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
Focus on Northern Ireland
Lending Works has become the first peer-to-peer (P2P) Finance Association member to become fully authorised by the FCA.
The FCA has regulated the consumer credit market, including P2P lenders, since April 2014. Lenders operating before this did so with a licence from the Office of Fair Trading and were able to apply for FCA interim permission. This interim permission allowed platforms to remain in the market pending applications to the FCA for full authorisation.
There has been a significant delay with the FCA considering these applications, due to the volume of applications submitted.
Lending Works, which has now obtained full FCA authorisation, is an online market place for lenders and borrowers which focuses on lending to consumers. The platform plans to offer Innovative Finance ISAs, having approached HMRC for approval as an ISA manager. Subject to HMRC approval, the company hopes to be able to launch the ISA product within the next three months.
Innovative Finance ISAs allow investors to make tax free returns from P2P and crowdfunding investments. Although these have been available since April 2016, they are not yet widely available as only P2P lenders with full authorisation are able to obtain ISA manager status from HMRC. Most other P2P lenders continue to await full authorisation from the FCA.
It is expected that many other P2P lenders, once in receipt of full FCA authorisation, will quickly follow in offering Innovative Finance ISAs.
Shared ownership forms a small but established part of the UK market with around 200,000 homes now owned under this tenure.
Whilst only 0.4% of the housing stock, if government plans come to fruition it could grow by up to 70% over the next five years.
Independent research published this month by the CML provides a thorough review of the challenges and opportunities for the sector and offers recommendations for dealing with growth. Read the full CML report here.
Key findings included:
Despite scepticism over Government targets, evidence suggests that shared ownership is likely to grow considerably. However, there appears to be a shortage of products available for buyers with low deposits and on new build sites with concentrations of other shared ownership properties.
Most of the 15-20 firms lending are small, locally-based building societies, only three or four of which lend the majority.
Research of the first time buyer market found that rates of arrears or repossessions were similar.
The CML recommended better assessment and understanding of risk, putting to one side 'outdated' perceptions, and the development of protocols for good working practices with housing associations.
Overall, the report found the shared ownership sector is working reasonably well for lenders. It also highlighted several opportunities for those already lending or considering entering the sector in order to grow business.
Credit scoring criteria narrowed for the second consecutive quarter in Q3 of 2016, increasing the proportion of declined mortgage applications.
In addition, demand for owner occupier and buy-to-let mortgages fell during Q3, with lending to landlords decreasing at the sharpest rate since 2007.
However, lenders anticipate increased activity in Q4, as they are already experiencing the first increase in new buyer enquiries since February, buoyed by the continuing availability of competitively priced mortgage products.
With credit scoring narrowing and increased activity anticipated, lenders may have the opportunity to build more robust books, if lending to increasingly reliable borrowers continues at high levels.
Lenders also reported that default rates fell in Q3 for the 13th consecutive quarter and are expected to fall again in Q4.
According to Key Retirement, £633.8 million of property wealth was released in the third quarter of 2016, a 35% increase on the £470.9 million released in the same period last year. In addition, over £1.58 billion has been released in the nine months to October 2016, being 92% of the £1.71 billion released during the whole of 2015 (which itself was an all-time high).
The average amount that homeowners gained was £75,900, varying according to region (£135,886 in London, £44,830 in Northern Ireland).
The usage trend for equity release monies has also changed slightly. More homeowners are using the cash for home improvements (82% compared with 61% in 2015) and credit commitments (41% in 2016 compared with 30% in 2015).
The trend of increasing numbers of equity release transactions is common across the UK. Nine out of twelve regions saw an increase, with only Scotland seeing a fall, and the North West and Northern Ireland had broadly static figures.
All of this suggests the equity release market may have shrugged off any fears about Brexit, but still reflects the current financial climate. Dean Mirfin, technical director at Key Retirement, said that these statistics highlight “how property wealth is enhancing retirement planning as other retirement income solutions are squeezed by historically low gilt and interest rates”.
New lenders entering the equity release market will bring about another record year. Whilst interest rates and investments offer low returns, homeowners will increasingly look to their property wealth to enhance or maintain their lifestyles in retirement.
Average UK house prices have increased by 8.4% in the 12 months to August 2016. The figures do, however, vary according to region:
The average house price for first time buyers saw an 8.3% increase to £184,000.
The increases show that the housing market remains resilient, although prices are not rising as quickly as they have done in the past.
The Institute for Fiscal Studies has warned that recent increases in inflation will cost households an extra £360 each per year.
The government had expected the impact of inflation to increase household costs by £260 per year. However, inflation rose to 1% in September 2016, the highest level in almost two years, as the weak pound contributed to increased import costs. At this stage, there is no evidence to show that the weak pound has had an effect on the price of everyday goods.
