December CPD Newsbrief — Financial services regulation and ethics
Meeting the Mortgage Credit Directive
On 21 March 2016 the European Mortgage Credit Directive (MCD) must be implemented.The Treasury is consulting stakeholders in the UK mortgage market, including banks,building societies intermediaries and builders, on how theUKshould meet its obligationsunder the Directive.
Most of the MCD provisions are concerned with setting minimum regulatory requirements thatmember states must meet to protect consumers who take out credit agreements relating toresidential property. The FCA was able to anticipate some of the emerging EU proposals andintroduce them as part of the Mortgage Market Review (MMR). Consequently, many of theDirective’s requirements are already met under current FCA rules, but there a few areas thatwill require FCA rule changes. The most significant of these relates to second charge andbuy-to-let lending.
The MCD covers all lending to consumers where the purpose is to buy or retain rightsover residential property, including where the loan is secured on something other than theproperty concerned. This clearly encompasses second charge and buy-to-let lending. TheUK government always intended to bring second charges within the wider mortgages regimeand decided to make the changes to coincide with the MCD. However, it has always believedthat business borrowers are better placed than consumers to judge whether the contractsthey make with other businesses are in their best interests.
The government contends that a buy-to-let mortgage is a primarily a business propositionunless it falls within the FCA definition of a regulated mortgage contract. As such, the proposalis for buy-to-let mortgages to be exempt from the detailed provisions of the Directive, but onthe condition that there is an alternative framework in place to protect personal borrowerstaking this type of mortgage.
MCD also aims to facilitate a more effective internal market for lending across the EU, but theUK government does not consider this practical for a number of reasons. Not only is it difficultto understand credit risk in unfamiliar markets, but it is notoriously complex to enforce loansunder foreign legal systems. The government has focused its involvement in the developmentof MCD on aligning its requirements with existing UK regulations as far as possible.
n the meantime, the Financial Policy Committee (FPC) has been given legal powers to reinin the mortgage market if it expects a housing bubble that could threaten the stability ofthe financial system. Currently, the FPC can only make recommendations to lenders aboutloan-to-value and loan-to-income ratios. It did this in June 2014 when it asked that lendersshould restrict mortgages representing more than 4.5 times income to no more than 15% ofeach lender’s total lending. The FPC also asked lenders to apply the new affordability stresstest at three percentage points above prevailing rates.
Under the new powers, which will be effective in 2015, the Bank of England will bein a position to force borrowers to find bigger deposits and limit the amount theycan borrow to buy a property if necessary. This requirement will apply to buy-to-letborrowers, unlike the existing ‘recommendations’.
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