You need to be aware of new rules which have come into force as a result of the Mortgage Credit Directive (MCD) being implemented.
Our rules for second charge mortgages, including regulated loans taken out before 21 March, are tailored to the risks that occur with secured lending.
For instance, the vast majority of sales require advice. Lenders are expected to carry out detailed affordability assessments, as well as deal with customers who experience payment difficulty – in a way that considers their individual circumstances.
Our implementation of the MCD is largely based on our existing rules. But we will be introducing some new requirements for firms, including the need to:
- explain a product’s essential features and the firm’s disclosures adequately
- give customers a European Standardised Information Sheet (ESIS) disclosure document.
If you want to arrange, advise on, enter into or administer second charge mortgages, you need relevant mortgage permissions. If you undertake a regulated activity without the relevant permission you are operating illegally and committing a criminal offence.
Things you need to consider
You should get to know how we expect firms to deal with customers and conduct themselves.
Our Mortgages and Home Finance: Conduct of Business (MCOB) rules are tailored to lending secured on a customer’s home and in some instances are more prescriptive than the consumer credit regime requires.
Among the key provisions that apply to mortgage intermediaries are:
- advised sales (MCOB 4.7A)
- initial disclosure (MCOB 4.4A)
- adequate explanations (MCOB 4A)
- remuneration (MCOB 2A.1).
To implement the MCD we have also made amendments to specialist sourcebooks including the:
- Training and Competence sourcebook (TC) for MCD knowledge and competence requirements
- Prudential sourcebook for Mortgage and Home Finance firms and Insurance Intermediaries (MIPRU) – MCD second charge intermediaries require PII cover
- Supervision Manual (SUP) for the aggregate data you have to report using the Retail Mediation Activities Return.
In addition to these detailed mortgage-specific rules, our Handbook sets high-level standards that apply to all regulated firms – for example, our Principles for Business (PRIN) and Senior Management Arrangements, Systems and Controls (SYSC).
Advising second charge mortgage customers
Advice must be given if there is interactive dialogue between the firm and the customer during the sale, or if debt consolidation is the loan's main purpose.
You must recommend a product, or products, that are suitable for the customer based on your assessment of their needs and circumstances. If there is no suitable product, you cannot recommend the product that is ‘least worst’. However, you do not have to recommend a single most suitable product.
You need to think about a number of things before making a recommendation, including whether it is appropriate for a customer to:
- have payment stability
- take out a mortgage of a particular term
- make early repayments.
We expect advisers to consider a lender’s eligibility criteria. But this does not extend to carrying out a full affordability assessment against the lender’s responsible lending criteria – assessing affordability is the lender’s responsibility.
We require mortgage sellers and advisers to obtain a relevant Level 3 qualification. Anyone in these roles on 21 March 2016 will have until 21 September 2018 to make sure they achieve this qualification.
Advising on both first and second charge mortgages
Firms do not have to broaden their services to include both first and second charge mortgages; however, if your firm does offer both, it needs to take these different products into account when giving advice.
If an existing mortgage holder wishes to borrow more, you must make the customer aware that other forms of borrowing are available that may also meet their needs.
For example, if a customer is considering a second charge mortgage, you must make them aware they may not be able to get a further advance. However, you do not need to provide advice on the suitability of alternatives if they are outside your scope of service.
MCD implementation and transfer of second charge regulation – firms have to comply with the new rules from this date
21 March 2016
Quarterly aggregate reporting through MLAR
From 21 March 2016
Transitional arrangements for MCD knowledge and competency requirements
Until 21 March 2017
Quarterly transaction-level data reporting through product sales data
From 1 April 2017
Transitional arrangements for second charge mortgage sellers in post at 21 March 2016 to gain Level 3 qualifications (new mortgage sellers have 30 months to gain this)
Until 21 September 2018
Professional experience of staff can be relied on to meet MCD knowledge and competency requirements
Until 21 March 2019
- Flowchart of the MCD authorisation process
- Policy Statement PS15/9: Implementing the MCD and the new regime for second charge mortgages, feedback to CP14/20 and final rules
- Consultation Paper CP14/20: Implementing the MCD and the new regime for second charge mortgages
- Perimeter Guidance Manual (PERG) Ch 4 (outline of regulated mortgage activity)
- contact us or email [email protected]