Fears over effect of Mortgage Credit Directive on mortgage prisoners

There have been reports of a number of lenders not allowing concessions to customers who are trapped on unfavourable rates when applying the affordability criteria under the Mortgage Market Review (MMR), a new set of mortgage rules which were implemented in April 2014. Yet the problem could get worse when the European Union (EU)’s Mortgage Credit Directive comes into force on March 21 2016.

The Directive will insist that the lender carries out a comprehensive affordability assessment for all applicants, and that if they cannot meet the criteria, then their application would be rejected. This would apply even if the deal the customer is applying for is actually cheaper than their current arrangement, and they would therefore be forced to remain on their existing deal. This gives rise to a paradoxical situation whereby the borrower is told ‘you can’t afford this mortgage, so you need to stay on your existing, more expensive mortgage’.

There will be an exception for customers who re-mortgage to cheaper deals with the same lender, but in practice this is unlikely to help much, as a lender has little incentive to offer their current customers more attractive deals.

The present situation under MMR requires lenders to check if the mortgage repayments would be affordable if interest rates rose to 6%, before they grant a mortgage. It does allow lenders to use their discretion for ‘mortgage prisoners’ – those trapped on unfavourable deals as described above. In practice, only a few smaller lenders are actually making use of this facility, but when the Directive is implemented, it will not be available to anyone.

Martin Lewis, founder of the consumer website Moneysavingexpert.com, has announced that he intends to campaign against this element of the Directive. He will meet the EU’s commissioner for financial services, Jonathan Hill; and intends to write to the Financial Conduct Authority’s chief executive, Martin Wheatley; and a Minister from the Treasury in the new UK Government.

A few weeks previously, as part of the General Election campaign, Nigel Farage, leader of the anti-EU United Kingdom Independence Party, told Mr Lewis’ website that the Directive “will … cut many borrowers from the best rates.”

The chief executive of the Ipswich Building Society, one of the few lenders currently offering concessions to mortgage prisoners, also criticised the EU proposal. Paul Winter commented:

“There are almost 800,000 mortgage prisoners across the UK – including older borrowers, the self-employed and those who have experienced life changes. It should not be the case that those who are approaching the end of a deal are forced to continue on a more expensive SVR rate and are denied choice and entry to an otherwise competitive market. We’re calling for a more inclusive approach to mortgage lending.”

Other effects of the Directive will include:

• Second charge mortgages (often known as secured loans) will be subject to a similar regulatory regime as first charge mortgages, including requirements regarding affordability assessments and advisers’ qualifications
• Customers must be given a European Standardised Information Sheet – a new method of ensuring certain important information is disclosed to the customer. This document will replace the existing Key Features Illustration
• Additional regulation for buy-to-let mortgages

The information shown in this article was correct at the time of publication. Articles are not routinely reviewed and as such are not updated. Please be aware the facts, circumstances or legal position may change after publication of the article.


Personal insolvencies at nine year low

The Insolvency Service has revealed that personal insolvencies in England and Wales in 2014 totalled 99,196, which represents a 1.8% fall from 2013. This is the lowest figure for nine years and the fourth successive year in which the figure has fallen.

It thus seems that the second quarter of 2014 may have been something of an anomaly. This quarter saw a rise of 5.1% in personal insolvency events when compared to the same period in 2013.

Bankruptcies accounted for just 20,318 of the insolvency events, representing a fall of 18.3% compared to the previous year. This is the lowest number of bankruptcies the UK has experienced since 1998.

The number of debt relief orders entered into fell by 3.1% to 26,688.

However, the number of Individual Voluntary Arrangements (IVAs) that were taken out in 2014 bucked the trend. The figure for this type of arrangement of 52,190 represents a 6.8% annual increase. IVAs thus accounted for the majority (53%) of insolvency events in 2014.

A DRO allows those with debts of up to £15,000 and assets of £300 or less and disposable income of £50 per month or less to have their debts and interest frozen for 12 months, and to have their debts written off if their financial position has not improved by the end of this period.