Poorer households are at the greatest risk as benefits are not set to rise in line with the consumer price index, which tracks with inflation. Benefits are not set to increase until 2020, following measures set out in the July 2015 budget, aimed at reducing social security spending by £12 billion.
Commentators anticipate a prolonged, negative, inflationary impact on household costs, with some predicting that inflation will reach 3% within the next 12 months.
The Bank of England (BoE) has confirmed that it does not intend to lower interest rates in an effort to slow rising inflation.
Longer term, a weaker pound could continue to increase pressure on household spending. Lenders may see increased instances of default across both their owner occupied and buy-to-let mortgage books, especially if the BoE is unwilling to reduce interest rates to counterbalance rising inflation.
The Economic Secretary, Simon Kirby, and the Minister for Pensions, Richard Harrington, have announced plans to develop a new advice service for the public. The aim is to create a single advisory body which will replace the Money Advice Service and the Pensions Advisory Service – offering guidance to the public on financial services, debt advice and pensions.
It will be helpful to lenders for their customers to have a single, free and impartial service for information and support regarding financial services. It is hoped that such a service will assist customers in engaging with lenders at an early stage and help prevent mortgage repossessions.
The next step will involve a consultation on the best way to design the new body. We will provide an update on the development of this new service in due course.
Three months into her Premiership, Theresa May is putting homes and housing at the forefront of her strategy to tackle social fairness. At the recent Conservative Party Conference she acknowledged that there was a growing gap between those on the property ladder and those who are not, and that this lay at the heart of the UK’s declining social mobility:
“We will do everything we can to help people financially so they can buy their own home. That’s why Help to Buy and Right to Buy are the right things to do. But…there is an honest truth we need to address. We simply need to build more homes”.
This is likely to be encouraging news to the housing industry, and will bode well for builders and intermediaries over the rest of this Parliament. In particular, the Help to Buy Equity Loan Scheme has been a considerable success since its launch in England in 2013. The Scheme accounts for 40-50% of sales on new development sites, with almost 92,000 completions achieved to date. Completions in the second quarter of 2016 were up 15% from the same period in 2015.
In addition, over 160,000 buyers have completed purchases using the Equity Loan or Mortgage Guarantee Schemes. New sign ups continue at a buoyant rate, which suggests that there has been little let-up since the EU referendum in June.
Over the last few months, billboards displaying the text “Legal name fraud. The truth. It’s illegal to use a legal name” have popped up around the country. They appear to have links to the ‘freeman of the land’ concept which some customers use to challenge the validity of their mortgages.
It is unclear who is funding the billboards or what the objective is. There are no telephone numbers or websites displayed. There does, however, appear to be an associated website – legalnamefraud.com which asserts that when a birth is registered control of the name is unwittingly given to the state and using it without the state’s written permission is fraudulent. Curiously, it then suggests that a name owned by the state is distinct from the individual. These arguments are legally unsound but they are sometimes adopted by those wishing to avoid or challenge their debts – claiming that they are not the person responsible.
Whatever the campaign is trying to accomplish, one of the effects will certainly be to draw the public’s attention to these arguments, albeit that they are flawed. Lenders may see more customers raising freeman of the land type arguments as challenges to mortgage arrears. When advancing such arguments, customers will send increasingly elaborate letters requesting documentation and other information which can be overwhelming. TLT is experienced in this area and is happy to provide support in responding to such letters.
Nemcova v Fairfield Rents is thought to be one of the first cases on short term lets under the AirBnB model. The Upper Tribunal of the Lands Chamber have examined whether this style of tenancy amounted to a breach of covenant.
The case concerned a flat held on a long lease. A covenant prohibited use of the property for any purpose other than as a private dwelling. The property was sublet on a series of very short term lettings and advertised as a bed and breakfast on the internet. The landlord claimed breach of covenant.
The Court agreed, thus if the lets continued the landlord would be justified in bringing an action for forfeiture. The judge's reason was that anyone letting their dwelling for short periods (ie days or weeks) could not consider it to be their private residence.
Lenders should consider whether their mortgage terms and conditions allow AirBnB lets and how to guard against the possibility of the landlord taking forfeiture action, thereby losing the security. These cases are likely to turn on interpretation of individual covenants and, as such, it is important for a lender to take advice as early as possible.
Research carried out by Verdict Financial shows that just a fifth of Britons have used a digital-only financial services provider in the last 12 months.
A very small number of those surveyed considered that online-only financial service providers could provide better service, rates and security than their more established tangible counterparts. More than 50% of people prefer a bank with an established record and recognisable brand, compared with a new entrant to the market.
