As MMR reaches its first anniversary, we are months away from what could be a potentially chaotic period caused by having to implement the European Mortgage Directive.  The final date for implementation of most of the directive provisions is 21 March 2016, but the rules will allow firms to implement early, with the option, if ready, to introduce the provisions from 21 September 2015.  For consumers, these changes do not appear to add any real protections or benefits.  For firms they add process and paperwork with significant IT development which add little or nothing to the post MMR regime.

The biggest single change is the integration of the first and second charge mortgage regimes.  After years with second charge loans operating under the provisions of the Consumer Credit Act, we will now have a unitary regime for all loans on residential property secured by a charge over the land. This will mean that the second charge industry will have to comply with all the FCA MCOB rules on suitability, affordability, acting in the customers best interests, and delivering all the same documentation as their first mortgage colleagues.

Last year’s MMR introduced major changes to affordability, suitability and introduced stress testing, and the directive changes have little impact on mortgage advice or the sale, but it does affect many parts of the sales process.

Disclosure

It requires disclosure, via a durable medium, of a number of elements to ensure the consumer is aware of any restrictions on the advice being provided. This durable medium provision means that it must be capable of being read before the sales process commences and be referred to again at a subsequent point.  The disclosure must set out the scope of the service being provided.  Firms will have to decide whether they are going to offer second charge loans as part of their service.  In the same way that the rules allow the exclusion of direct deals and further advances, a firm can exclude seconds.  However, they will need to consider their competitive position and how they will explain all these exclusions to the consumer.

Disclosure will need to include the usual details on remuneration, roles and responsibilities and a new requirement to detail all the lenders the broker deals with.  In addition all firms will need to have a schedule of lenders and their rates of commission (procuration fees) available if requested by a consumer.  As a side show to all of this any firm which has the term independent in its company name or trading name will have to remove it unless it is truly looking at the whole of the newly expanded mortgage market.  Accordingly firms will need to amend their terms of business or use some form of initial disclosure document to meet these requirements.

The ESIS

The introduction of the European Standardised Information Sheet (ESIS) can be deferred for up to three years, but many lenders are likely to introduce this as part of their changes before March 2016.  The remainder will use the dispensation that allows the use of the existing KFI with top-up disclosures.

Mortgage brokers will continue to use the ESIS or “KFI plus” as part of their discussion to compare options and arrive at a recommendation – indeed the recommendation is one of the trigger points for a broker to issue an ESIS.  We are likely to see a period during the six month interim period where brokers will have to cope with different lenders producing old style KFI’s, others the new KFI-plus and the remainder may have introduced the ESIS.  It will be important that all brokers understand the options open to lenders  and brokers will need robust briefings from lenders to ensure that they can fully explain the new content.

There could potentially be some consumer confusion when a consumer is comparing an “ESIS” issued by one lender against a “KFI plus” issued by another.  However, such instances should be limited and the potential for consumer detriment will be mitigated by the mandatory advice process required under MMR.  Any consumer using a good mortgage broker will be able to navigate through any potential confusion.  One crucial aspect of this will be that any sourcing system used will deliver an accurate document that matches the lenders requirements and includes the detail required under the directive.

Advisers will use a version of the “ESIS” or “KFI plus” to talk through details early in the sales process as they do now and we do not anticipate problems with this.  The lender will have to issue a final offer referring to an existing or new “ESIS” or “KFI plus” that makes all the detail clear.  It might be helpful to make clear that any documents issued prior to the final offer will be illustrative and it will be dependent on the lender to define the final position.

The need for new FCA permissions

The lack of full transitional arrangements for pipeline cases leaves little time for all mortgage firms to be ready to implement these new requirements .  Some lender firms may have difficulty in meeting the requirements by 21 March 2016.  In allowing lenders a six month window to “go early” Treasury has given some respite, but we doubt that enough will be ready for this be an industry-wide solution.  Alongside this, the process set out for firms adding seconds to their permissions, the consumer buy-to-let provisions and the timetable for authorising second charge firms runs well into 2016, therefore if lenders transition early they may be excluding some firms from being able to transact with them.  The complexities for firms trying to establish timings on gaining full consumer credit permissions or whether they will need this post March 16 is challenging.

Advising on lots of different interest Rates

We are concerned that in many cases advisers will have to explain up to 5 different rates to consumers – the actual rate charged; any revert to rate; the APRC relating to the actual loan, a second APRC being the highest rate the loan might have attracted in the previous 20 years and any stress rate and its impact on affordability.  This will only add to confusion and make the need for advice absolute in order to meet the adequate explanation provisions.  AMI considers that these provisions make the ability of firms to undertake execution only business more difficult.  However the interest rate disclosure provisions are a mandatory requirement under the directive, so the UK has to implement.

Stress Testing Rates

Second charge mortgage products  do not often carry five year plus fixed rates therefore they will have to stress test the repayments on most of their products.  In addition, by the time the consumer comes to taking out a second charge loan the vast majority of consumers would already be well into their first charge mortgage fixed rate period.  FCA has simplified the stress regime for second charge lenders basing this on the combined mortgage costs, which should make the regime practical.

Consumer buy to let

A new category of regulated loans had emerged to protect individuals where they are borrowing to fund a property where it was acquired without the initial intention to rent.  Borrowers can self-certify to confirm they are already landlords to exempt themselves from the provisions.  Firms will need to advise the FCA if they intend to transact such business within their existing mortgage permission.  Most firms will want to hold this permission for the occasional event particularly let-to-buy, but many of these may be landlords already or previously, which will exempt them from the rules.

Professional indemnity insurance

The MCD sets professional indemnity insurance requirements at €460,000 for each individual claim, and €750,000 per year for all claims. This will capture all mortgage broker firms – both first and seconds.  AMI will be working with FCA and the insurance market to try to ensure that there are workable solutions for all.  We are concerned about the additional costs that this will levy on firms, in particular smaller firms. The FCA has confirmed that the current exemptions allowed to firms to self-insure or to use capital off-set will no longer apply, therefore all firms will need appropriate insurance cover.

Conclusion

Many firms consider that they have until next March to be ready.  However, what is clear is that all firms have work to do with the FCA to ensure they have the correct permissions in place.  Firms will have to make decisions as to when they will convert to the new regime within the 6 month window, and we need to ensure that all advisers have the correct training and documentation in place to ensure that consumers are properly advised.  Even more so than MMR there will have to be good liaison between lenders and brokers to ensure an effective migration that works well for consumers.

Robert Sinclair
AMI – April 2015