An IVA is where creditors representing at least 75% of an individual’s debt agree to an arrangement whereby the individual’s debts are restructured, on the basis that only a certain percentage of the debt needs to be repaid. It is administered by an insolvency practitioner.

In January 2015, the Government announced plans to increase the bankruptcy threshold to £5,000. At present, individuals can be the subject of a bankruptcy petition over debts as small as £750, with this threshold having remained unchanged since 1986.
At the same time, the requirements for entering into a DRO will be relaxed. The maximum debt that can be covered under a DRO will rise from £15,000 to £20,000; and the maximum value of assets that a DRO holder can have will rise from £300 to £1,000. If the individual owns a vehicle of up to £1,000 in value, then this does not need to be included in the asset limit. The requirement for DRO holders to have no more than £50 per month of income left after essential expenses have been accounted for is expected to remain unchanged.
The Government estimates that 3,600 more people will be able to enter a DRO each year as a result of the changes. It is estimated that the proposals will become law in October 2015.

The information shown in this article was correct at the time of publication. Articles are not routinely reviewed and as such are not updated. Please be aware the facts, circumstances or legal position may change after publication of the article.


Plans drawn up to bring BTL mortgages under FCA regulation

Firms selling buy-to-let (BTL) mortgages will soon have to operate under a new regulatory regime. At present, these types of mortgages are essentially unregulated, unless the borrower intends to use more than 40% of the property as their residence.

However, as with residential first and second charge mortgages, the regulatory landscape for BTL mortgages will change as a result of the European Union’s Mortgage Credit Directive. EU member states are faced with the choice of either applying the Directive to BTL mortgages, or else putting in place an appropriate alternative regulatory system. The UK has chosen to take the latter course of action, and hence financial regulator the Financial Conduct Authority (FCA) issued a consultation paper in early February 2015 on how it plans to regulate the BTL market.

Under these proposals, firms operating in the BTL market (including lenders, brokers and administrators) will need to register with the FCA, although strictly speaking they will not be ‘authorised’ by the financial watchdog. Firms already regulated by the FCA for other activities are expected to be able to follow a simple registration process, which might consist of little more than informing the FCA they intend to carry out BTL activity. BTL firms that are new to FCA regulation will be expected to provide information about the firm’s key personnel, and their criminal records, disciplinary records and skills and competence.

Applications for BTL registration can be considered by the FCA from September 2015 onwards. Initial registration fees are expected to be £500 or less (£100 or less for firms already authorised by the FCA), while periodic registration fees are not expected to exceed £500 for lenders or £250 for intermediaries.

Once registered, firms will be subject to a risk-based supervision programme by the FCA. The conduct standards for BTL firms will include requirements relating to areas such as:

• Provision of information to clients
• Verification of information supplied by clients
• Creditworthiness assessments
• Training and competence
• Calculation of Annual Percentage Rates
• Treatment of clients in arrears

The FCA will have the power to take enforcement action against BTL firms.

Registered BTL firms will need to complete data returns and submit these to the FCA, but the requirements are expected to be less onerous than those of the existing Mortgage Lenders and Administrators Return (MLAR) which authorised mortgage firms need to complete.

Complaints about BTL mortgages will also come under the jurisdiction of the Financial Ombudsman Service for the first time, with BTL firms expected to pay the same case fee as other firms, i.e. £550 per case once the allowance of 25 free cases per year has been exhausted.

Regardless of the EU’s Directive, with the size of the BTL market having grown by a quarter in both 2013 and 2014, many will feel that the introduction of regulation to the BTL sector is highly desirable.

A consultation on the proposed changes has commenced, and firms are invited to submit their views prior to March 19 2015. The new BTL regime is expected to commence on March 21 2016.

