Second charge firms’ preparation for the MCD should be advanced but the FCA sets out how to comply with the new rules
With less than two months until the implementation of the Mortgage Credit Directive, firms should be well on their way to meeting the new rules. The biggest impact will be felt by the second charge sector, which has been brought within scope of the FCA’s mortgage rules for the first time.
The first action by second charge firms should be to ensure they hold, or have applied for, the relevant mortgage permissions if they intend to carry on lending, administering, advising or arranging second charge mortgages. This includes firms administering a backbook of mortgages entered into prior to 21 March 2016.
Around 100 second charge firms have already submitted their application and there is still time for those that have not. Any that fail to apply before the deadline and continue to undertake the regulated activity will be committing a criminal offence.
Firms also need to understand how the FCA expects them to conduct themselves. Our Principles for Business are an important part of this, setting out the fundamental obligations for firms we regulate. This includes treating customers fairly and conducting business with due skill, care and diligence.
Firms will need to familiarise themselves with our handbook rules and guidance as they differ from the Consumer Credit Act requirements that most will be used to. Reading through our policy statement (PS15/9) on MCD implementation and the consultation paper that preceded it (CP14/20) will also be helpful.
It is important to note that all firms are required to meet a certain base level of requirements – our threshold conditions – regardless of the number of second charge loans they conduct. As such, all firms, irrespective of size, need to have regard to the regulatory requirements.
Lenders must demonstrate they have assessed a mortgage as affordable by the customer before entering the transaction. This involves taking account of the verified income of the borrower and their expenditure, including things like credit card and loan repayments, as well as basic expenditure such as on food and utilities. In addition, the lender must consider the impact of any future interest rate rises on higher-ranking mortgages, as well as its own.
Advice and arrears
Advice must be given if there is interactive dialogue between the firm and the customer during the sale or if debt consolidation is the main purpose of the loan. Advisers are required to recommend a product (or products) that are suitable for the customer based on an assessment of their needs and circumstances. In arriving at their recommendation, advisers must consider a range of factors, including whether it is appropriate for a customer to have payment stability, have a mortgage of a particular term or make early repayments.
But while many of our rules focus on the treatment of customers during the sale of a mortgage, we also require firms to comply with our post-sale requirements. For example, we expect firms to treat customers with a mortgage payment shortfall fairly and put in place and operate a written policy for doing so.
Existing second charge mortgages
Second charge mortgages that are currently regulated under the CCA regime will become regulated mortgage contracts from 21 March, and relevant Mortgage Conduct of Business provisions will apply from that date (for example, the rules on post-sale disclosure and charges).
In addition, some CCA provisions will be retained for these loans, including the prohibition of interest being increased on default, the right to complete payments ahead of time and the right to an early settlement rebate.
Further information on the MCD and applying for the correct permissions is available on the FCA website. We have also published several factsheets and other material tailored to the different types of firm affected by the directive. Our handbook is available online and can be ‘time-travelled’ to see the rules that will apply on future dates. Our website also includes information for firms that intend to undertake first charge activities and consumer buy-to-let activities, which will also be affected by the MCD changes.
Philip Salter is director of retail lending at the FCA