The Mortgage Credit Directive (MCD) will be implemented on the 21st March 2016. The final rules for the MCD have been issued and can be read in full by clicking here:
The Mortgage Credit Directive Final Rules PS15/9
Buy to Let Mortgages – implementing the Mortgage Credit Directive PS15/11
Further to our previous bulletins on the implementation of the Mortgage Credit Directive, this bulletin contains updated information on how Lenders are getting ready for MCD day on 21st March. It also includes a reminder of the key action points so you can use this as a checklist approach to see if your firm will be MCD compliant in time, as well as a useful spreadsheet to be able to provide your clients with a list of commissions paid should they request it.
Lender Updates on Mortgage Credit Directive
There are now 20 working days remaining to ensure your firm is MCD compliant from Day 1. Last week we saw all the second charge lenders go live with their new processes. By all accounts it was not that smooth a transition and most advisers and clients are having a bumpy ride so far. Hopefully the process will sort itself out and it will get back on track. This obviously doesn’t bode well for today, Monday 22nd, which is the date that most first charge lenders will go live with their new processes and procedures. We need to be prepared and we have updated our matrix to show you which lenders are aiming to be MCD compliant and what their intentions are. Please click here to visit the matrix.
Lenders and Consumer Buy to Let
As we know CBTL will also come into affect on 21st March this year. There has been a lot of different interpretations of CBTL by the market. Most of the lenders have followed the CML guidance by amending their BTL application process to allow for further questions to identify CBTL clients. The flowchart of these questions can be found by clicking here.
As MCD compliant firms, Paradigm strongly recommend that you have a method of identifying a potential CBTL client, that means adding similar questions to your fact finding process. Below are some anomolies from our lending panel that you will need to be aware of:-
- Accord and Metro Bank are not going to be offering Consumer Buy to Let. This means that if your client has ever lived at a property that they would like to re-mortgage, these lenders will NOT accept the case as they will class this as a CBTL client.
- Virgin Money and Santander are simply going to ask you to identify if it is a Consumer Buy to Let before you start the application - so having the questions in your fact find should help with this.
- NatWest have taken an interesting route by consulting with the FCA on their approach, rather than following the CML flowchart. They believe that because the client will either enjoy capital growth or rental income from the BTL then it can only be a business venture. Therefore, in NatWest’s eyes Consumer BTL does not really exist.
I will update you further on other Lender’s stances should they be any different.
Disclosure of Commission
The MCD rules have also had an impact on what you tell your clients about the commission you might receive from introducing the client to a lender.
You will need to make the client aware that you receive commission, which is no change from what we do now, but you will also need to tell the client that they can request a list of all of the Lenders that you use and the commissions that are paid. This means that you will need to have to hand an up to date list of these that you can hand out if necessary, including lenders that you might not use on a regular basis. To help you with this, we have created this document - a list of the Paradigm panel of lenders and their commissions with space at the bottom to be able to add any other lenders that you may use from other Club routes/networks or direct that are not on our panel. Please note that this is correct at the time of publishing but may be subject to change.
3rd party commission
As a “best practice” note, we are recommending that, if the ESIS and/or KFI plus document does not split out the procuration fee payable to show the relevant beneficiaries from the payment, then you make a note (via the suitability report or on file) to show who has benefited, so the client has been told. For example, if it does not show the amount that your chosen mortgage club receives. This is down to some very high profile complaint cases which went to the High Court regarding the disclosure of 3rd party commission. Although the case has been dismissed, there is an appeal going through which may be found in favour of the client and if that does happen there will be repercussions to all industries that pay commission to 3rd parties including Financial Services. This could mean some retrospective action will need to be taken.
Key Action Points
- Apply for your Consumer Buy to Let permissions via the FCA Connect system.
- Complete your Mortgage Credit Directive Data Control return for the FCA.
- Amend your IDD/Client agreement to reflect the service you offer.
- Remove the word Independent from websites and client facing material if you are not going to offer advice on second charge loans.
- Liaise with your chosen 3rd party Master Broker to ensure you understand what the referral process will look like for second charge loans post 21st March 2016.
- Familiarise yourself with your sourcing system to understand when and how it will show you a comparison of second charge loans.
- Review your fact find to add in questions around Consumer BTL.
- Remember to disclose to your client about the alternatives to a capital raising re-mortgage which may be more suitable - regardless of whether you are going to advise on them or not.
- Review your suitability report to ensure it covers the relevant disclosures around the alternative finance options mentioned in point 8.
- If you offer independent advice for investments you can still continue to do this even if you don’t offer second charge advice, but you will have to differentiate this in your relevant IDD/Client agreements for each service. You will not be able to say across the board that you are Independent unless you offer second charge advice. Don’t let second charges spoil the Independence party!
- Ensure all the Lenders you deal with are MCD compliant. Do not deal with any lender that is not ready. Paradigm will try and keep you up to date on this area.
- Ensure all of your staff understand what the changes are and are fully up to speed with the new documentation. Add this to your T&C and CPD records.
- Attend a Paradigm Mortgage Workshop on MCD for further information and clarity or attend a Best Practice Workshop by Paradigm Partners. Click here for details of our upcoming events.
Mortgages Technical Director
Paradigm Mortgage Services LLP