The European Mortgage Credit Directive (MCD) sees new rules apply from 21 March 2016 to firms that deal with mortgages. From 21 March 2016 second charge mortgages, including regulated loans entered into prior to that date, will be subject to FCA MCOB mortgage rules.

The change in regulatory treatment means that firms will need relevant mortgage permissions if they wish to arrange, advise on, enter into or administer second charge mortgages from 21 March 2016. 

This newsletter highlights some of the points that first and second charge mortgage intermediaries should consider in getting ready for these changes.

What are the main changes?

First charge changes

• the need to provide a binding offer and seven day reflection period;
•  an adequate explanation of a product’s essential features;
• new disclosure requirements.

Disclosure (MCOB 5A)
The new rules require firms to issue a European Standardised Information Sheet (ESIS), a mandatory product disclosure document that is replacing the Key Facts Illustration (KFI). Firms must comply with the requirement to issue an ESIS by 21 March 2019 at the latest, although they can choose to use the ESIS before then. Firms which issue a KFI rather than an ESIS must from 21 March 2016 provide the following additional information to the customer (MCOB TP 1.1.45 and 46):

•  information on the new seven day right of reflection;
• where the interest rate is variable, information on the the Annual Percentage Rate of Charge (APRC) and the borrowing rate (including warnings about the variability of these rates);
• where applicable, extra information for foreign currency loans, including an illustration of the impact of a 20% change in the exchange rate.

Adequate explanations (MCOB 4A.2)
Firms will have to provide an adequate explanation of the proposed mortgage contract and any ancillary services, and the explanation must include the pre-contract information, the essential features of the product, and the potential impact on the consumer (including the consequence of default).

Commission disclosure (MCOB 4.4A and 4A.1)
Requirements include that firms paid by commission must tell consumers that they have the right to ask for information on the commissions paid by different lenders, and ensure that they have access to relevant market data to allow them to respond to such a request.

Adviser Remuneration (MCOB 2A.1)
The MCD introduces some more extensive requirements, including that remuneration of advisers cannot be contingent on sales targets.

Second Charge Changes

• Training and Competence (TC) – for MCD knowledge and competence requirements, which apply to a range of staff, and the associated transitional provisions. The FCA requires mortgage sellers (including advisers) to obtain a relevant Level 3 qualification. Staff in post at 21 March 2016 will have until 21 September 2018 to ensure they meet this requirement. After 21 March 2016, staff will have 30 months from the date they first carry out the relevant activities to become qualified;
• Prudential sourcebook for Mortgage and Home Finance Firms, and Insurance Intermediaries (MIPRU) – MCD second charge intermediaries will require PII cover;
• Supervision Manual (SUP) – for the aggregate data you will have to report using the Retail Activities Mediation Return, which has been amended to capture second charge activity.

Impact on Firm Status
FCA rules do not require firms to broaden their scope of service to include second charge as well as first charge mortgages. If firms choose not to offer second charge then their disclosure documentation should make this clear and they will not be able to use the term ‘Independent’ in relation to advice on mortgages. 

But, where a firm does offer both, it will need to take all these products into account when giving advice. If an existing mortgage holder wishes to borrow more, the rules require firms to make the customer aware that other forms of borrowing are available that may also meet the need (e.g. a second charge mortgage if a customer is considering a further advance, or if a customer is considering a second charge mortgage, the firm must make the customer aware that it might be possible to obtain a further advance). However, firms are not required to provide advice on the suitability of possible alternative options if these are outside the scope of service they have chosen to offer.

Milestone Dates