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
The Land Registry is working on a system to create and register a digital mortgage. The system is currently being tested by Enact, a firm of volume licensed conveyancers, and Coventry Building Society.
It is proposed that the system will use the 'Gov.UK Verify' service to identify borrowers. This is the Government's online portal where a person’s identity is verified via a third party certifier before that person is able to use Government services, like filing a tax return or checking universal credits. The system works by asking users a series of questions before listing the third party certifiers (which include Barclays, Experian, Royal Mail and the Post Office). The user then creates an account with the third party and is asked questions to verify their identity, such as their passport or driving licence number.
For now, the Land Registry pilot is not creating any legal deeds – paper mortgages are created alongside test digital mortgages. However, the Land Registry hopes to have a working system towards the end of the year and open up the system for public testing.
The latest figures from the Council of Mortgage Lenders show that, as at the end of the second quarter this year, the number of mortgages in arrears is now at its lowest level in the more than 20 years since records began.
At the end of June there were 92,500 mortgages in arrears of at least 2.5% of the balance, representing only 0.84% of all mortgages. That overall figure is down from 95,900 at the end of March, and is 13.4% lower than this time last year – when the figure stood at 106,800.
The number of properties repossessed has also fallen to 1,900 in the second quarter, down from 2,100 in the first quarter. If this trend continues, the number of mortgaged property repossessions this year is on course to be the lowest since 1982 when there were only 6.5 million mortgages – compared to 11.1 million today.
These figures are significantly lower when compared to the rental sector – there were 42,729 rental evictions in England and Wales in 2015, compared to 5,592 mortgaged property repossessions, despite the rental sector accounting for around one-third of the housing.
Homeowners have of course been helped by years of low interest rates, and these figures come following the news that the Bank of England has cut interest rates to a new record low of 0.25%, which will mean cheaper mortgage repayments for many home owners.
Mortgages4Life, a new lender aimed at borrowers aged 55 and over, has received full regulatory approval from the FCA. The firm is close to launch and will offer a range of products to older borrowers, with the aim of improving choice in the later-life market. The products will only be available through financial advisers and mortgage brokers.
The green light given to Mortgages4Life comes months after it was reported there had been a sharp rise in the number of over-40s struggling to obtain a mortgage or remortgage because of their age. Earlier this year, brokers reported a worrying trend regarding the difficulty faced by older borrowers and predicted this would only worsen.
Older lenders are generally considered to be more risky and the outstanding debt will run into retirement. Almost a quarter of those turned down for a mortgage in the last two years say their age was a factor.
The reality is that many older people will have more secure retirement incomes than those in work as they will usually benefit from both state and private pensions. Final salary pensions will be even more secure.
Mortgages4Life will be aiming to capitalise on this traditional reluctance to lend to older borrowers, viewing them as a low risk sector poorly served by major lenders.
The Help to Buy ISA was introduced by the 2015 budget to enable first time buyers to save for a deposit in the face of rising prices and increased demand for houses. Some 500,000 accounts have been opened to date, with twenty three lenders, including the major clearing banks, offering the product. However, only 1,500 people have actually used the scheme to buy a home so far.
The official Government Help to Buy website states: "If you are saving to buy your first home, save money into a Help to Buy: ISA and the government will boost your savings by 25%."
However, it turns out that first-time buyers cannot actually use the publicly funded "boost" towards their deposit, due to a clause which delays the release of the bonus until after completion. This could be made clearer on the product website.
The Treasury has said that the clause was included to prevent people from obtaining the public funds on offer, without buying (or perhaps intending to buy) a property. By way of an explanation, the Treasury has said that its 25% contribution was in fact intended to reduce the size of a first time buyer's mortgage by increasing the equity available to them after completion. It now seems clear that the market did not share this understanding.
The clarification of the ISA's terms has been met with consternation. Both savers and those working in conveyancing were under the impression that the scheme was intended to help first time buyers save a deposit – generally considered to be the biggest challenge between them and the property ladder.
