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.