Mortgages: Cerberus

Lord Wrigglesworth Excerpts

Wednesday 28th November 2018 Lords Chamber

[Lord Bates]

It is a major issue. The average size of the mortgage held under UK Asset Resolution is around £120,000. People find themselves in these very difficult situations, but we are bound by the rules as they are. There will be some opportunity to offer a little bit of flexibility when the credit directive has to be onshored into UK legislation. There will be that opportunity, within tight limits, to look again at some of these aspects, and of course we will do that to the full with the FCA.

[Lord Wrigglesworth (LD)]

The mortgage prisoners that have been created by this deal between UK Asset Resolution and Cerberus are seeking to get further mortgages. Cerberus gave an undertaking when it bought this package of mortgages that they would be allowed to do so. Is the Minister saying that Cerberus is helping these people to get the lower mortgages that are available and to stop being imprisoned in the deal that was done at the time? Will UK Asset Resolution also ensure that if any future mortgages are sold off, the undertakings given will be upheld?

[Lord Bates]

My Lords, I will not go into the technical detail, but one of the conditions for Cerberus to operate in this country was that it operate under a regulated body, so it operates under Landmark Mortgages. It is not active in the lending market, so the people who can move to get the better deals are those who are up to date with their payments, have equity in their property and can meet the new affordability test. That is the conundrum that we are seeking to find a way through.

Financial Regulators’ Powers (Technical Standards etc.) (Amendment etc.) (EU Exit) Regulations 2018

Lord Wrigglesworth Excerpts

Wednesday 17th October 2018 Grand Committee

Following the approach set by Parliament in the FSMA, our regulators are best placed to ensure that EU technical standards are fit for purpose as we prepare to withdraw from the EU and in the period following exit. I hope that the Committee will join me in supporting these regulations and our regulators in this important preparation period which is now taking place. I commend the regulations to the Committee.

[Lord Wrigglesworth (LD)]

My Lords, I am grateful to the Minister for introducing the SI. I am sorry that my colleagues and noble friends Lady Bowles and Lady Kramer cannot be with us today, which is why I am here rather late in the day.

Returning to retail banking and other matters—it is a long time since I was last involved in it, both in the City and the north-east—when I saw the Explanatory Memorandum and the mention of some of the Acts, I realised that I am more familiar with the Acts that I remember were passed when I was in the House of Commons back in the 1980s than some of the legislation that has been coming through in recent times.

However, this is a very different situation from any we have ever faced. Therefore, before I go on to ask questions and seek assurances about the contents of this SI, I wish to say something about the political position that has led to this. I regard all this as a complete and utter waste of time and effort. It would never have been necessary if it had not been for the Conservative Government getting us into the predicament that we are in at the moment. The referendum and the decisions that have been taken since then have given rise to a massive distraction from the many problems facing this country. I frequently sit in the Chamber of this House and think we must have gone mad. Although this SI has big implications it is one small example of many thousands of other problems that are taking place because of the distraction of Brexit on the country, the Government and Parliament. These SIs today are symbolic of the terrible problem we face as a country. It is completely fatuous that we should be doing this but we have got to live with it and hope to get through to the other side. This is really the Treasury’s equivalent of preparing the M20 and M26 as car parks, and I assume other departments are doing similar things.

I give my broad acceptance to these regulations. We have questions to ask and assurances to seek. The Minister has already given some in his comments introducing the statutory instrument, but the first thing I would like to ask is: where is the impact assessment? It is mentioned in the Explanatory Memorandum but we still do not have it. It is vital that we know the impact that this is going to have on the important and complex financial services sector. I will be grateful if the Minister will tell us where it is, and when not just the Houses of Parliament but the industry can expect to see it.

I was pleased to hear what the Minister said about openness and the consultation that will be done by the bodies taking over the binding technical standards. That was one of my major queries about how this is going to operate. Can he say a little more? He mentioned some 7,000 pages of regulation, which gives an indication of the scale of the work that these organisations will be involved in, but it is vital that institutions in the City and the financial services sector are consulted properly on changes that might be made. In addition to publication in the way that the Minister described, I hope that active consultation will take place with City institutions and the different sectors that work in financial services to ensure their input in any changes in the regulations that will so profoundly affect them. I will be grateful if the Minister will give some indication of how the financial services sector will be consulted on any changes that take place.

