FCA consults on Mortgage Credit Directive implementation

The financial regulator, the Financial Conduct Authority (FCA), has published details of how it proposes to implement the European Union’s Mortgage Credit Directive. Most of the provisions of the Directive need to be in force in the UK by March 21 2016.

The greatest impact of the changes will be on firms who offer second charge mortgages, which are sometimes known as secured loans. Essentially, once the Directive is in force, these products will be subject to similar standards to those which currently apply to first charge mortgages. Hence, from March 2016 the most important section of the FCA Handbook for second charge lenders and brokers will be the Mortgage Conduct of Business Rules (MCOBS), and not the Consumer Credit Rules (CONC) as at present.

Firms offering second charges can therefore expect to be subject to the same requirements for proving affordability which currently apply to first charge mortgages. Second charge advisers will be expected to make customers aware of all available options: second charge mortgage, re-mortgage, further advance with existing lender, unsecured loan etc. They will also be expected to comply with rules on pre and post-sale disclosure, and submit the same level of data on regulatory reports as first charge firms.

Second charge firms will be able to apply to the FCA for mortgage permissions from April 2015.

Individuals giving advice on second charge mortgages will also need to hold an appropriate qualification, such as the Mortgage Advice Qualification or the Certificate in Mortgage Advice and Practice. However, this requirement will not come into force until September 21 2018.

Lenders and brokers who offer first charge mortgages can be re-assured that the Directive will not bring about another change of similar magnitude to the Mortgage Market Review. In most cases, the FCA’s existing rules regarding first charge mortgages already satisfy the requirements of the Directive.

However, there will be new requirements for first charge mortgage firms in the area of post-sale disclosure. Firms will need to issue a European Standardised Information Sheet (ESIS) instead of a Key Features Illustration (KFI). The ESIS will require additional information which does not currently appear on a KFI, including:

  • Details of the new right to a seven day cancellation period
  • An illustration of the effect on payments that would occur were interest rates to rise to the highest level experienced in the previous 20 years
  • For foreign currency mortgages, an illustration of the effect on payments that a 20% change in the exchange rate would have

Until March 21 2019, first charge firms will be able to rely on a ‘topped-up KFI’, but after this date will need to provide a full ESIS. Second charge firms will need to provide the ESIS from March 21 2016.

A consultation on the proposals runs until December 29 2014, and firms, trade associations and consumer groups are invited to respond. However, it should be noted that, under EU law, the new rules will need to satisfy the provisions of the Directive, and so the scope for changes may be limited. The new mortgage rules firms will be subject to as a result of the Directive should be published in the first quarter of 2015.

Lifetime mortgages, most bridging loans, most business loans and credit union mortgages are exempt from the Directive.

Christopher Woolard, FCA director of policy, risk and research said of the proposed changes:

“We recognise that second charge mortgages are beneficial for some customers but we are concerned that consumers can be put at risk by poor sales practices and ineffective affordability assessments. Given the risk of consumer detriment, we want to embed good practice and we believe that applying our mortgage rules is the best way to do this.”

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.