Some commentators have called for the government to be held to the same strict regulatory standards as lenders when providing descriptions of their products. Whilst perhaps honest, the Treasury Committee's Jacob Rees-Mogg MP's comment that the issue may have been spotted had the government allowed itself a longer consultation period, is unlikely to placate angry savers.
With the Help To Buy ISA likely to fall out of favour, lenders may receive increased interest in the more flexible Lifetime ISA.
Following the Bank of England's (BoE) recent cut in base rate interest to 0.25%, it has also voted to implement a new term funding scheme.
Under the scheme, the BoE will lend up to £100 billion to banks at a rate close to 0.25% for four years. Additionally, for every extra pound their net lending increases, banks will be able to access another pound of funding. However, for each percentage fall in their net lending, the cost of the scheme will rise.
The aim of the scheme is to ensure that the base rate cut is passed on to businesses and households. It removes the difficulties in banks' abilities to cut their lending rates now that interest rates are close to zero.
The scheme has been described as good news for banks, customers and clients. This should mean very cheap financing and less risky lending for banks.
There has been much media coverage about stress testing banks to assess capital adequacy. The housing charity Shelter carried out its own version of stress testing in July to ascertain whether individuals could cope if they faced a sudden loss of income.
Of the 8381 adults surveyed it was found that nearly a quarter (23%) would be unable to pay their rent or mortgage if they lost their job. A further 37% would be unable to cover their rent or mortgage for more than a month in this situation. This survey backs up the government’s own figures which suggest there are around 16.5 million adults in the UK without savings.
Shelter Chief Executive, Campbell Robb, said “these figures are a stark reminder that sky high housing costs are leaving millions of working families stranded to breaking point scraping from one pay cheque to the next”.
This means a high number of borrowers who would be unable to contribute anything to their mortgage if they lost their job. Lenders should be mindful of their obligations to treat customers fairly and may wish to allow extra time for customers to find alternative employment. However, it will be important to engage with the customer to make sure there is a clear plan to prevent arrears rising to unmanageable levels.
Having made significant reductions in their exposure to commercial property in recent years -roughly 40% since 2010 -, the UK's largest banks still face substantial risks from the sector.
Credit rating agency Moody's recently suggested that the UK's six biggest lenders would still suffer £12 billion of losses in a period of only two years. This follows a hypothetical stress test in relation to commercial property – equivalent to only 14% of their exposure.
This stress test was prompted largely because the commercial property sector was an early victim of June's EU Referendum, with investors withdrawing funds and prices decreasing. In fact, July 2016 saw commercial property values fall by the largest percentage since March 2009.
Lenders have reviewed their underwriting criteria since the economic crisis, which meant that the stress test itself could be more generous, assuming only a 10% drop in prices rather than the 45% fall seen almost a decade ago.
Shadow home secretary, Andy Burnham, was recently selected as the labour party's candidate for mayor of Manchester ahead of next May's election.
If elected, Mr Burnham wants to introduce measures to tackle problems in the Manchester private rental sector. One such measure would be for all landlords in Manchester to be licensed by the Local Authority. A similar scheme is now in place in Wales.
Mr Burnham also plans a community buy back fund, which will give the Local Authority powers to compulsory purchase rented properties if they fail to meet the decent home standard. In such cases the Local Authority would usually be obliged to pay sufficient compensation to cover the redemption of the mortgage. The exception is where there is negative equity, in which case the Local Authority would negotiate with the lender and borrower as to the amount to be paid to the mortgagee.
However, there is no guarantee that Mr Burnham will be elected.
Accountants, tax planners and advisors who provide advice on how to avoid tax are set to face tougher penalties under proposals being consulted on by the Government. Under the new proposals, enablers of tax avoidance could be fined up to 100% of the tax avoided, as well as being named and shamed in order to alert and protect taxpayers.
Currently, tax avoiders themselves face significant financial costs when they are defeated in court by HMRC, but those who facilitated or advised on the avoidance bear little risk. The new proposals are aimed at combating tax avoidance at its source, and it is hoped that the new measure will target all those involved in the supply train of tax avoidance, including independent financial advisors marketing the schemes as well as lawyers and bankers who facilitate their implementation.
