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 and Northern Ireland
Challenger banks have suggested that the UK's departure from the EU will enable the country to dispense with European minimum capital requirements.
Smaller lenders have complained that the current EU regulations can require them to hold ten times the equivalent capital, when compared with their larger rivals; they believe that they are held hostage by risk ratings fixed by the Prudential Regulation Authority.
Presently larger lenders are able to rely on their own data to analyse risk on a bespoke basis, reducing the amount of capital they are required to hold to counterbalance their exposure on loans.
Andrew Tyrie, chairman of the Treasury Select Committee, has expressed his hope that the UK can establish a more proportionate approach to regulating smaller banks. This will enable them to compete with the market leaders on a more even footing.
If these measures are implemented, we are likely to see an increasingly innovative mortgage market as challenger banks take advantage of their increased flexibility to offer a wider range of specialist products.
With sterling down 11.5% against the dollar and 10.5% against the euro following Brexit, brokers are reporting soaring interest from foreign investors.
In addition, some increased certainty around the UK's relationship with Europe post referendum, coupled with a cooling of domestic investment enthusiasm, has given overseas investors with an appetite for risk the opportunity to pick up advantageous deals. This is also good news for secured lenders who will see an increase in overseas business.
Coincidentally, agents have reported that American investors are effectively able to save the costs of the tax they would have been charged pre-referendum. This has led to an upturn in US investment, for example, US bank Fargo Wells recently announced that it will invest £300 million on a new London office.
Following the Brexit result, intermediaries have concluded that overseas property investors still see the UK as open for business; good news for lenders.
Recently the Lending Standards Board (LSB) launched their new 'Standards of Lending Practice' (Standards). They come into effect from 1 October 2016 and will replace the current Lending Code (Code).
The Standards are voluntary and apply to personal customers. The intention is to guide the way that LSB registered firms are expected to deal with their customers and set a benchmark for good lending. The focus is on achieving good outcomes for customers from advertising products and applications to account closures.
There are six main areas to be aware of in the Standards:
The Standards currently cover credit cards, loans and overdraft facilities on current account; however the LSB may include a wider range of lending products in the future. A further section sets out a framework that should be applied to ensure the Standards are implemented and operated effectively.
These new Standards will build on the current Code and will provide greater protection for vulnerable customers and those at risk of financial difficulties.
Work has already started on extending standards for lending to SME and these are expected to be published in early 2017.
On 18 July 2016, the FCA published a new webpage for the rent-to-own (RTO) sector. The RTO sector is typically dominated by three large firms: Bright House, Perfect Home and Buy As You View.
The FCA reminds RTO firms that:
The FCA also states that the three largest have been required to appoint an independent person (called a skilled person) to consider whether the changes undertaken by those firms have been effectively implemented.
There is a clear message that if they find consumer detriment, the FCA "will not hesitate to take action where [they] find evidence of consumer detriment", which is a message for all consumer finance firms.
Customers’ changing habits and technological advances in banking have resulted in a significant rise in the use of apps to deal with everyday banking needs.
Payments made via apps rocketed by 54% in 2015, reaching a total value of £347 million.
A report by the British Bankers’ Association (BBA) found that the average customer of some UK banks looks at finances on their phone more than once a day. The banking apps are providing consumers with the ability to check account balances and make payments, with some customers even applying for personal loans and manage overdrafts via their app.
Internet banking logins fell slightly last year, according to BBA, with customers preferring apps as quick access on the move. The annual use of contactless cards has risen by 250% with banks issuing 15 million cards with contactless technology in 2015 - up by a staggering 54% on the previous year.
The BBA reports a 32% decline since 2011 in the number of customers visiting high street branches on a daily basis.
The inevitable concern is that as mobile banking becomes more a part of the daily routine, its potential impact is branch closures.
However, it is considered that many people will still prefer to speak to someone in a bank branch when it comes to complex transactions.
Customers' interaction with banks, whether face-to-face or digital, is changing; and those interactions are on the rise. Since 2011 interaction has increased by 1.2 times per month. This trend is expected to continue – rising to 6.3 times a month by 2021.
Recent research by Royal London has shown the average downsizing transaction will enable the homeowner to purchase an underwhelming annuity of £13,700, inclusive of state pension.
Given the average UK full time wage is £27,400; annuities at this level would require a significant change in living standards for many people.
The research showed that as many as 3 million UK homeowners planned to sell their primary residence in order to fund their retirement. But this plan faces a number of challenges.
