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Regulator Assessment Summary: Implementation of the Mortgage Credit Directive and Consequential Changes in Second Charge Mortgage Regulation

Core Content

The FCA conducted an assessment of the implementation of the Mortgage Credit Directive (MCD) and consequential changes in second charge mortgage regulation, effective from 21 March 2016. The assessment aimed to evaluate the impact on businesses, particularly second charge mortgage lenders and intermediaries, and included cost-benefit analysis across multiple regulatory areas.

Main Viewpoints and Key Information

Regulatory Scope and Implementation

• The MCD introduced a European framework for conduct rules for both first and second charge mortgage lenders.
• The FCA implemented the MCD by relying on existing rules for first charge lenders, which already exceeded MCD requirements, and by copying the MCD into its rules for second charge lenders.
• The policy was not part of the Cutting Red Tape review.
• It affects the whole of the UK.

Types of Businesses Affected

• Second Charge Lenders: Initially not subject to the mortgage regime.
• Second Charge Intermediaries: A subset of the 5,500 mortgage intermediaries.
• First Charge Firms: Some were affected by the information sharing requirement (around 200 firms).

Cost Estimates

Total estimated net cost to business: £12m (annual)
Business Net Present Value: -£122.8m
BIT Score: £60.25m

Impact Breakdown

A1 - Responsible Lending

• Requirements: Affordability assessment and interest rate stress testing for second charge mortgages.
• Costs: One-off compliance costs of £330k for lenders and £85k for brokers; ongoing costs of £225k and £35k respectively.
• Revenue Impact: Estimated 20% reduction in lending volumes, leading to a £11m annual revenue loss.
• Caveats: Overestimates due to baseline assumptions and lack of adjustment for post-crisis lending trends.

A2 - Arrears Handling

• Requirements: Full application of MCOB 13, including telephone call recording.
• Costs: One-off costs of £600k and ongoing costs of £700k for second charge lenders.
• Notes: These costs are considered an overestimate compared to MCD requirements, but the alignment with MCOB is justified.

A3 - Service Disclosure

• Requirements: Initial oral disclosure of service scope and remuneration.
• Costs: Estimated annual cost of £250k based on 20,000 loans.
• Notes: May involve double-counting due to overlapping disclosure requirements.

B1 - Advice

• Requirements: Staff must hold a Level 3 qualification; 30-month transition period.
• Costs: One-off costs of £1.1m and ongoing costs of £1.6m.
• Notes: Some costs were already incurred by intermediaries.

B2 - Data Reporting

• Requirements: Transaction-level and aggregated data reporting to the FCA.
• Costs: One-off £500k and ongoing £300k for lenders; one-off £200k and ongoing £800k for intermediaries.
• Notes: Some costs were already incurred by firms with mortgage permissions.

B3 - Approved Persons

• Requirements: Broader control functions under the mortgage regime.
• Costs: One-off costs of £500 per lender and £150 per intermediary.
• Notes: Costs are likely lower due to existing governance and control functions.

B4 - Fee Rolling-up Ban

• Requirements: Prohibition on automatic inclusion of fees in loan amounts.
• Costs: One-off compliance costs of £150k.
• Notes: Minor ongoing costs expected.

B5 - Debt Consolidation

• Requirements: Direct payment to creditors for consolidated debt.
• Costs: One-off £700k and ongoing £200k.
• Notes: Overestimated due to assumptions about payment methods.

C1 - Information Sharing Between Charge Holders

• Requirements: Timely sharing of information during repossession or sale shortfalls.
• Costs: One-off £100k for second charge lenders and £1m for first charge lenders.
• Notes: Modifications were made to reduce compliance burden.

D - Unquantified Proportionality Aspects

• Disclosure of Alternative Finance Options: Not costed, but can be integrated into existing sales processes.
• Fair Treatment of Vulnerable Customers: Already covered under CONC, so no new costs expected.
• Arrears Charges: Implemented through existing rules, with minimal additional cost.
• Customer's Best Interests: Existing rule applied, with minor incremental cost.

Summary of Regulatory Changes

• Responsible Lending: Affordability and stress testing introduced for second charge mortgages.
• Arrears Handling: Enhanced rules, including telephone call recording.
• Service Disclosure: Oral disclosure required for service scope and remuneration.
• Advice: Level 3 qualification for staff; transition period of 30 months.
• Data Reporting: Transaction-level and aggregated data submission to the FCA.
• Approved Persons: Broader control functions required.
• Fee Rolling-up Ban: Prohibition on automatic inclusion of fees in loan amounts.
• Debt Consolidation: Direct payment to creditors for consolidated debt.
• Information Sharing: Mandatory sharing of information during repossession or sale shortfalls.
• Vulnerable Customers and Customer Interests: Existing rules applied, with minor additional requirements.

Conclusion

The FCA's implementation of the MCD and consequential changes to second charge mortgage regulation introduced additional compliance and operational costs for second charge lenders and intermediaries. While the total estimated net cost to business was £12m annually, the actual impact may be lower due to some overestimation in cost assumptions. The policy also aimed to improve responsible lending practices and fair treatment of customers, though the full benefits of these measures have not been quantified.