Will the Minister also give us an assurance that if there is any amendment to the principal financial services legislation it will be done through a Bill rather than by statutory instrument? I take it that that will be the case and that if some of the financial services legislation is to be amended it will be done through the normal procedure of a Bill and that the Government will not try to make changes—even minor amendments —to primary legislation through statutory instruments. If the Minister can give assurances on the way in which this will operate, he will have our support for the statutory instrument coming into operation.

--- Later in debate ---

[Lord Bates]

We are in the process of preparing five impact assessments covering financial services and onshoring legislation. They will be considered by the Regulatory Policy Committee, the independent body that scrutinises impact assessments before they are released. As has been said many times, we are in extraordinary times in terms of what we are seeking to do with this work. I think we all recognise that the conventional form would be that the impact assessment would have been available at the same time. With that explanation about the context of the decision—

[Lord Wrigglesworth]

I wonder whether the Minister will mind if I emphasise the importance of this. We are dealing with thousands of businesses whose procedures are possibly going to be changed as a result of this. Not only are businesses going to be affected: millions of customers may possibly be affected. It is tremendously important that they and their customers know what impact this will have, so that if necessary they can change their forms and procedures, move their money and do whatever they want to do in the light of the impact of this. If changes are in the pipeline as a result of this, and they are going to affect businesses, it is vital that businesses know about them as soon as possible.

[Lord Tunnicliffe]

On the same point, I draw attention to page 33 of the statutory instrument:

“Explanatory Note (This note is not part of the Regulations)”.


The final paragraph states:

“An impact assessment of the effect that this instrument will have on the costs of business, the voluntary sector and the public sector will be available from HM Treasury, 1 Horse Guards Road, London SW1A 2HQ and published alongside this instrument”.


I apologise for this, but if we are going to get impact assessments, the Government have to realise the irritation it causes to the Opposition and our colleagues in the Liberal Democrats if we do not have them published on time.

Building Societies Legislation (Amendment) (EU Exit) Regulations 2018

Lord Wrigglesworth Excerpts

Wednesday 17th October 2018 Grand Committee

[The Minister of State, Department for International Development (Lord Bates) (Con)]

My Lords, following the UK’s decision to leave the EU after the referendum, the Treasury has undertaken a significant amount of work with respect to withdrawal negotiations and in preparing a range of potential outcomes for these negotiations. The best outcome is for the UK to leave with a deal and we have put forward a serious and credible proposal for the future relationship. While we remain confident that agreement will be reached this autumn, in the meantime we must and will continue to work preparing ourselves for no deal.

As the department responsible for financial services, HM Treasury has been conducting particularly intensive work to ensure that there continues to be a functioning legislative and regulatory regime for financial services in the event that the UK leaves the EU without a deal or an implementation period. An essential part of that work is using powers delegated to Ministers under the European Union (Withdrawal) Act to fix deficiencies in applicable EU law that would be transferred directly on to the UK statute book at the point of exit.

The Building Societies Act 1986 and related legislation contains various technical provisions governing how building societies must act. This includes setting out requirements relating to the UK’s membership of the EEA. For instance, one provision ensures that loans secured on UK land and loans secured on EEA land are treated equally. The concept of a loan secured on land is used when defining who counts as a building society member in legislation and calculating a building society’s lending limit—a legal requirement which makes sure that the building societies focus on their core business of mortgage lending.

Other parts of the legislation ensure that EEA bodies and UK companies are treated in the same way regarding transfers of business from a building society to a commercial company. However, in a no-deal scenario the UK would be outside the EEA and outside the EU’s legal supervisory financial framework. The legislation therefore needs to be updated to reflect that, and to ensure that the provisions work properly in that scenario.

The original legislation treats members of the EEA differently from third countries in certain respects. Given that that will no longer be appropriate after exit day, this SI will amend the Building Societies Act 1986 and related legislation to treat EEA countries similarly to other third-party countries after exit day. To take an example, I have already set out that this SI will amend the original legislation to ensure that in future new mortgages on properties in non-EEA states and EEA states are treated the same after exit day. Note that the instrument maintains the pre-exit legal treatment of mortgages on properties in EEA states, providing contractual continuity for building society members who have an existing mortgage on a property in an EEA state. Building societies will have to take this treatment into account in calculating lending limits and defining building society members.

