Your IndustryNov 12 2015

Regulation of consumer buy-to-let

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The bulk of buy-to-let mortgage lending has been outside of the Financial Conduct Authority’s scope.

This is because one of the conditions that had to be met, in order for a property to be regulated when mortgage rules were first introduced back in 2004, was that at least 40 per cent of the property was occupied, or intended to be occupied, by the borrower or their relative.

The UK fought long and hard to ensure that buy-to-let was kept out of scope of the European Mortgage Credit Directive, which will be introduced in March 2016.

However, the one exception is consumer buy-to-let, which is any buy-to-let mortgage contract that is not entered into by the borrower “wholly or predominantly” for the purposes of a business.

An example of this would be where the property is inherited and either the borrower or a relation has occupied the property, or where a borrower does not own other properties, is a first time landlord and it is a let to buy transaction.

For these so-called ‘accidental landlords’, lenders will need to meet a variety of conduct standards.

These cover everything from the provision of information, knowledge and competence requirements for staff, tying and bundling practices, to pre-contractual information, information requirements for brokers, early repayment, arrears and repossessions.

There are also reporting requirements for all firms that want to carry out consumer buy-to-let, as the FCA will be compiling consumer buy-to-let sales data.

Despite the new rules, Andrew Turner, director at Commercial Trust, says there have been growing concerns around a lack of clarity in relation to the definition of ‘consumer’.

When determining whether a transaction is a consumer buy-to-let, he says a key factor is whether the client has ever lived, or plans to live, in the property.

If the buy-to-let loan is genuinely for business purposes and a property has been purchased with the sole intention of letting it out (and the borrower has never lived in it), then the loan will lie outside the remit of the regulation.

Ultimately, consumer buy-to-let will be controlled in the same way as regulated mortgage contracts. It will therefore need to follow the rules set down by both the FCA and the EU under the Mortgage Credit Directive.

In addition, advisers will need to be fully qualified and have the appropriate permissions in order to introduce consumer buy-to-let business to lenders.

For example, with every mortgage offer, an adviser will need to provide the borrower with either the new European Standard Information Sheet (ESIS) or the Key Facts Illustration (KFI) Plus document.

These need to give the borrower a clear explanation about why that particular mortgage is the most suitable for them, in order to avoid any mis-selling claims. The mortgage offer must then mirror the information provided in the ESIS or KFI Plus.

HM Treasury’s own projections are that 11 per cent of the current buy-to-let market come under the new rules.

Whether this is an accurate reflection remains to be seen, says Paul Broadhead, head of mortgage policy at the Building Societies Association.

He reckons those borrowers that do find they come under the new classification of consumer buy-to-let from March next year will have the same consumer protections afforded to residential mortgage borrowers, and will also have access to the Financial Ombudsman Service.

Roland McCormack, TSB’s mortgage intermediary director, says he expects that in reality, accidental landlords will feel minimal impact from the implementation of the Mortgage Credit Directive.

Typically these customers stay with their existing lender, providing their existing lender is aware and agrees to the customer letting out the property.