With UK firms having been given the opportunity to adopt the revised rules up to six months early, many have chosen this option and are therefore already complying with the directive’s requirements.
In practice, borrowers will notice few changes in the process of taking out a mortgage as we pass the MCD implementation date, according to the Council of Mortgage Lenders (CML) which does not expect the move to have any significant effects on the market or on the availability of mortgages.
However, in a report, the CML says that over time, borrowers may notice changes in the disclosure documents presented to them by lenders when they are considering taking out a new mortgage. Other changes as a result of the directive include the creation of a new class of consumer buy to let borrowing, sometimes abbreviated to CBTL, as well as modifications affecting foreign currency loans and second charge lending.
It points out that in many ways, implementation of the directive in other European countries will align them with standards already applying in the UK, where the mortgage industry has been operating for the last two years under a system of enhanced consumer protection following the mortgage market review (MMR).
Nonetheless, the UK, like other EU countries, is required to implement the MCD, which is intended to set minimum regulatory requirements across Europe.
An assessment from the European Mortgage Federation (EMF) of how different countries were working towards implementation the directive said that the MMR in the UK already went beyond the core provisions of the MCD.
The EMF also estimated that many firms in the UK were six months ahead of most of their European counterparts on implementation. Firms in Belgium and Denmark had also made rapid progress, and had almost completed the process of adopting the directive by last autumn.
At that stage, the EMF was predicting that a handful of European states, including Finland, Latvia, Portugal, Slovenia and Malta, might not meet the 21 March deadline. But all of those countries were expected to have adopted the directive within four to eight weeks thereafter.
Government, regulators and firms in the UK have all supported the adoption of the MCD, even though consumer protection in this country has already been comprehensively re-appraised and reinforced through the MMR and the directive does little in practice to extend protection for UK borrowers.
The process of implementing the MCD has been overseen by HM Treasury, although the rules will be supervised by the Financial Conduct Authority (FCA).
The CML report also points out that the transition towards implementation of the MCD has been smoothed by the decision to give lenders a six month window, within which they have been able to adopt the directive’s measures to their own timetable. This means that firms have, in effect, been allowed to operate within the requirements of the directive since last September. This has helped reduce any broader, cumulative effects on the mortgage market as a consequence of every firm having to work to implementation on the same date.
One change that borrowers will notice over time is in the way in which information is presented to them as part of the sales process. Consumers who have become familiar with the UK’s ‘key facts’ illustration (KFI) will gradually see it replaced by the European standardised information sheet (ESIS).
The EMF has described the introduction of the ESIS as ‘a bone of contention’ in the UK, given that consumers are already familiar with the KFI. But by 2019, the process of transition to ESIS will be complete. Until then, many firms will continue use the KFI, as they have to make significant changes to systems, staff training and other processes in order to adopt the ESIS.
But even if lenders stick with the KFI for now, they will have to introduce a topped up version of the document, showing to borrowers what the monthly repayment cost of a mortgage would be if interest rates were to rise to a 20 year high. Firms can do this either by applying their own rate, or one specified by the FCA reflecting the Bank of England base rate.
This requirement has been an unexpected late twist in the preparations for lenders for, although the FCA set out this requirement in its original consultation on the MCD, it inadvertently omitted it in later documents setting out the rules, the CML explained.
The FCA subsequently rectified this, but only in January, when it published the consultation paper, Mortgage Credit Directive: Minor changes to our rules and guidance. ‘We were disappointed that this change was set out so late in the process. Despite this, however, many firms are on track to fulfil the requirement,’ said a CML spokesman.
Buy to let mortgages are not generally subject to conduct regulation in the UK because they are used to finance investment decisions by landlords who buy a house as a business. They are therefore seen as fundamentally different to a residential mortgage. But the MCD introduces the new category and concept of consumer buy to let lending, which will be regulated.
In future, there will therefore be a distinction between professional landlords, who take out buy to let mortgages for business reasons, and so called ‘accidental’ landlords who have taken out a loan for a property they are renting out but not wholly or predominantly for the purposes of a business.
The report explained that the intention is that people who may be planning to let out a property they have inherited, or a home they have previously lived in, will count as a consumer buy to let borrower, whose loan will be regulated by the FCA.
Lenders will have to interpret this, and decide on a case by case basis, how to treat individual customers. Estimates vary about the proportion of buy to let mortgages that will be consumer loans, but the number will be small. Most buy to let mortgages will be unaffected.
Lenders offering mortgages that a borrower can repay in a foreign currency will have new requirements under the directive. They will have to monitor the rate of exchange between the currency in which borrowers pay their mortgages and that in which they receive their incomes. They will also have to warn customers about their level of exposure and, if the two currencies fluctuate beyond a certain limit, the lender would have to offer the borrower the option of switching currency.
The directive also introduces new rules about binding offers and a period of refection for the consumer. Once a lender has made an offer, it can only be withdrawn if the information provided by the customer is inaccurate. Customers will also have a seven day reflection period, during which they are free to accept or reject the mortgage offer. Borrowers must be told in a timely manner if their mortgage application is declined.