The research confirms that an established brand and access to local branches are the two most important criteria for consumers selecting a bank in the UK. This is evidenced by 50% of account openings still taking place in branch.
Perhaps surprisingly, the studies have shown that younger customers are more dependent on local branches than older age groups. This outlines a further challenge for online market entrants, who have specifically targeted the younger generation to increase their market share.
However, those who do regularly use online only banks have shown a higher satisfaction rating than those carrying out their banking in branch. Telephone banking comes in a distant third, with a satisfaction rating of 37%.
On 18 October 2016, the FCA published new information sheets which consumer credit lenders and consumer hire owners must send to borrowers and hirers when they fall into arrears or are in default. These new information sheets must be used from 18 January 2017 (and not before). You can access copies of the current and new versions by visiting the FCA's website.
The EU Commission has suggested that it will shortly publish plans representing the first major financial services proposal since Brexit. We will have a say in how this proposal is shaped while still a full Member State.
Following lessons learned from the 2008-09 economic crisis, the Commission recommends that banks, commodity traders and asset managers may be forcibly involved in emergency fundraising if any of the clearing houses in the EU fail.
If a particular platform found itself in financial difficulties the Commission considers that the resulting losses would fall to the clearing house, its member banks, the banks' customers or the taxpayer to deal with, which should be avoided.
The proposals would see clearing house members being required to play an active role in a cash call if the troubled institution had already exhausted its default procedures. However, the proposal would see those members taking a share in the recipient of those funds.
More extremely, the Commission proposes that authorities could reduce the value of payments to clearing house members and use government funds in the event of a systemic crisis. Further, regulators could rescind derivative contracts and trim the margin or collateral laid out by the clearing house's end users.
It is rumoured that these plans will be pushed through as a regulation, not a directive, to ensure a consistent application throughout all Member States. Whilst it is possible that Britain will have left the EU before then, the UK is home to some of the world's largest clearing banks and so is unlikely to remain untouched.
On 28 November 2016, the Act of Sederunt (Lay Representation for Non-Natural Persons) 2016 will come into force in Scotland.
The new rules make provision for companies and other bodies (including LLPs any other partnerships or unincorporated associations of persons) to apply to be represented by non-lawyers in civil proceedings. This includes the Court of Session, the Sheriff Appeal Court and the Sheriff Courts.
Prior to the Act of Sederunt, only individuals were held to be capable of acting as party litigants. Under the act, such bodies can apply to the court for permission to instruct a lay representative (ie non-lawyer) to conduct proceedings for them. The rules also provide the functions and duties of lay representatives, when the court can find lay representatives and non-natural persons liable in expenses, and the conditions that the court may impose on lay representatives.
The new power will be capable of exercise by directors/secretaries of companies, members/partners of LLPs and partnerships and members/office holders of unincorporated associations.
The new power may be good news for a cost-sensitive company director, or a small business unable to afford lawyers. If a costs award is made against the company/business, the lay representative could be held personally liable – or if the court determines that the lay representative has been acting unreasonably. Whether a company director agrees to assume that risk will involve a balancing of considerations in terms of legal fees, litigation costs and time spent.
The property market in Belfast is proving buoyant with plans for more than 80 buildings currently in various stages of construction across the city centre. These include the City Quays project at Belfast Harbour - which offers premium office space and a £55 million Lanyon Central office development comprising four buildings of varying height. The plans also include hotels with the ongoing development of the landmark Grand Central Hotel, a 200 bedroom hotel in a 23 storey building on Bedford Street. In addition, works have started on a 179 bed hotel on Hope Street.
The impact of the Brexit referendum on the Northern Ireland property market has yet to be determined but figures indicate that around £45 million of commercial property sales took place following the EU vote. Although the weakening pound has created favourable buying opportunities for international investors, the latest figures are considerably lower than the same period last year (£133.5 million). Although pundits remain divided, in terms of how the market will progress in 2017, most are in agreement that demand in Belfast for office space will continue to outstrip supply.
In the residential market, house prices in Northern Ireland have climbed by 7.8% to reach £123,000 in August. Despite this, Northern Ireland remains the lowest price region for potential home buyers. The average UK home now costs £219,000 - an increase of 1.3% on the previous month. In England, average prices vary across regions with London the most expensive at £489,000 and the North East the lowest at £127,000. At this stage, although the extent of future increases in both commercial and residential property prices cannot be accurately predicted, it seems that Northern Ireland is boldly going forward.
This publication is intended for general guidance and represents our understanding of the relevant law and practice as at November 2016. Specific advice should be sought for specific cases. For more information see our terms & conditions.