In the first instance, high prices are preventing first time buyers from leaving the family home, meaning that parents at retirement age may not be in a position to downsize; currently one in four 22 to 30 year olds are still living at home with their parents.
Additionally, one in three mortgages now runs beyond the borrower's 65th birthday, meaning that the downsizing has to be postponed.
It is seldom easy to forecast the eventual value of any property, especially as there has been considerable movement in the property market over recent years. The market has also seen a significant demand for smaller, cheaper, properties, as first time buyers scramble to make the most of limited supply.
Disappointing annuity returns may reduce retirees' enthusiasm for the mortgage market if they are unable to realise their targeted retirement income via downsizing.
The FCA published guidance in September 2015 relating to WeRe Bank, a community organisation that members of the public can subscribe to for a monthly fee.
The organisation is purportedly funded by members issuing a promissory note to the organisation for £150,000. The organisation claims that it will never call in this promissory note. This system of financing is the supposed backing of the organisation`s own currency, "the Re".
The organisation issues its members with a chequebook and encourages the use of cheques to pay off debts such as mortgages, loans and council tax.
In addition to the chequebooks the organisation also planned to launch a credit/debit card last month. Details of this remain scarce.
The FCA recently confirmed that WeRe is not a regulated organisation and is concerned that consumers will be taken in by the scheme – believing the cheques can be used to effectively write off debts. The FCA is also worried that in the long term this will lead to consumers failing to manage their debts. This could result in an increase of county court judgments against consumers or additional charges from their lenders.
From a lender’s point of view, WeRe cheques are not legal tender and should not be accepted in connection with mortgage or loan repayments. The cheques are easy to spot as they are headed "WeRe Bank", printed on poor quality paper and often feature account number “88888888”.
There have been attempts to challenge lender’s refusals to accept WeRe cheques via the Financial Ombudsman Service (FOS). These complaints have not been upheld and the FOS agreed that WeRe cheques are not legal tender and do not have to be accepted by lenders.
There has been a recent, unexpected, increase in fees for a number of court services, some of which will be relevant to lenders:
When the Land Reform (Scotland) Act 2016 was introduced earlier this year it began a process of introducing significant changes to the way that land in Scotland is managed. Provisions within the Act include the creation of a:
The Act, which was described as controversial and transformative throughout the parliamentary debate process, has recently been brought back in to the spotlight when the first provisions came in to force on 28 June 2016. From this date, shooting and deerstalking estates no longer benefit from an exemption from business rates. The rights of local authorities to deal with common good land were extended, in particular the right to seek authorisation to use the land in a different manner and the right to dispose of it.
The beginning of the commencement process for the Act questions what impact it will have on lenders as the remainder of the provisions come into force over the next few years. In terms of heritable securities, where there is a security over a property subject to a right to buy application then the lender must be notified. The lender also has the opportunity to intimate repossession proceedings within 60 days and to express a written view on the application. The purchaser must pay the full sum due under the security, unless a separate agreement is reached between parties.
There is potential for this to be a costly process for those wishing to exercise the right to buy and arguable scope for it to be manipulated by land owners to discourage applications.
The overall effect of this controversial piece of legislation remains to be seen. Many of the details and practical aspects are yet to be determined. But there will certainly be significant changes on the horizon over the next couple of years.
You cannot petition to have someone made bankrupt in Northern Ireland unless they owe you an amount which is equal to or greater than what is termed the bankruptcy level. The bankruptcy level is £750.
In England and Wales the bankruptcy level increased from £750 to £5,000 on 1 October 2015. The increase was welcomed by some, who thought the level of £750, which had been in place since 1986, was out of date. But creditor groups were unhappy that debt claims under £5,000 would now have to be progressed in an alternative manner.
The Department of Enterprise, Trade and Investment has proposed that the bankruptcy level in Northern Ireland should rise to the level of England and Wales.
The consultation closed in November 2015 and the findings are to be presented to the departmental committee shortly. If the committee determines that the level should indeed be increased; the law is likely to be changed by the end of 2016. An increased level will mean that creditors pursuing debts under £5,000 will only be able to issue county court or small claims court actions against debtors.
Contributors: Duncan Martin, Katie Hill, Russell Kelsall, Ben Hanham, Sarah Ainslie, Peter McGrath, Catherine Zakarias-Welch.
This publication is intended for general guidance and represents our understanding of the relevant law and practice as at August 2016. Specific advice should be sought for specific cases. For more information see our terms & conditions.