You need to be aware of new rules that have come into force as a result of the Mortgage Credit Directive being implemented.
If you are a lender and you also arrange or advise on mortgages, see the page for second charge intermediaries.
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 have introduced some new requirements for firms, including the need to:
- provide an adequate explanation of a product’s essential features
- issue a binding offer
- provide a 7-day (minimum) reflection period
- 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 will be operating illegally and committing a criminal offence.
We can confirm that as we often do following the introduction of new regulation, we are speaking to second charge firms to understand how they are complying with the affordability rules introduced as part of the Mortgage Credit Directive in March 2016.
Things you need to consider
You should get to know how we expect firms to deal with customers and conduct themselves throughout the life of a mortgage.
Our Mortgages and Home Finance: Conduct of Business (MCOB) rules are tailored to lending secured on a customer’s home. In some instances they are more prescriptive than the consumer credit regime requires.
To implement the MCD we have also amended specialist sourcebooks including the Training and Competence sourcebook (TC) for MCD knowledge and competence requirements, which apply to a range of staff, and the associated transitional provisions.
In addition to these detailed mortgage-specific rules, our Handbook sets high-level standards that apply to all regulated firms – for example, our Senior Management Arrangements, Systems and Controls (SYSC).
MCOB 11 establishes a framework for how we expect firms to lend responsibly. Essentially, a lender cannot enter into a transaction (a new mortgage or a contract variation that involves additional borrowing) unless it can show that the customer can afford the mortgage.
This involves considering their:
- verified income (net of tax and national insurance)
- spending – both committed spending (eg credit cards, loans) and basic spending (eg food, utilities)
- basic household quality-of-living costs.
A lender will also need to consider the impact of any future interest rate rises on higher-ranking mortgages, as well as its own loan.
Consumer Credit Act rules
If a second charge mortgage was regulated under the consumer credit regime as at 20 March 2016, it will have become a regulated mortgage contract. Therefore, relevant MCOB rules (such as those on post-sale disclosure and charges) will apply from 21 March 2016.
Additionally, some Consumer Credit Act (CCA) provisions remain for these loans, including the:
- prohibition on interest being increased on default (section 93)
- right to complete payments ahead of time (section 94)
- right to a rebate on early settlement (section 95).
It is important that you treat customers with a mortgage payment shortfall fairly. Your firm will need to have and operate a written policy for doing so. MCOB 13 sets out the steps you should follow once a customer is in payment shortfall, before you take any possession action.
Systems requirements will depend on your firm’s business model and current practices. However, two areas of change that are common to all second charge firms:
- ESIS. Second charge firms need to issue the ESIS for all second charge mortgage sales that are subject to the MCD rules.
- Data reporting. We delayed the collection of transaction level second charge data from lenders until Q2 2017. But you need to report aggregated data for all your regulated activities in both the Mortgage Lenders and Administrators Return forms and second charge ‘sub-forms’ from March 2016. Technical documents will be released in due course, but the specific reporting fields are set out in the Handbook.
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
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)