Information
Registration & Regulation
Lightfoots LLP is a limited liability partnership registered in England and Wales under number OC343229
Registered office: 1-3 High Street, Thame, OX9 2BX.
VAT Registration Number: GB 194 3038 59
Lightfoots LLP - Solicitors of England and Wales. Authorised and Regulated by the Solicitors Regulation Authority (SRA) under number 508443.
For further information on standards and requirements of SRA regulation, please read the SRA Handbook.
FCA Business Plan 2016-17
The FCA have published the annual Risk Outlook and their Business Plan for 2016/17, which outlines the key regulatory priority themes for the current year. These priorities will form the primary focus of the FCA’s discretionary work over the course of the year ahead.
The FCA follow an intelligence-led approach that allows them to bring together information both externally derived and from across the FCA/PRA and other regulatory bodies to develop a cohesive view of the risks, issues, challenges and opportunities in the financial markets. These include competition issues, firm and consumer behaviour, regulatory and legal changes, among others. They use this process to identify the risks they believe are the most significant against the FCA’s statutory objectives. The following factors are considered in the development of the risk outlook.
As a result of their risk assessment, the FCA have identified the following seven key priority themes for their Business Plan for 2016-17:
The FCA have also noted additional key work-streams in relation to sustainable regulation, payment protection insurance, prudential regulation and ring-fencing.
Consumer Buy to Let
As a result of the government’s implementation of the Mortgage Credit Directive (MCD), there have been changes to how buy-to-let activity is regulated.
The FCA are adding a standard requirement/ limitation to the permission of the Consumer buy-to-let (CBTL) mortgage and consumer credit firms (holding certain regulated activities) that are not registered for CBTL mortgage business. This is displayed on the Financial Services Register and specifies that they are unable to carry on CBTL activity.
Advising on, arranging, lending and administering consumer buy-to-let (CBTL) mortgages is subject to a legislative framework, as set out in the MCD Order 2015.The FCA are responsible for registering, supervising and taking action where necessary against firms carrying out these CBTL activities.
The MCD Order defines a CBTL mortgage contract as:
‘A buy-to-let mortgage contract which is not entered into by the borrower wholly or predominantly for the purposes of a business carried on, or intended to be carried on, by the borrower.’
The legislation gives a series of circumstances that would constitute a buy-to-let customer acting for the purposes of business, and therefore taking them outside the legislation. These include where the customer:
The legislation also enables a firm to presume that a customer is acting for his/her business if the agreement includes a declaration from them stating this fact, and that they understand that they are forgoing protections offered by the legislation to consumers, unless the firm has reasonable cause to suspect that this is not the case.
PRA sets out Buy to Let Lending Norms
The Prudential Regulation Authority (PRA) published a consultation paper on 29 March (CP11/16) which seeks the industry’s comments on a supervisory statement setting out the PRA’s proposals regarding its expectations of minimum standards that firms should meet when underwriting buy-to-let mortgage contracts. The proposals also include clarification regarding application of the small and medium enterprises (SME) supporting factor on buy-to-let mortgages.
The supervisory statement follows a PRA review of underwriting standards in the buy-to-let sector which covered 31 firms (around 92% of the market). This review highlighted concerns about lenders’ growth plans and how they might meet them. In particular, there is a risk that firms relax underwriting standards, thus affecting their safety and soundness. The findings suggested a need for micro-prudential action.
The consultation paper proposes:
The Financial Conduct Authority regulates buy-to-let lending to related persons through its Mortgages and Home Finance: Conduct of Business sourcebook and lending in relation to consumer buy-to-let mortgage contracts through the Mortgage Credit Directive Order 2015. The PRA’s proposals do not apply to either of these types of lending. The PRA will also expect regulated firms to ensure that the standards contained in the supervisory statement are adopted by other firms undertaking buy-to-let lending within their groups. Comments are requested by 29 June 2016.
The standards proposed by the PRA mirror those set out by the FCA for regulated mortgages in terms of income verification, affordability assessment and interest rate stress testing albeit while recognising the different nature of risks and affordability criteria that would apply to the BTL sector.
Amendments to Rules on Loan to Income Ratios in Mortgage Lending
The Prudential Regulation Authority (PRA) have published a policy statement in March 2016 (PS11/16) which sets out final rules to keep second and subsequent charge mortgage contracts excluded from the loan to income (LTI) flow limit, following the implementation of the Mortgage Credit Directive (MCD). It also provides feedback to responses to the PRA’s February 2016 consultation paper (CP6/16) on amendments to the PRA’s rules on loan to income ratios in mortgage lending. The rules came into force on 26 March 2016.
From 21 March 2016, second and subsequent charge mortgage contracts fell under the definition of a regulated mortgage contract. This change is part of the UK’s implementation of the MCD, which applies equally to first and subsequent charge mortgages. The PRA’s rules, which implement a Financial Policy Committee (FPC) recommendation, place a LTI flow limit on regulated mortgage contracts. Hence, the implementation of the MCD means that the LTI flow limit would have automatically applied to second and subsequent charge mortgage contracts, which are currently exempted from the LTI flow limit.
Regulatory Sandbox
As part of their commitment to promoting effective competition in regulated financial services in the interests of consumers, the FCA have developed a regulatory sandbox, which provides a ‘safe space’ to businesses for testing innovative products, services, business models and delivery mechanisms without immediately incurring all the normal regulatory consequences of engaging in the activity in question.
The FCA have published, in April 2016, the eligibility criteria and testing criteria for any firm that wishes to use the Sandbox Framework for getting the regulatory approval for their business proposition, as summarised below.
FCA have said that the Regulatory Sandbox will be open to applications for authorisation by sandbox firms on 9 May 2016. They are expecting a high degree of bespoke engagement from the FCA staff and therefore will only be able to work with a small number of firms at a time.
The potential benefits of a regulatory sandbox could be significant from: