Mortgage Credit Directive: Implementation of new MCOB rules for 1st and 2nd charge mortgages (PS 15/9) and further amendments to FCA’s rules and guidance (CP 16/2)
The countdown has begun – with the new MCD provisions due to come into force on 21 March 2016. The biggest impact of the regulatory change will be felt by the second charge/ secured lending firms, as the FCA move the conduct requirements for these firms from CONC to an expanded MCOB.
Synopsis of Key Changes
After setting out the final MCD rules in PS 15/9 in March 2015, the FCA have since incorporated them in the revised MCOB. We have summarised below, for the benefit of our clients, some of the key changes to the regulatory framework for secured lending activities, with the extended MCOB being used by the FCA as the primary MCD implementation tool in conjunction with consequential changes made to the Supervision, Training & Competence and other relevant sourcebooks.
- Scope – MCD has widened the definition of a ‘Regulated Mortgage Contract’ to include all loans secured over land in the EEA (as against the current definition of 1st legal charge over land in the UK). The scope extends to all loans where at least 40% is used in connection with a dwelling (removing the need for it to be used by borrower or their relatives and therefore capturing ‘consumer buy to let’ (CBTL) loans for which a tailored regime will come into force from 21st March 2016.
- Regulatory Permissions – the FCA’s authorisation is required for carrying out any second charge lending or advising activity. Second charge lending permissions have been aligned with 1st charge mortgages, which introduces a different set of regulated activities for secured loans (such as advising, lending and administering etc) with new obligations. There are new registration and conduct rules requirements for CBTL activities.
- Conduct Rules – new chapters have been added in MCOB for MCD compliance, while old chapters have been retained for non-MCD lending (for MCD exempt bridging and lifetime mortgages). The new rules completely transform the way second charge lending activities will henceforth be regulated. Some of the most significant changes to conduct rules relate to the following areas:
- Disclosure – new disclosure requirements for intermediaries and lenders. Please note further amendment to disclosure rules proposed in CP 16/2 noted below
- Advised sales – as for 1st charge mortgages, the FCA expect most second charge lending to be carried out on a fully advised basis by duly authorised and qualified advisers. Limited ‘execution-only’ sales will be permitted but they will have to follow a rather strict framework designed for such sales
- ESIS – additional chapter added for the new disclosure document, which applies to all second charge lending from 21 March 2016. First charge lenders may opt for old style KFI with a ‘top up’ disclosure during transitional period
- Adequate Explanation – must be provided orally or in durable medium before a binding offer is issued. This will be especially challenging for ‘execution only’ sales.
- Responsible lending – change of approach for all secured lending, aligned with rules for fist charge lending
- Binding Offer & Reflection Period – new requirement for both 1st and 2nd charge lenders
- Arrears and collections –all secured lenders will be required to follow the enhanced provisions (Post MMR) set out in MCOB 13, duly supported by various ‘finalised guidance’ papers published by the FCA for fair treatment of customers in mortgage arrears
- Back-book – the servicing of the second charge back-book will be governed by new rules with some retained provisions (such as charging of simple interest on default charges/ fees etc and in relation to early settlements), which are different to the rules for first charge loans.
- Financial Promotion – the current MCOB 3 will be deleted in its entirety and replaced with MCOB 3A, introducing enhanced application of the rules for both MCD and non-MCD qualifying credit activities. Application of rules widened to include ‘communication of information’ besides ‘financial promotion’.
- Other changes – SUP and TC sourcebooks now include new provisions for regulatory reporting and staff training & qualification requirements. While the qualification requirements are subject to transitional relief, the second charge firms will be required to submit additional regulatory returns (MLAR and RMAR) from April 2016 onwards (though the date of submission for PSD sale and performance data has been put back to April 2017)
The above summary highlights the key areas of MCD impact especially for second charge lending activities and is not intended to be an exhaustive listing of all changes.
Lightfoots has been providing regulatory advice and services to firms in relation to both CONC (for consumer credit activities) and MCD/ MCOB (1st and 2nd charge lending and advising activities) compliance. The services include:
- Making application for FCA authorisation or Variation of Permission, including dealing with the FCA’s queries and correspondence
- Legal advice on the scope of regulatory permissions and exemptions
- Tailoring legal and regulatory documentation including ESIS/ Offers, lender-broker agreement, Board Committee Terms of References (ToR), T&Cs etc
- Review of governance and risk framework including systems, processes and controls to align them with the new requirements
- Regulatory/legal ‘health check’ of firm’s internal policies and controls with a view to identifying any areas that need further improvements
- Outsourced services for arrears management, complaints handling, and
- Full suite of legal services such as litigation and recovery and compliance with Pre-Action Protocol etc
Firms wishing to avail any of the services can contact us by email or telephone.
Further Amendments to FCA Rules – CP 16/2
The Government has proposed certain amendments that will, among other things, clarify the regulatory status of housing association mortgages, and other agreements which were entered into before 1 April 2014 and regulated under the Consumer Credit Act 1974. If this legislation is made and comes into force as anticipated, the FCA will make the required changes to its Handbook, in particular to the Perimeter Guidance manual and Glossary of terms. On 15 January 2016, the FCA published a consultation paper, CP 16/2, which consults on these changes now, so that they can be made before 21 March 2016 (see link below).
The FCA are proposing some consequential changes to the Mortgage and Home Finance: Conduct of Business sourcebook (MCOB) to implement the MCD. The key changes are 1) amendments to MCOB 4.4A on initial disclosure to align more directly with the MCD and the FCA’s current rules which do not require such disclosures to be made in a durable medium though firms can do so if they decide, and 2) changes to the MCOB transitional provisions for the “topped up” key facts illustration to ensure the inclusion of the monthly payments figure should interest rates rise to a 20-year high. The FCA will publish a summary of the consultation feedback it receives together with its response in the March 2016 Handbook Notice.