledge. CGL claimed it did not have the relevant knowledge until June 2012, when the FCA’s review appeared in the media. 

The Court observed that the extent of knowledge, and when it was required, were questions of fact. It found that CGL had more than a mere suspicion that it had been mis-sold in 2009, which sufficed as knowledge for the purposes of limitation. The claim was therefore time-barred and was struck out.

This case highlights the significance of limitation defences to financial claims.  Lenders should consider at the outset whether claims are out of time, as that will end the claim quickly, without the need for further factual investigation. Determining whether a claim is time-barred is a highly fact sensitive issue but this case demonstrates that a claimant does not need a complete understanding of their claim to have the necessary ‘knowledge’ to bring it – sufficient awareness is enough.

Supreme Court decision helps lenders who lose their security

A recent judgment will enable lenders to recover some or all of their outlay in some cases where their charge is held to be void.  

It is established law that a seller acquires a special interest called a lien over property they have sold but for which they have not yet received the purchase monies. Their lender, whose charge may have been removed from the title when the sale completed, can also make use of that lien by a concept called subrogation – in effect, the lender gets an equitable charge over the lien. The lender therefore gets a type of security.

In this new case (Bank of Cyprus UK Limited v Menalou) the Bank had a charge over Rush Green Hall owned by Miss Menelaou's parents and agreed that on the sale of the property it would release its security, receive part repayment of the outstanding loan and take a charge over a new property being purchased by Miss Menelaou and her father (Great Oak Court).

Two years later, when selling Great Oak Court, Menelaou claimed she was unaware of the agreement between her father and the Bank. It was accepted that she had not signed the charge over Great Oak Court and that the charge was void.

The Bank successfully claimed that in the absence of a right to be subrogated to the lien Menelaou would have been unjustly enriched by having had the benefit of the Bank’s money but a charge-free property. The Bank’s position was therefore protected.

Banks and police task force to tackle fraud

The Home Secretary, Teresa May, recently announced an intention to create a new joint taskforce to tackle financial fraud.

Figures from the Office of National Statistic show that last year there were 5.1 million frauds in the UK. These frauds are becoming increasingly sophisticated with new technology creating new opportunities for the fraudsters. Often the frauds are committed by organised criminal gangs operating in jurisdictions outside the reach of traditional policing.

The new task force will be made up of the major industry stakeholders such as Financial Fraud Action UK, City of London Police, Cifas, Bank of England and the heads of banks and building societies.

The goal is to present a unified front to tackle fraud. This will be achieved by focusing on four areas:

  • Building a better understanding of the threat. Sharing expert knowledge from each taskforce to enable the taskforce to identify and map threats and vulnerabilities.
  • Tackling vulnerabilities that are identified. Often simple measures can be put in place which can make huge differences. For instance, recently a loophole has been closed by addressing the amount of time a telephone line stays open after a person has dialled. The fraudsters have been exploiting this to trick people into thinking the fraudsters are calling from a legitimate telephone number. 
  • Improving the collective response on fraud. By sharing information it is hoped that patterns can be spotted and suspicious transactions can be identified.  It is hoped this will lead to more convictions.
  •  Focus on victims. By sharing information the identification of victims and address barriers, which are currently delaying refunding those victim, will be quicker.

These measures are welcomed and we hope to be able to report on a positive impact from the taskforce once it becomes fully operational.

Northern Ireland: Slipping through the property ladder

Home ownership rates in Northern Ireland are dropping to the lowest in the UK outside London. Recent statistics released by PwC indicate that home ownership has slipped from 72% in 2000, to 65% in 2014. At the current rate of decline, it could plummet to 59% by 2025.

This has led to a corresponding trend in the private rental sector experiencing high growth.  According to PwC, the private rental market has increased from just under 6% in 2000 to just over 18% in 2014. The trend is set to continue on an upward trajectory to over 25% in 2025.

It seems that it is not just in London in which there is a shift from owning to renting a home.

Commentators attribute this trend to a lack of confidence in the Northern Ireland property market, which has only relatively recently showed signs of recovery, following its dramatic drop in 2007. A low level of house building has also been identified as a contributing factor to the decline.

Pundits are growing concerned that the emergence of “generation rent” in Northern Ireland will not help kick start the recovering property market. As rents in urban areas continue to rise, potential first time buyers could find themselves without deposit monies to secure the keys to their own home.

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


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