Protection for consumers in the UK mortgage market was extensively reinforced two years ago as a result of the MMR, so the European directive will have only a modest impact.
Council of Mortgage Lenders spokesman Bernard Clarke assesses the UK’s adoption of the Mortgage Credit Directive
UK lenders are ahead of most of their European counterparts in implementing the mortgage credit directive (MCD) – a process that is due to be formally completed in three weeks’ time, on 21 March. With UK firms having been given the opportunity to adopt the revised rules up to six months early, many have chosen this option and are therefore already complying with the directive’s requirements.
In practice, borrowers will notice few changes in the process of taking out a mortgage as we pass the MCD implementation date. Nor do we expect to see any significant effects on the market or on the availability of mortgages.
Over time, borrowers may notice changes in the disclosure documents presented to them by lenders when they are considering taking out a new mortgage. Other changes as a result of the directive include the creation of a new class of “consumer” buy-to-let borrowing (sometimes abbreviated to CBTL), as well as modifications affecting foreign currency loans and second charge lending.
In many ways, implementation of the directive in other European countries will align them with standards already applying in the UK, where the mortgage industry has been operating for the last two years under a system of enhanced consumer protection following the mortgage market review (MMR).
Nonetheless, the UK, like other EU countries, is required to implement the MCD, which is intended to set minimum regulatory requirements across Europe.
Progress towards the directive
Last year, we published an assessment by the European Mortgage Federation (EMF) of how different countries were working towards implementation the directive. In that article, the EMF agreed that the MMR in the UK already went beyond the core provisions of the MCD.
The EMF also estimated that many firms in the UK were six months ahead of most of their European counterparts on implementation. Firms in Belgium and Denmark had also made rapid progress, and had almost completed the process of adopting the directive by last autumn.
At that stage, the EMF was predicting that a handful of European states, including Finland, Latvia, Portugal, Slovenia and Malta, might not meet the 21 March deadline. But all of those countries were expected to have adopted the directive within four to eight weeks thereafter.
Adopting the directive
Government, regulators and firms in the UK have all supported the adoption of the MCD, even though consumer protection in this country has already been comprehensively re-appraised and reinforced through the MMR – and the directive does little in practice to extend protection for UK borrowers.
The process of implementing the MCD has been overseen by HM Treasury, although the rules will be supervised by the Financial Conduct Authority (FCA).
Transition towards implementation of the MCD has been smoothed by the decision to give lenders a six-month window, within which they have been able to adopt the directive’s measures to their own timetable. This means that firms have, in effect, been allowed to operate within the requirements of the directive since last September. This has helped reduce any broader, cumulative effects on the mortgage market as a consequence of every firm having to work to implementation on the same date.
What effect would ‘Brexit’ have?
Implementation of the directive is likely to be unaffected by the outcome of the referendum on EU membership in June.
Lenders comply with UK legislation and regulation, with UK regulators embedding EU requirements into their frameworks. If there was a vote to leave the EU, it would be a matter for the authorities to decide whether or not to propose changes to UK regulation, but there would be no instant regulatory effect.
The referendum presents both political and economic risks, and it is no surprise that it is creating some volatility in financial markets. Markets dislike uncertainty, but the UK authorities are well placed to mitigate any short-term instability.
There is no simple answer to the question of how a decision to leave the EU might affect housing and mortgage markets. Such a decision by voters would represent a material shift in our political, economic and social lives. As a relatively small, open economy and a major financial centre, the UK has, and would continue to have, close links with global economies, including those within the EU.
The CML is unlikely to take a view on the outcome of the referendum, or on EU membership. Individual member firms may have a variety of views, depending partly on how they believe their businesses may be affected by the outcome.
Disclosure of information to borrowers
One change that borrowers will notice over time is in the way in which information is presented to them as part of the sales process. Consumers who have become familiar with the UK’s Key Facts Illustration (KFI) will gradually see it replaced by the European Standardised Information Sheet (ESIS).
The EMF has described the introduction of the ESIS as “a bone of contention” in the UK, given that consumers are already familiar with the KFI. But by 2019, the process of transition to ESIS will be complete. Until then, many firms will continue use the KFI, as they have to make significant changes to systems, staff training and other processes in order to adopt the ESIS.
But even if lenders stick with the KFI for now, they will have to introduce a “topped up” version of the document, showing to borrowers what the monthly repayment cost of a mortgage would be if interest rates were to rise to a 20-year high. Firms can do this either by applying their own rate, or one specified by the FCA reflecting the Bank of England base rate.
This requirement has been an unexpected late twist in the preparations for lenders for, although the FCA set out this requirement in its original consultation on the MCD, it inadvertently omitted it in later documents setting out the rules.
The FCA subsequently rectified this – but only in January – when it published the consultation paper, Mortgage Credit Directive: Minor changes to our rules and guidance. We were disappointed that this change was set out so late in the process. Despite this, however, many firms are on track to fulfil the requirement.
Consumer buy-to-let
Buy-to-let mortgages are not generally subject to conduct regulation in the UK because they are used to finance investment decisions by landlords who buy a house as a business. They are therefore seen as fundamentally different to a residential mortgage. But the MCD introduces the new category – and concept – of consumer buy-to-let lending, which will be regulated.
In future, there will therefore be a distinction between professional landlords, who take out buy-to-let mortgages for business reasons, and “accidental” landlords, who have taken out a loan for a property they are renting out but not “wholly or predominantly for the purposes of a business.”
The intention is that people who may be planning to let out a property they have inherited, or a home they have previously lived in, will count as a “consumer” buy-to-let borrower, whose loan will be regulated by the FCA.
Lenders will have to interpret this, and decide on a case-by-case basis, how to treat individual customers. Estimates vary about the proportion of buy-to-let mortgages that will be “consumer” loans, but the number will be small. Most buy-to-let mortgages will be unaffected.
Other changes
Lenders offering mortgages that a borrower can repay in a foreign currency will have new requirements under the directive. They will have to monitor the rate of exchange between the currency in which borrowers pay their mortgages and that in which they receive their incomes. They will also have to warn customers about their level of exposure and, if the two currencies fluctuate beyond a certain limit, the lender would have to offer the borrower the option of switching currency.
The directive also introduces new rules about binding offers and a period of refection for the consumer. Once a lender has made an offer, it can only be withdrawn if the information provided by the customer is inaccurate. Customers will also have a seven-day reflection period, during which they are free to accept or reject the mortgage offer. Borrowers must be told in a timely manner if their mortgage application is declined.
The MCD will also mean that in future second charge mortgages are also regulated by the FCA.
Conclusion
The MCD is set to be fully implemented on 21 March, but many UK lenders have already adopted its key provisions. The formal implementation date will therefore have little direct impact on the mortgage market.
Over time, consumers may notice some differences in the information about mortgages presented to them by lenders when they apply to take out a new loan. Other changes include the regulation of second charge mortgages and “consumer” buy-to-let loans. But protection for consumers in the UK mortgage market was extensively reinforced two years ago as a result of the MMR, so the European directive will have only a modest impact.