The proposed changes come as part of a continued government effort to fight tax avoidance, and follows Theresa May's promise in her leadership campaign to crack down on it. It is thought that past crackdowns have been misguided and have ignored the real offenders.
There are concerns that reputable professional advisors who are advising on legitimate tax planning could be caught in the crossfire, whilst the real enablers escape penalty. A spokesperson for the Chartered Institute of Taxation has spoken of the need to ensure the Government does not prevent taxpayers from obtaining honest, impartial advice from advisors engaged in ordinary tax planning.
Card fraud losses are on the up in the UK and it appears that the UK is the loss leader amongst other countries in Europe. One of the reasons for this could be the now standard request for personal information when banking or shopping online. As a result, criminals can source personal information to use to commit fraud. To combat this, one commentator has suggested that financial firms need to develop further their fraud detecting initiatives or try to make the data found by the criminals redundant.
The increase in card fraud may be one of the factors which prompted the FCA to roll out new duties for financial firms. The new initiative will require banks and building societies to file a yearly report detailing any high risk customers, all submissions they have made to the National Crime Agency and any internal reports dealing with potential fraudulent activity, amongst other data.
This report will add to the already onerous regulatory duties financial organisations face. From 31 December 2016, financial organisations will have to evidence how they manage elements of fraud effecting their business and customers.
The Financial Ombudsman Service (FOS) is facing judicial review. This is a result of its rejection of thousands of complaints of unfair sales of PPI on credit cards. The FOS is alleged to have refused compensation to thousands of victims of unfair sales in relation to cards issued by MBNA and Capital One and store cards issued by Genworth (now AXA). The allegations include generally high charges as well as illness exclusions preventing claims – often not properly explained to customers.
The claim is being brought by ‘We Fight Any Claim’ (WFAC), a Wales-based claims management company specialising in claims involving mis-sold PPI. WFAC's business model is based on making fees from successful compensation payouts.
WFAC estimates that 50,000 PPI claims have been rejected by the FOS, despite many of the policies at the centre of these claims excluding the most common reasons for missing work – such as back pain and mental health issues.
This news comes weeks after the announcement by the FCA that there will be a cut-off for PPI claims – June 2019.
The FOS is yet to comment on the judicial review. However, in a letter to one complainant it ran through a number of key issues that would indicate whether the policy breached any rules and came to the conclusion that it did not.
On 2 August 2016, the FCA announced a further consultation paper (CP) on its proposals for implementing rules to deal with the Supreme Court's judgment in Plevin v Paragon Personal Finance (1) Limited  UKSC 62 (Plevin), CP 16/20, following its earlier consultation paper, CP 15/39. You can access CP 16/20 by visiting here and CP 15/39 by visiting here.
CP 15/39 made two key proposals:
to introduce a long-stop date of two years for payment protection insurance (PPI) complaints (including complaints alleging unfairness under the unfair relationship provisions because of undisclosed commissions); and
to make specific rules for lenders dealing with complaints alleging unfairness because of commission non-disclosure.
While maintaining those two proposals, the FCA now also proposes in CP 16/20:
to include the profit share as part of the calculation for fairness and redress;
to allow rebates on cancellation (if any) to be reflected in any redress proposals; and
to clarify how firms should assess fairness and redress where the commission or profit share changes during the lifetime a policy.
If these proposals are implemented, they will effectively bring an orderly end to complaints relating to PPI. However, borrowers may (subject to applicable limitation periods) be able to bring a claim in the Court. The proposals will also have the practical effect of significantly increasing the amount of redress paid where a customer successfully alleges unfairness because of undisclosed commissions than the proposal under CP 15/39. This includes those commissions (including any profit share) exceeding 50% of the premiums paid.
