The Mortgage Credit Directive in the UK

What is the Mortgage Credit Directive?

The Mortgage Credit Directive (2014/17/EU) (The ‘MCD’) is a minimum harmonisation directive designed to promote an efficient and competitive single market for mortgages and to prevent irresponsible lending practices judged to have been prevalent in the market in recent years.  The MCD entered into force on the 21st March 2014 and was to be transposed by member’s state international law by 21st March 2016.

The MCD applies to both first charges and second charges.  In the UK, second charge mortgages were of course previously regulated under the FCA consumer credit regime, with first charge mortgages usually being dealt with by the FCA’s FSMA regime. 
Implementation of the MCD within the UK

The approach taken to the MCD within the UK has been to use the existing regulatory regime as far as possible to implement the requirements of the MCD, rather than transposing the requirements directly.  Many of the primary changes brought by the MCD have accordingly been dealt with in changes to the FCA handbook and in particular the Mortgage and Home Finance Conduct of Business section (“MCOB”). 

Key Changes

Ongoing reforms carried out by the FCA in recent years anticipated some of the requirements of the MCD, but key changes have included the following:

Second Charge and Buy-to-let Mortgages

  • Bringing within the ambit of FSMA regulation certain buy-to-let mortgages and second charge mortgages, through changes to the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (SI2001/544) and the implementation of the MCD Order 2015.

Product Disclosure Document - the ESIS

  • The introduction of a new product disclosure document for all mortgages, the European Standardised Information Sheet (ESIS), which firms must now provide to customers.  The rules and guidance relating to MCD pre-applications disclosure are now set out in MCOB 5A.  The ESIS is a prescribed and standardised product disclosure document designed to help consumers shop around.
  • Within the UK transitional provisions allow however for UK firms to have until 21st March 2019 to provide an ESIS to customers.  However, to take advantage of transitional provisions, certain top up disclosures must be included in the key facts illustration.  These relate to:
    1. Information on the 7 day right of reflection period introduced by the MCD.
    2. Where applicable, extra information for foreign currency loans, including an illustration of the impact of a 20% change in the exchange rate. 
    3. Information for consumers on the potential impact on interest rate changes, describing both the APRC and monthly repayments should interest rates rise to the highest levels seen in the past 20 years.
    4. Such information is to be provided with the Key Facts Illustration rather than being part of the Key Facts Illustration.

Binding Offers 

  • The MCD requires lenders to make a binding offer.  In the UK market, it is of course common practice for lenders firstly to make an offer in principal, subject to further steps being taken to satisfy the lender that lending should actually take place.  Lenders are still able to make a conditional offer, but if they do so, rules relating to binding offers set out in MCOB 6A.3 set out that the lender will need to make its offer binding, whether in a new document or simply by confirming the details already given in a conditional offer.

Right of reflection 

  • Once a binding offer is made, consumers must have at least 7 days from the making of the binding offer to reflect on such offer and can accept the offer any point during such reflection period (see MCOB 6A34R).

Interest rate calculation

  • The MCD requires a particular method of calculating the APRC, although it is similar to the FCA existing rules.  The method of calculation for the APRC is set out in MCOB 10A.  The MCOB accordingly now contains two different methods for calculating the APRC for a loan, depending on whether the loan is covered by the MCD.
  • As suggested above, the ESIS will require a second APRC where borrowing is on a variable rate, reflecting a 20 year high on the reference rate used for any variable rate or using a benchmark rate set by the FCA.  Such benchmark will be calculated as being the difference of the current Bank of England base rate and the high level of Bank of England base rate over the past 20 years added to reversionary interest rate for the mortgage product.

Pre-sale disclosures 

  • There are additional pre-sale disclosure obligations required by the MCD and now set out in the MCOB 4.4A, 4A and 4A.2.  These include a requirement for an adequate explanation of disclosures made by the lender, the essential features of the product and the impact of a consumer.  For advised sales, such requirements are unlikely to prove onerous.  However, for non-advised processes, there is likely to be considerably more of an onus on the lender.  General information about mortgage products is to be made available, whether in hard copy or in electronic form and intermediaries are to provide details about their services in good time before the service is actually provided.

Training and monitoring 

  • Minimum standards of professionalism for lenders and their intermediaries are also set out by the MCD.  Such changes have been reflected by the FCA in the training competence section of the FCA handbook.  The MCD allows until 21st March 2017 for individuals to reach the required standards.

Other Changes

  • Tying or bundling products, (i.e. where a mortgage is only available if the borrower takes out other financial products as services) is banned by the MCD, subject to some available exemptions.  These are set out by the FCA in MCOB 2A.2.
  • Affordability requirements have been amended by the FCA to ensure that they comply with the MCD and are set out in the MCOB 11A.
  • The MCD provides a right to repay any mortgage early.  Whilst this has for many years been almost universally available within the mortgage market in the UK, it was not previously a defined right.  The MCD changed the position in this regard and is now reflected in the MCOB 2A.4. 

Areas of the MCOB Where FCOA Rules Have Not Changed

There are a number of areas within the FCA’s regulation where the FCA chose not to change its rules in light of the MCD.  Such areas are summarised in the FCA’s consultation paper in implanting the MCD and include rules on the customer’s best interest, advice, arrears and foreclosure and early repayment charges.  The FCA’s explanation (at annex 3 of the document) is essentially that the obligations imposed by the MCD were already dealt with adequately by existing regulations.

Transitional Provisions

The transitional provisions relating to the MCD are set out in part 4 of the MCD Order 2015, as amended by the Mortgage Credit Directive (Amendment) Order (SI2015/1557). 

Action for Lenders

Lenders should in light of the various changes made by the MCD review their processes and business models to ensure that they align with the new requirements.  Particular attention will need to be paid to the new training requirements.

For advice and assistance in relation to the Mortgage Credit Directive or any other commercial lending issue, please contact Philip Gordon or Patrick Keown in our Belfast Office.

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