Will the Mortgage Credit Directive benefit consumers?

Why is the Law Society concerned about the effects of the Mortgage Credit Directive (MCD) and the Financial Conduct Authority’s (FCA’s) proposals for implementation? Charlotte Eborall of 3 Verulam Buildings, explains the background to the MCD and the FCA’s proposals and discusses the Society’s concerns surrounding lenders’ binding offers.

What’s the background to these rules?

In February 2014, the EU published the MCD (Directive 2014/17/EU on credit agreements for consumer relating to residential immovable property). The purpose of the MCD is to introduce a European framework of conduct rules for firms selling both first and second charge mortgages to ensure consumer protection. The MCD is required to be implemented by the UK by 21 March 2016.

What are the key features of the MCD implementation proposals?

In September 2014, the FCA issued a Policy Statement (CP 14/20) explaining the key features of the MCD and the way in which it will transpose the Directive into UK legislation (see FCA consults on MCD implementation, LNB News 25/09/2014 97). The FCA’s approach has been to use its existing Mortgage Conduct of Business (MCOB) rulebook or, where necessary, to copy out the MCD in order to give it effect in the UK. The FCA’s MCOB rulebook is already a robust set of rules and guidance detailing the way in which firms must sell mortgages and the FCA’s recent mortgage market review (MMR) has meant those rules have been further tightened since their inception.

The most significant effect of the implementation of the MCD is that second charge mortgages, which currently fall under the interim consumer credit regime, will be regulated by MCOB. Thus, second charge lenders will need to seek the necessary authorisation and permissions from the FCA to continue their business and, in respect of new loans, will need to comply with the same pre-sales disclosure and assessments as first charge mortgagees. Current second charges will be regulated by the new regime in respect of their post-sales disclosure as well.

This is in line with the UK government’s previously stated intention to regulate second charge mortgages and is intended to address:

  • poor sales practices
  • the lack of affordability assessments, and
  • inadequacies in relation to dealing with consumers in payment difficulties

There are other important changes to the current MCOB regime, which are to ensure an appropriate degree of consumer protection:

Disclosure requirements

The MCD will introduce more stringent pre-contractual and early disclosure requirements for firms. The Key Features Information (KFI) currently provided by firms will need to be augmented, and ultimately replaced, by the European Standardised Information Sheet (ESIS). The ESIS is required to be provided at the time a binding offer is made by the lender (see below). Although this has a high degree of equivalence with the current KFI required by MCOB, the ESIS introduces:

  • information on the new seven-day right of reflection period during which the consumer may consider a binding offer (as to which, see below) from the lender
  • extra information on foreign currency loans, including an illustration of the impact of changes in exchange rates, and
  • information and worked examples of the impact of interest rate changes on the repayments under a mortgage, including a calculation of the ‘APRC’ (annual percentage rate of change), and describing repayments should interest rates rise to the highest level seen in the past 20 years

Binding offers

Although the MCD does not prevent the provision of conditional offers to consumers, it makes it a requirement for a lender ultimately to produce a binding offer which does not contain conditions. The provision of the binding offer then triggers the commencement of the ‘reflection period’ which is imposed by the MCD, during which the consumer has at least seven days to consider the binding offer.

Financial promotions

The MCD strengthens current MCOB legislation surrounding financial promotions (which are required to be clear, fair and not misleading). It requires firms to ensure that adequate explanations are provided of the features of the mortgage and to provide additional general information about mortgages (which may be provided on a website).

Conduct requirements

Conduct requirements are expanded by the MCD such that specific levels of knowledge and competency are required for intermediaries and lenders.

Minor changes are made to the lender’s requirement to assess affordability for a first charge mortgage. Second charge mortgagees come under new rules requiring the assessment of affordability for second charge holders. Early repayment becomes a universal right of the consumer and amended disclosure rules are drafted into MCOB to require lenders to explain the implications of settling early.

What is the significance of the proposals around binding offers?

The proposed new MCOB rules require a firm to provide the customer with a binding offer in an offer document (MCOB 6A.3.1(1) R). The binding offer is the latest time by which the ESIS must be provided to the customer (see MCOB 6A.3.1(3) R and MCOB 4A.2.1(1) R). The binding offer is also the trigger for the customer’s reflective time period of at least seven days to begin to run.

The provision of a binding offer is not ordinarily currently undertaken by UK mortgage lenders. Instead, lenders tend to provide ‘in principle’ mortgage offers, which are subject to a series of due diligence checks before the monies will be advanced. So the provision of a binding offer is likely to be a new step for most mortgage lenders.

In the FCA’s Policy Statement (para 2.19), the FCA suggests that:

‘We propose leaving it to firms to establish the precise trigger for their making this binding offer, it could for example, be when obtaining references and a satisfactory survey, equally it could be when receiving the certificate of title from the solicitor.’

What are the Law Society’s concerns?

The Law Society does not support the above proposal. In particular, it does not agree that the provision of the certificate of title should be the trigger to render a conditional offer binding upon the lender. The Law Society’s view is that the offer process must be controlled by the lender throughout.

The Law Society considers that using the certificate of title as the trigger for a binding offer would leave consumers with very little time to reflect upon the offer and seek an alternate mortgage offer (which would be very unlikely at such a late stage in the process). It would therefore not achieve the purpose of consumer protection intended by the MCD and the FCA.

In fact, the Law Society notes that the time when a mortgage offer is classified by the English courts as legally binding is when monies are advanced by the lender (see Abbey National Building Society v Cann and another [1991] 1 AC 56, [1990] 1 All ER 1085, per Lord Oliver). But the Law Society proposes that the legislation should consider the practical reality—consumers would not proceed with property transactions without offers of finance that they considered to be binding. In the existing process, the consumer therefore effectively treats as binding a conditional offer the conditions of which are to be satisfied by the consumer. Equally, lenders would not make offers (albeit conditional) that they did not consider themselves bound to provide upon satisfaction of those conditions. On that basis, the Law Society proposes that the conditional offer should, in fact, be regarded as the binding offer under the MCOB rules. This could be achieved by making refinements to the current conditional offers provided by mortgage lenders.

If the MCD is implemented in the proposed form, what would be the impact for lawyers and their clients?

There is no specific rule under the proposed new MCOB rules requiring lenders to consider the certificate of title as the trigger for the issue of a binding offer. But mortgage lenders would be obliged, under the current drafted rules, to determine what constitutes their binding offer, which may mean having to amend their mortgage offer documentation.

For conveyancing lawyers, the ability of the lender to choose when it issues a binding offer, and what constitutes that binding offer, could make the conveyancing process very difficult. Solicitors would be required to advise their clients as to when the reflective period arises and the implications of such a reflective period arising for another seller or purchaser in the same property chain. As the Law Society notes, this could create regulatory implications for solicitors, as well as increasing costs for their clients.

Are there any other issues with the proposals? What should lawyers do next?

The Law Society has also noted that the FCA proposes to ‘turn on’ MCD rules from 21 December 2015. Because mortgage offers tend to remain open for a period of between three and six months, mortgage offers issued after September 2015 may become non-compliant in the following year. The position becomes even more complex where there is a chain of property sales and more than one mortgage offer to be considered.

The Law Society has requested a meeting with the FCA to discuss the proposed MCOB drafting and the timing of the binding offer. Lawyers should await discussions between those entities before considering how to amend their conveyancing process with clients.


Interviewed by Nicola Laver.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

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