The original legislation also allows building societies to transfer business to and from companies and mutuals in EEA states but not those in countries outside the EEA. This SI will amend the legislation so that such transfers are no longer allowed, equalising the treatment of EEA firms with those in other third countries. The SI also replaces several references to EU directives with equivalent references to the Prudential Regulatory Authority’s rulebook and ensures that the current relationship between the UK and the Channel Islands, the Isle of Man and Gibraltar is maintained. There may be some cost to businesses linked to the restriction on the ability of building societies to lend on properties in the EEA, although since building societies do the overwhelming majority of their lending in the UK we believe this would be minimal.

In summary, the Government believe the proposed legislation is necessary to ensure that the legislation governing building societies functions appropriately if the UK leaves the EU without a deal or implementation period. I hope the Committee will join me in supporting these regulations, which I commend to the Committee.

[Lord Wrigglesworth (LD)]

I am grateful to the Minister for managing to get through the presentation of this SI to us. He might think of going into juggling at some stage. I want to raise a number of very important issues that affect millions of our fellow citizens. There is no more self-evident part of the financial services industry that impacts on so many people than the building societies. I will therefore return to the discussion we had a few moments ago about impact assessments.

Once again, we have no impact assessment of how this will affect those societies. I refer to the millions of people involved, but they are not all people with mortgages. There are also people saving in building societies and they want to know what the impact of all this will be on their savings. What will be the impact on the balance sheets, profitability and liquidity of building societies? Their resources may be at risk as a result of changes of this sort being made. The importance of the impact assessment for this SI is tremendous; it cannot be exaggerated.

In that context, I also want to return to the question of this being time-limited under EU legislation, which could have a direct bearing on the impact it will have on people—a point made by the noble Lord—and the fact that it will fall away two years after exit. When will our exit take place? Here we are, with the Cabinet not knowing on this very day where it is going and whether there will be a deal, discussing alternatives that will impact upon very many people. What impact will a no-deal scenario have on when this statutory instrument comes into effect? What will happen with the transitional period? Will we leave on the date forecast? It raises profound questions that will affect the livelihoods, savings and mortgages of millions of our fellow citizens. This is just one example of where the Government have a tremendous responsibility to make things as clear as possible to building society customers. I hope that the Minister will address the issue of the impact of this when he responds.

Can the Minister also say something about the impact of this SI, if it is agreed to, on the members of buildings societies who will no longer necessarily be able to become members if they borrow overseas? As I understand it, the position is that as soon as they get a mortgage with a building society, they become members of it; in the future, under this statutory instrument, that may or may not be the case. What position will those people be in? It has been well understood that membership of a building society comes with being a customer in that way. It would be helpful if the Minister could make it clear whether people can, and will, become members of building societies if they do business in that way in the future.

What will be the position of people if they wish to borrow money from building societies to buy overseas? A lot of people might be contemplating buying a property in France, Italy or somewhere else in Europe. Will they be able to borrow from a building society and what will the status of their mortgage be? What happens from the building society’s point of view if the customer defaults on an overseas property? If the building society cannot regain the property and set it against the debt, that will have an impact on its financial position. Can the Minister tell us how many of these loans there are, whether they can be rolled over and what the impact on building societies will be if these changes take place? How will their business be affected in the future?

If any changes are to be introduced—this is the same question as on the previous SI—can we have an assurance from the Minister that the building societies will be consulted? I assume from his previous remarks that they will be as a matter of course. But clearly, like so many other institutions in the country, they are wondering what the devil is going to happen in the coming months. If they at least know that they will be consulted if changes are taking place, I think they will be consoled to a certain extent. Because so many people—people with very modest means, in many instances—could be involved if these changes take place to their detriment, I hope that the Minister will be able to respond to these questions and that the Government will be able to reassure us that that will not be the case.

[Lord Tunnicliffe (Lab)]

My Lords, I join the noble Lord, Lord Wrigglesworth, in his comments on an impact assessment. I have to admit that rather than knowing that there is not one, I could not find it—but that may be a lack of skill on my part. I hope that the Minister’s answers may cover my concerns. On a lighter note, can the Minister confirm that paragraphs 7.1 to 7.8 of the Explanatory Memorandum are identical to the same paragraphs for the previous instrument? From my reading, they are. Will it be standard procedure for all Treasury SIs to have identical paragraphs 7.1 to 7.8? If they are to be identical, it will save an awful lot of time in reading them if I know that to be true.