Unfair relationship provisions
While the unfair relationships provisions came into force on 6 April 2007, they do not just apply to either regulated credit agreements or agreements entered into on or after this date. They apply to most credit agreements with individuals, sole traders or partnerships of two or three partners - not all of whom are corporates. The main exception to this is a regulated mortgage contract (but mortgages only became regulated on 31 October 2004). The provisions can also apply to agreements pre-dating 6 April 2007 where the agreement did not become a 'completed agreement' by 6 April 2008.
When does the consultation end?
The consultation period ends on 11 October 2016. The FCA proposes to make the rules by December 2016, to bring most of them into force by March 2017 and to start the two year period for complaints in June 2017 (so the end date will be June 2019).
What should I do?
The impact of Plevin is still a hot topic for the credit and mortgage industries. There are a number of points which remain unresolved including, for example, when a policy for PPI is a "related agreement" under the unfair relationship provisions. It is necessary for a policy to be a related agreement so the court can consider it under the unfair relationship provisions. If you have entered into credit agreements (whether regulated or not), you will no doubt need to consider whether Plevin has any impact and, if so, which claims fall into the proposed new rules.
There are currently a number of litigated cases brought by borrowers who are seeking a better award from the court than CP 16/20 proposes (and three recent County Court decisions all provide more favourable awards than under the proposals). It therefore remains to be seen whether borrowers will use the proposed rules (if implemented) or will prefer to take their chances in court. If they go to court, they must prove the facts of their claim and ensure it is brought in time. If they do so, the burden is then on the lender to show the relationship is not unfair to the borrower.
The Treasury Select Committee (TSC) has called for a review on breaking up the FCA, particularly in relation to isolating the FCA's enforcement division. This comes after "severe flaws" found in relation to its oversight of the fallout from HBOS' collapse and its "highly problematic" relations with other divisions of the FCA.
The latest call for reform has come following the exposure of particular shortcomings in the regulator's decision making processes. This was revealed in a report by Andrew Green QC last year.
Andrew Tyrie MP, chairman of the TSC, has suggested that the isolation of the enforcement division and creation of an entirely separate agency would "bolster the perception of the enforcement function's independence, and provide the regulators with greater clarity over their objectives". He further suggested that an independent review of this proposal ought to be commissioned.
But this position is not entirely new, as the Parliamentary Commission on Banking Standards (PCBS) has previously recommended a break up of the FCA for similar reasons. Whilst this proposal was quashed by a Treasury led review at the time, the involvement in the TSC this time round may see it develop further.
If the enforcement division of the FCA is hived off into an entirely separate agency, we are likely to see more efficient and less lenient sanctions being imposed. The FCA and Prudential Regulation Authority would also be free to focus on preventative measures.
The Scottish Courts are in the process of implementing new reforms to replace the current small claims procedures. According to Schedule 1 of the new Simple Procedure Rules (The Rules) it is designed to "provide a speedy, inexpensive and informal way to resolve disputes". The Rules, which are due to come into force on 28 November 2016, will replace the current processes for cases with a value of £5,000 or less in the Sheriff Court.
Perhaps the most revolutionary aspect of this procedure is that it will be available online via a digital Integrated Case Management System which is being introduced by the Scottish Courts and Tribunals Service (SCTS). This new system is currently being developed by SCTS and will allow online processing for most actions up to £5,000. As well as facilitating electronic submission of documents and online payment of fees, it also enables the progress of actions to be tracked digitally.
The Rules introduce greater use of plain language and a flow chart to improve accessibility for party litigants. The principles which should be complied with are also incorporated. It is, however, worth noting that more complex cases will be excluded from the rules. Cases such as personal injury actions, aliment, and recovery of heritable property will be governed by a further set of rules known as the Simple Procedure (Special Claims) Rules. These are yet to be published but are scheduled to come in to force early 2017.
Contributors: Sam Storey, Sarah Ainslie, Michael Finnegan, Duncan Martin, Hannah Haughton, Russell Kelsall, Ben Hanham, Catherine Zakarias-Welch.
This publication is intended for general guidance and represents our understanding of the relevant law and practice as at September 2016. Specific advice should be sought for specific cases. For more information see our terms & conditions.