The proposed changes will only affect residential BTL mortgages – commercial BTL mortgages will remain unregulated.
The information shown in this article was correct at the time of publication. Articles are not routinely reviewed and as such are not updated. Please be aware the facts, circumstances or legal position may change after publication of the article.


MOJ Issues Guidance to CMCs on New Complaints Regime

The Ministry of Justice (MOJ) has issued guidance to the claims management companies (CMCs) it regulates ahead of the forthcoming move of CMCs to the Legal Ombudsman’s jurisdiction.

The much delayed plan for customers to be permitted to refer complaints about CMCs to the Ombudsman finally comes into force on January 28 2015. A complaint made before this date can still be considered by the Ombudsman if the company’s final response letter to the customer is sent after the switchover date.

Perhaps the most important step CMCs now need to take is to update their complaints procedures, so that they clearly and unambiguously state that customers can refer complaints to the Legal Ombudsman, once the company has had an opportunity to look into the matter.

Customers of CMCs should be informed of the changes, and the MOJ asks that this is done on the next occasion that the company corresponds with a particular customer. So for example, a written paragraph could be added to all client letters, and a footer to any email sent.

When sending a final response letter, CMCs will need to make reference to the right to refer the matter to the Ombudsman, will need to state the time limit for referring the complaint (this is still to be determined) and will need to give the Ombudsman’s contact details.

The Ombudsman will also look at cases where the company has not sent its final response within eight weeks.

Companies will also need to train their staff regarding the changes.

During an investigation, the Ombudsman may make requests for paperwork or other information about a company’s dealings with the relevant customer, and the CMC will be expected to comply promptly with such requests.

The move will also, in one respect, reduce the powers of the Claims Management Regulator at the MOJ. The MOJ will no longer be able to request that companies apologise to customers or make refunds, as orders such as these will now be delivered by the Ombudsman where necessary. The Ombudsman will have the power to issue legally binding instructions to CMCs, under which they could have to pay up to £30,000 in redress to disadvantaged customers.

The Legal Ombudsman and the MOJ intend to work together under the new regime. For example, the Ombudsman may identify developing trends in the complaints received, and the MOJ may then use this information to take enforcement action against companies.

Fees to be paid by companies for funding the Legal Ombudsman service will be:

  • Turnover of under £5,000 – £75
  • Turnover of £5,000 to £14,999 – £150
  • Turnover of £15,000 to £24,999 – £250
  • Turnover of £25,000 to £74,999 – £340
  • Turnover of £75,000 to £163,636 – £540
  • Turnover of more than £163,636 – 0.33% of turnover up to £1 million, plus 0.22% of turnover between £1 million and £5 million, plus 0.18% of turnover above £5 million, all subject to a cap of £40,000.

The information shown in this article was correct at the time of publication. Articles are not routinely reviewed and as such are not updated. Please be aware the facts, circumstances or legal position may change after publication of the article. For more information, visit some of our other pages.


FCA Disclosure Requirements: Meeting the Regulator’s Requirements

The Financial Conduct Authority (FCA) has revealed some negative findings in its latest thematic review into implementation of the Retail Distribution Review (RDR). The study focuses on whether firms correctly disclose charges and other matters at the start of the advice process. The FCA says that 73% of the 113 firms surveyed failed to meet at least one of the requirements regarding disclosing the cost of advice. In the executive summary to its report, the FCA describes this as ‘unacceptable’.

Understanding the Retail Distribution Review (RDR)

The RDR came into force on January 1 2013. Amongst the changes was a ban on FCA-regulated firms receiving commission payments for investment advice. As the only way for these firms to receive compensation firms is through client fees, there is an increased focus on whether companies are explaining the charging structure clearly. Firms often discuss fee charging structures in a client agreement, terms of business letter or other document, which they need to provide on the first occasion the adviser meets a client.

Advice charges might include an initial fee paid at the time the advice is given and ongoing charges paid at set intervals in the future, e.g. annually.