An impact assessment would have been useful because it tends to use plainer language. It would have been particularly useful in this case because I took an entirely different view of this instrument from that of the noble Lord, Lord Wrigglesworth. I did not put much effort into it because it seemed pretty benign and reasonably consequential. I did not see the risks, so perhaps I may ask the questions that the noble Lord asked—but rather more bluntly. What will happen if there is a deal, as this document’s commencement date is the exit date? Will it therefore still be alive or be deleted? Will all contracts in force on exit date between a building society and its members be secure thereafter? If they are entered into before exit date, will they continue in force after it? My reading was that they would, but it is an absolutely key point that they should. If you have foreign property as a result of a loan from a building society, is your security in the relationship and all that sort of stuff unchanged by this instrument? Does it refer only to new loans or not?

My reading of the instrument was that it would not have an immediate impact on a building society’s balance sheet, because the composition of that balance sheet would be unchanged by it. The instrument starts to impact on the balance sheet only as new contracts are commenced, which will then have different weightings and so on. Will all UK consumer protections stay in place, so that consumers will in no way have less protection as a result of the instrument?

--- Later in debate ---

[Lord Wrigglesworth]

I wonder whether the Minister will therefore explain why the memorandum says:

“There will be some costs for businesses linked to the restriction on the ability of building societies to lend on properties in the EEA. This is because loans secured on properties in the EEA post-exit will no longer count towards the calculation of the building societies’ lending limit (which requires that 75% of a building society’s assets are secured on residential property)”.


Another paragraph says that,

“the legislation allows building societies to transfer business to and from companies and mutuals in EEA States, but not countries outside the EEA. This SI will amend the legislation to no longer allow these transfers”.

So we are in a different situation again. Taking out a mortgage with a building society on property in the EEA will no longer automatically mean becoming a member of that society, which I have referred to as a slightly separate point. There are specific references to changes that will take place under this SI, and those could have an impact both on members and on the societies.

[Lord Bates]

I would counter that by saying that the majority of those changes are going to relate to the building societies themselves that have been cited in terms of the treatment of those provisions. I will come back to that in just a second, if I may, after dealing with another point that the noble Lord raised about members borrowing overseas and members’ rights. All current building society members will retain their membership and associated rights. Loan terms are not affected. If people wish to borrow from the building society for an overseas property, they will not automatically become members. This is the current situation with all non-EEA countries, but it will be extended to EEA countries as the EEA will become a third country. Paragraphs 7.1 to 7.8 are the same in both these Explanatory Memorandums and will be very similar for all the SIs in this group.

The noble Lord asked what the impact of the SI on building societies would be and how the Government were mitigating it. The SI will act to prevent building societies diversifying too far into EEA-based mortgage lending in future, should they wish to. However, the vast majority of building societies conduct all their lending in the UK and show no interest in lending overseas. Mortgages currently owned by building societies in EEA states such as Spain will not be affected by this SI as the provision applies to new mortgages only. However, the SI may make building societies which have previously given mortgages on properties in Spain unwilling to remortgage such properties. In that case there is no reason why the individuals concerned would be unable to remortgage with another bank.

The noble Lord, Lord Tunnicliffe, asked what will happen to the SI if there is a deal. These regulations will not come into force on exit day if there is an implementation period, as we expect. If we reach an agreement on the implementation period, for the duration of that period the UK will remain subject to EU law. Building societies can continue to operate in the same way as they do now. The noble Lord asked what will happen to all contracts on exit day. This SI does nothing to affect existing building society contracts. On exit day all contracts between a building society and its customers, including mortgage contracts, will remain unchanged.

The noble Lords, Lord Wrigglesworth and Lord Tunnicliffe, asked whether UK consumer protection would remain in place. This SI does not remove any existing protections for building society customers. Financial services compensation varies depending on the financial services in question. Generally, FSCS protection for customers in the UK will not change. Further details on the changes to FSCS protection will be set out by the regulators over the autumn.

I hope that I have been helpful in responding to the questions raised by noble Lords in this debate. I commend these regulations to the Committee.