The Financial Conduct Authority has outlined an approach for the implementation of the Mortgage Credit Directive, outlining changes to disclosure documents which will require lenders to apply 20-year high interest rate projections.
The FCA’s consultation paper states compliance with the European rules will “be achieved largely through reliance on existing mortgage rules”.
However, in related two areas - product disclosure and ‘annual percentage rate of change’ - are not yet in line with European standards and will require “full harmonisation with the new European rules”.
It says in the consultation that to make sure the same content is addressed, it will be necessary for firms who intend to keep using the KFI for transitional period to make extra ‘top-up’ disclosures.
In particular, lenders would be required to disclose the APR and monthly payments should interest rates rise to the highest point seen in the past 20 years.
Under MMR rules, lenders are currently required to apply interest rate projections three years ahead and stress test the effects of a 3 per cent rise in the base rate.
They would also have to include information on the new ‘seven day right of reflection’ period and where applicable, extra information for foreign currency loans, including an illustration of the impact of a 20 per cent change in the exchange rate.
The mortgage credit directive applies to a wide range of loans, with limited exemptions including lifetime mortgages, bridging loans and credit union mortgages.
Alongside the credit directive changes, the consultation paper released today proposes that from the March 2016 the regulation of second charge mortgages should move from the FCA’s consumer credit regime and instead be governed under mortgage rules.
Second charge firms would be required to comply with FCA mortgage rules in areas such as affordable lending, advice and dealing with payment difficulties under the proposals.
Christopher Woolard, director of policy, risk and research at the FCA said: “We recognise that second charge mortgages are beneficial for some customers but we are concerned that consumers can be put at risk by poor sales practices and ineffective affordability assessments.
“Given the risk of consumer detriment, we want to embed good practice and we believe that applying our mortgage rules is the best way to do this.”
Paul Broadhead, head of mortgage policy at the Building Society Association, added: “The devil may be in the detail of this 300+ page consultation, but the FCA has made it clear that they intend to largely rely on existing mortgage rules to implement this EU Directive.
“As with MMR, we have just gone through the largest shake-up in mortgage regulation since the market was first regulated in 2004, this is welcome news. Moving second charge mortgages from the consumer credit to mortgage regulatory regime also makes good sense.
“There will be some areas where existing rules won’t be sufficient so some change is inevitable, particularly in relation to product disclosure and the use of APRs”.
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