Mortgage Credit Directive Changes: Implementing MCD in the UK

1. Mortgage Credit Directive Conference

2. Mortgage Credit Directive – changes to the definition of a regulated mortgage contract James Ross | GOUGH SQUARE CHAMBERS

3. Mortgage regulation prior to 31.10.04 • Consumer Credit Act 1974 did not cease to apply merely because credit agreement was secured on land / used for purchase of land • Secured loans advanced by certain categories of creditor were exempt under s.16 of the CCA (e.g. local authorities and building societies) • Many secured loans (especially first charges) exceeded historic monetary limits

4. Regulated mortgage contracts after 31.10.04 • FSA regime under the Financial Services and Markets Act 2000 • Regulated activity of entering into / administering a regulated mortgage contract • RMCs exempt from CCA regulation under s.16(6C) • Mutually exclusive regulatory regimes operated by the OFT and FSA

5. Original definition of regulated mortgage contract Three stage test for RMC in Article 61(3) of the RAO: Lender provides credit to an individual (or trustees) Secured by first legal mortgage on land in the UK At least 40% of land used (or intended to be used) as or in connection with a dwelling by borrower or related person

6. Interim period from 01.04.14 to 21.03.16 • Consumer credit regulation transferred from OFT to FCA on 01.04.14 • Significant amendments to CCA, FSMA, RAO and introduction of new Consumer Credit sourcebook (“CONC”) • Firms had recently implemented Consumer Credit Directive • Transfer intended to make relatively little substantive changes to existing requirements

7. Mortgage Credit Directive • European Directive on credit agreements for consumers relating to residential immovable property (Directive 2014/17/EU) • Known as “CARRP” or the Mortgage Credit Directive (“MCD”) • UK Government adopted position that MCD added relatively little benefit to consumers but would impose substantial costs on firms • Scepticism that MCD would facilitate a better internal market in mortgage lending

8. Implementation of the MCD • Decision only to make such changes as absolutely necessary • New “appropriate framework” required for buy-to-let mortgages • FCA took opportunity to move second charge lending into mortgage regime • Key implementation date 21.03.16

9. Structure of new MCD regime after 21.03.16 • Important changes to definition of RMC in Article 61 of the RAO • New Article 61A setting out exemptions (Simon Popplewell) • Changes to MCOB (Thomas Samuels) • Mortgage Credit Directive Order 2015, including new consumer buy-to-let regime (Ruth Bala)

10. New definition of RMC in Article 61(3) Three stage test has changed: Lender provides credit to an individual or trustees (unchanged) Secured by mortgage on land in the EEA At least 40% of land used (or intended to be used) as or in connection with a dwelling

11. Changes in second stage of RMC test • Wording “first legal mortgage” used in original test has gone • “Mortgage” defined in Article 61(4) as including a “charge” • Second and subsequent mortgages and equitable charges now included within scope • Land can now be anywhere within EEA; not restricted to UK

12. Changes in third stage of RMC test • Original test required at least 40% of the land to be used (or intended to be used) as or in connection with a dwelling by the borrower or a related person • New test merely requires at least 40% of the land to be used (or intended to be used) as or in connection with a dwelling – not necessarily by the borrower or related person • This change brings buy-to-let mortgages within the RMC definition in Article 61A(3), subject to exemptions

13. Practice points relating to third stage of RMC test • MCOB 1.6.3R requires a firm to take reasonable steps to establish whether a mortgage will be an RMC • What does “in connection with a dwelling” mean? • FCA perimeter guidance referring to gardens and farms (PERG 4.4.7G)

14. Further practice points relating to third stage of RMC test • How does a firm know how the land is intended to be used? • Survey can include confirmation of how land is used • Application process / contract can give rise to estoppel (see Waterside Finance Ltd v Karim[2012] EWHC 2999)

15. RMC test – the negative requirement • In addition to the three stage RMC test, there is a negative requirement • Article 61(3): • “…such a contract is not a regulated mortgage contract if it falls within Article 61A(1) or 61A(2)” • Article 61A sets out various exemptions

16. The RMC exemptions • Regulated home purchase plan • Limited payment second charge bridging loan • A second charge business loan • Investment property loan • Exempt consumer buy to let mortgage contract • Exempt equitable mortgage bridging loan • Exempt housing authority loan • Certain second charge credit union loans