Learning About Common Industry Problems

In 58% of firms, there were issues with the generic cost of advice information provided. 50% of firms were insufficiently transparent as to what costs would be for individual clients. 58% did not give sufficient ‘additional information’, such as that ongoing advice fees may fluctuate. 34% did not clearly describe the nature of the service they offer in return for the fee or did not inform clients of their right to cancel ongoing advice fees.

Separate to the issue of fees, 31% of firms claiming to provide a restricted advice offering were not clearly informing clients about the nature of the restriction.

Wealth managers (financial advisers who give investment advice) and private banks were said to be the worst offenders.

To help businesses, we have created a list of issues firms should remember:

  • When computing fees as a percentage of the investment amount, a cash example should be given, such as what 3% of £80,000 is.
  • When charging fees on an hourly rate, the information provided should include an estimate of the number of hours each part of the service is likely to take.
  • When computing ongoing fees as a percentage of the investment amount, it should clear that this amount will fluctuate in line with the performance of the investment.
  • If the firm has two or more fee charging methods, it should clear whether clients have a free choice among these methods in all circumstances or in what circumstances each method applies
  • It should be clear when ongoing advice charges will commence
  • When the client needs ongoing service, firms must have robust procedures to make sure they deliver advice to the standard promised to the client and at the correct times.

The FCA has already referred two unnamed firms – one financial adviser and one wealth manager –to their Enforcement Division due to issues identified during the review. The FCA warned that more firms might receive possible disciplinary action if the agency does not see improvements by the time it conducts its next study in the third quarter of 2014.

Clive Adamson, director of supervision at the FCA, said he was ‘disappointed with the results,’ and urged firms to improve standards. ‘These results are a wake-up call and we expect the industry to respond,’ he added.

For more information on IFA compliance, send us a message or give us a call at 0845 154 6724.


MAS consults on debt advice standards

The Money Advice Service (MAS), an independent organisation set up by government to provide advice on money matters to the general public, has launched a 12-week long consultation on debt advice standards in the UK. Following this consultation it intends to create a single framework for quality standards in the debt advice sector, which would apply to both free to use debt charities and to commercial debt management companies. The latter already have their own codes of practice such as the Code of Conduct of the Debt Managers Standards Association.

Compliance with the requirements of the new framework will be mandatory for all organisations who wish to receive MAS funding. The move is aimed at reassuring customers as to the service they will receive in the future.

MAS assumed responsibility for co-ordinating the debt advice sector in April 2012, and is seeking to improve the accessibility, quality and consistency of advice.

A survey by the Money Advice Trust, a charity which operates the National Debtline service, has previously found widespread differences in how debt advice is delivered and regulated across different organisations.

MAS has three principles which it sees as key to the new framework: being receptive to client needs, demonstrating strong governance and promoting reflective and on-going learning.

The new framework is likely to require role profiles of debt advisers to be much clearer, and to set minimum standards for skills, knowledge and competencies for staff working in the sector.

After the consultation, MAS will finalise the new framework, and from April 2014, organisations which receive funding from MAS will need to demonstrate that they are complying with its requirements. MAS will be able to accredit existing codes of practice and quality standards that meet the requirements of the framework.

Opinions are invited from the debt advice sector on the proposals, and comments can be made via the MAS website until March 15 2013. Alternatively views can be expressed at one of the consultation events MAS will hold across the UK in February 2013.

Caroline Siarkiewicz, Head of the UK Debt Advice programme at MAS, said:

“In the current economic climate, it is vital that debt advice is always of the highest quality. When people look for advice they need to know they can trust what they are hearing and that the right people, with the right training, are helping them. We have seen excellent practice in many parts of the country and today’s consultation is the start of a process to bring the standard across the whole country in line with that best practice.”

Responding to comments that commercial debt management companies already have their own codes of practice, Ms Siarkiewicz added:

“We are conscious the fee-charging sector has its own codes of practice. This framework is not to preclude them but we want them to look at our framework and map their existing standards against our framework.”

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