Mortgage Credit Directive Order 2015

Lord Tunnicliffe Excerpts

Thursday 19th March 2015 Grand Committee

[Lord Newby (LD)]

Noble Lords might find it helpful if I start by outlining the background to the legislation. In February 2014 the mortgage credit directive—MCD—was agreed, giving member states until 21 March 2016 to ensure that it is implemented. The MCD has two broad aims: to protect consumers by setting minimum regulatory requirements that member states must meet and to promote the creation of a more harmonised European mortgage market.

However, the UK already has a strong regulatory framework in place to protect consumers in the residential mortgage market. Under this framework, the independent regulator, the FCA, has the authority to put in place, supervise and enforce a range of rules to ensure that firms act responsibly when conducting residential mortgage business. Since this framework was put in place in 2004, the FCA has been able to make incremental changes and develop a regime with strong consumer protections, tailored to the specifics of the UK market.

The MCD does not offer many additional benefits to UK consumers beyond those already provided. However, it does have the potential to increase the burden on business. In recognition of this, the UK’s approach throughout the negotiations on the MCD was to try to align the directive’s requirements with the existing UK regulations, in order to minimise the impact on UK industry and consumers. This strategy proved highly successful and the Government were able to secure a good outcome for the UK.

Once the directive was agreed, the Government set out an approach to implementation that was an extension of the earlier negotiation strategy. We decided to build on the existing UK regulatory regime, minimising the impact on the UK market, avoiding disruption and ensuring that the gains made from improvements in regulation over the past 10 years were not squandered unnecessarily. This approach means that implementation of the MCD will be achieved primarily through adjustments to existing FCA rules. However, there are areas where UK legislation has to be changed, and that is the purpose of the draft order under consideration today.

There are two main areas where the draft order makes a significant change. The first is to the regulatory framework for second charge mortgages. These are loans secured on property that is already acting as security for a first charge mortgage. The terms first charge and second charge refer to the priority of securities held by the lenders, where the second charge is subordinate to the first. Typical uses for this type of loan include debt consolidation and home improvements. Currently, the scope of FCA mortgage regulation is limited to first charge mortgage lending, with second charge lending regulated as part of the FCA’s consumer credit regime.

The Government previously committed to move second charge mortgage lending into the regulatory regime for mortgage lending on the basis that it is more appropriate to regulate lending secured on the borrower’s home consistently. This proposal was welcomed by the industry. However, it was decided that this move would be postponed to coincide with the implementation of the MCD and reduce the number of regulatory changes that firms would have to ensure compliance with. As a result, this draft order will ensure that, as of 21 March 2016, the FCA will be able to regulate the vast majority of secured lending under one regulatory regime.

The second area where this order will make a significant change is with respect to buy-to-let mortgages. Existing UK legislation excludes buy-to-let mortgages from the scope of FCA regulation. This approach is driven by two key considerations. The first is that, unlike lending to an owner-occupier, the borrower’s home is not at risk. Second is the acknowledgement that buy-to-let borrowers tend to be acting as a business.

The Government are committed to introducing FCA regulation only where there is a clear case for doing so in order to avoid putting additional costs on firms that would ultimately lead to higher costs for borrowers. However, while the MCD allows member states to exempt buy-to-let from the detailed requirements of the directive, it requires that member states using this option put in place an appropriate framework at a national level for buy-to-let lending to consumers. The Government have decided to use this option to put in place the minimum requirements needed to meet the UK’s legal obligations, as they are not persuaded of the case for the full conduct regulation of buy-to-let mortgages.

The order under consideration today sets out these rules and gives the FCA the power to register, supervise and enforce them in line with its existing statutory duties. This draft order has been prepared in close co-ordination with the FCA, industry and consumer groups. The overall approach we have taken has had broad-based support from all these groups and it has been extremely pleasing to see how we could work together to achieve a positive outcome for the UK. By delivering on our key objective and putting this legislation in place well in advance of the transposition date, we will give the mortgage industry the certainty it desires and the best chance possible of a smooth transition to the new regulatory framework.

The net cost of this draft order is expected to be £11 million in total over a 10-year period. However, it is also worth noting that the cost of taking a copy-out approach in this instance was estimated to cost £48.7 million more per year over the same period.

I hope I have persuaded the noble Lord that this statutory instrument will ensure compliance with the EU mortgage credit directive in a manner that minimises the impact on industry, retains the strengths of our regulatory framework for mortgages and ensures that consumers experience limited change as a result.

[Lord Tunnicliffe (Lab)]

My Lords, I thank the noble Lord for introducing this order. He has persuaded me that it is perfectly sensible and that it achieves the objectives.

My sole comment relates to the tone of the description of our relationship with the EU in this matter. I would love to have heard a tone that said we were concerned about the health of the EU in these markets—because, in all probability, this is a good EU directive, taking the EU as a whole—and that we had secured appropriate freedoms to build on our own well developed market regulation. It is just a matter of tone, but one has to remember that the idea of having these unified directives is to clean up—though that is too hard a term—or to codify European markets as a whole; and, in general, that is a good thing. As far as the order itself goes, how it was created and how it has been evaluated, I am content.

Motion agreed.