17. Temporal application of the new RMC test • Article 61(5) of the RAO deals with timing • Contracts made before 21.03.16 can only be an RMC if: • they fell within Article 61(1) at the time; or • the contract is a “consumer credit back book mortgage contract” within the meaning of article 2 of the Mortgage Credit Directive Order 2015

18. Consumer credit back book mortgage contracts • General intention was to bring existing regulated secured consumer credit agreements within the FCA mortgage regime • A “back book” contract will fall within the new RMC test if it was a regulated consumer credit agreement when made and would have satisfied the new RMC test if it had been in force • Ongoing duties under MCOB will therefore generally apply to back book mortgage contracts after 21.03.16

19. Transitional provisions for the back book • Transitional provisions for “consumer credit back book mortgage contracts” are contained in Article 29 of the MCDO • General intention was that borrowers would not lose any CCA protections as a result of the transfer of the back book into the FCA mortgage regime • Where a back book contract was void or unenforceable before 21.03.16, it will remain so (albeit subject to existing mechanisms for obtaining relief) • Certain CCA protections will continue to apply (e.g. interest not to be increased on default, rebate on early settlement) • Unfair relationships provisions in sections 140A and 140B of the CCA continue to apply

20. Article 3(1)(b) agreements • Article 3(1)(b) provides that the MCD applies to “credit agreements the purpose of which is to acquire or retain property rights in land or in an existing or projected building” • Article 3(1)(b) agreements fall outside the RMC test • Likely to need CCA permissions for entering into Article 3(1)(b) agreements • Article 3(1)(b) agreements need to comply with MCOB 14

21. What next? • Recent changes relating to consumer credit and then MCD have left regulatory regime in a poor state • FCA review of retained provisions of the CCA by 01.04.19 • Brexit unlikely to make much difference in short to medium term • Parliamentary counsel are likely to be in short supply

22. Any questions? E-mail: james.ross@goughsq.co.uk

23. Mortgage Credit Directive - Exemptions Simon Popplewell | GOUGH SQUARE CHAMBERS

24. The exemption provisions • Article 61A contains a number of exemptions to a contract being a regulated mortgage contract • However, these are only exemptions from being a RMC. • An agreement that would otherwise be a RMC but for Article 61A would still be a credit agreement. Therefore will need authorisation under Article 60B of the RAO unless there is an applicable CCA exemption • Need to also take into account CBTL provisions.

25. Article 72I RAO • Any consumer buy to let mortgage business carried on by a registered consumer buy to let mortgage firm which relates to an agreement entered into on or after 21st March 2016 is excluded from • Articles 25A (advising on RMCs); • 36A (credit brokerage); • 53DA (advising on regulated credit agreements for the acquisition of land); • 60B (credit agreements); and • 61 (RMCs) • Not all activities in relation to CBTLs exempt. For example debt collection and debt administration still potentially applicable.

26. The RMC exemptions • Article 61A of the RMC • Regulated home purchase plan • Limited payment second charge bridging loan • A second charge business loan • Investment property loan • Exempt consumer buy to let mortgage contract • Exempt equitable mortgage bridging loan • Exempt housing authority loan • Certain second charge credit union loans

27. Regulated home purchase plan • A way to buy a home without paying interest - Islamic mortgages • Is an authorised activity under article 63F of the RAO

28. Limited payment second charge bridging loan • Must satisfy the 3 stage test for being an RMC • It is a borrower lender supplier agreement financing the purchase of land • It is used as a temporary financial solution while transitioning to another financial arrangement for the land subject to the mortgage • The mortgage is a second or subsequent charge • The number of payments to be made is not more than 4

29. Second charge business loan • Must satisfy the 3 stage test for being an RMC; • Credit is over £25,000; • 2nd or subsequent charge; and • The agreement is 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

30. An investment property loan • Must satisfy the 3 stage test for being an RMC • Less than 40% of the land is used, or intended to be used, as or in connection with a dwelling by the borrower or a related person (or beneficiary of trust); and • The agreement is entered into wholly or predominantly for the purposes of a business carried on, or intended to be carried on, by the borrower

31. The business test • There is provision in Article 61A(3) for a business purposes declaration • This is not compulsory • Can be rebutted if the lender know or had reasonable cause to suspect not entered into for business purposes • Wood v Capital Bridging Finance Ltd [2015] EWCA Civ 451 • In respect of buy to let mortgage contracts is to be regarded as a business “for the purposes of this article” if • the borrower or a related person has never lived in the property (and is not intended to in the future); or • The borrower has more than one rental property • This is not a test found in the MCD • Can the buy to let test be used for CCA exemptions?

32. Exempt consumer buy-to-let mortgage contract • Is a consumer buy-to-let mortgage contract; and • Is outside the scope of the mortgages directive because of article 3(2) of that directive; or • Is a bridging loan

33. What is outside the scope of the mortgage directive • Equity release credit agreements (defined in MCD) • Employer to employee loans interest free or with rates of interest lower than generally available on the market • Interest free agreement where no other charges except the cost of securing the credit • Overdraft facilities where the overdraft has to be repaid inside a month • Credit agreements which are the outcome of a settlement reached in court or before another statutory authority • Article 3(2)(b) credit agreements which relate to the deferred payment, free of charge, of an existing debt

34. Bridging loan • Has the same meaning as Article 4(23) of the MCD • “a credit agreement either of no fixed duration or which is due to be repaid within 12 months, used by the consumer as a temporary financing solution while transitioning to another financial arrangement for the immovable property” • Recital 15 : “[credit agreements] whose purpose is to provide temporary financing between the sale of one immovable property and the purchase of another” • What about: • Where there is to be a sale of the old property, so no new financial arrangement? • Where there is not to be a sale of the old property, but rather renovation of the existing property?

35. Exempt equitable mortgage bridging loan • A contract that is a bridging loan • Is secured by an equitable mortgage on land; and • Is an exempt agreement within the meaning of article 60B(3) by virtue of article 60E(2) • E.g. a local authority or a person specified in rules made by the FCA (charities, friendly societies etc)

36. Exempt housing authority loan • Credit is to be provided by a housing authority; and • Is a bridging loan; or • Outside scope of the MCD; or • A restricted public loan within the meaning of article 60HA (i.e. general interest enactment test) in respect of which the borrower receives timely information on the main features, risk and costs at the pre-contractual stage, and any advertising is fair, clear and not misleading

37. Credit Union Loans • Must be a “limited interest second charge credit union loan” • i.e. borrower lender • 2nd or subsequent charge • Lender is a credit union • Rate of interest not exceed 42.6% • Borrower receives timely information on the main features, risks and costs of the contract at the pre-contractual stage; and • Any advertising of the contract is fair, clear and not misleading

38. Pre-existing exemptions • Article 62 – Arranging administration by an authorised person (administering RMCs only) • Article 63 – Administration pursuant to agreement with an authorised person (administering RMCs only)

39. CCA exemptions • Over £25k and for business purposes • Buy to let exemption in Article 60D (less 40% used as dwelling by borrower and secured) butnot applicable to Article 3(1)(b) agreements • Agreements relating to purchase of land where lender is a local authority, or specified by the FCA but subject to Article 60HA • 12 payments or less inside 12 months and secured or interest free • Low interest borrower lender loans, but for Article 3(1)(b) agreements only if meet general interest test, and given timely information on main features risks and costs of agreement and advertising is clear fair and not misleading • high net worth debtors but subject to Article 60HA • Article 60HA – precludes exemptions not permitted under MCD.

40. Article 3(1)(b) agreements • Likely to need CCA permissions for entering into article 3(1)(b) agreements • This is despite the fact that article 3(1)(b) agreements cannot be regulated consumer credit agreements (they are excluded by s.8 of the Consumer Credit Act 1974) • Whilst this looks strange, it is deliberate • Article 3(1)(b) agreements need to comply with MCOB 14

43. Thought process • Am I secured on land? • If not then not an RMC. • BUT, am I acquiring or retaining an interest in land? • is the customer a consumer ? • if yes, Article 3(1)(b). CCA exemptions unlikely to be applicable • Am I a CBTL? If yes, need to be registered CBTL • Is there a MCD exemption? If not then RMC • Is there an applicable CCA exemption? Should be if an RMC exemption

44. Examples • A barrister wants to borrow money to pay his tax bill. The loan is secured over his home

45. Examples • A dentist borrows £400,000 to purchase a second rental property. He uses the rental income to pay for his children’s school fees

46. Examples • A greengrocer borrows money to pay for his daughter’s wedding. He borrows this money by securing his loan against his greengrocer’s shop

47. Examples • A father borrows money to help his son buy a car. The loan is secured over the son’s flat (which the father owns)

48. Examples • A mother borrows money to help her daughter find the deposit for her first flat. The mother will be a co-owner of the flat to help obtain the mortgage. The loan for the deposit is unsecured

49. MCOB CHANGES Thomas Samuels| GOUGH SQUARE CHAMBERS

50. Regime Change