It is understandable that some brokers might feel nervous about the implementation of the Mortgage Credit Directive.
With new regulation comes the need to adapt, but the industry has proven that it is more than capable of adapting to fit new regulatory frameworks, particularly since the introduction of the Mortgage Market Review in 2014.
For brokers, the changes should not pose any difficulties. That said, it is crucial that advisers stay on top of the rules if they are to continue to thrive. With the final deadline of 21 March fast approaching, it is paramount that advisers work to fully prepare themselves for the rules, if they have not done so already.
The impact the MCD will have on brokers’ businesses will entirely depend on how well prepared they are for the new rules and, if their response to past regulation is anything to go by, the impact will be minimal.
As with any regulation, there are minor points that may need clarifying, and some of the rules are still up for debate ahead of the final deadline, so it is important to stay up-to-date with announcements from the regulator as well as lenders.
In addition to keeping an eye out for announcements, there are several changes to the advice process that brokers will need to act on ahead of the deadline in March. Only once brokers have familiarised themselves, and worked these changes into their businesses’ processes, can they consider themselves to be fully prepared for the new rules.
It is important that advisers familiarise themselves with all of what this means to your sales processes and operating standards. However, the main changes that require action can be narrowed down to three key points: the regulation of second charge loans, the conditions under which advisers may refer to themselves as independent, and the definition of consumer buy-to-let mortgages.
One of the most significant changes is in the BTL market. The vast majority of BTL lending will now become non-regulated, and will be called Business Buy-to-Let (BBTL). Some BTL mortgages will be defined as Consumer Buy-to-Let (CBTL), and these types of loans will now be regulated.
A loan will be classified as CBTL if the borrower or an immediate relative of theirs has ever lived in the property, or intends to live in the property in the future. Additionally, lenders are expected to treat let to buys and some inherited properties as CBTLs.
Given that CBTL loans are now regulated, brokers who plan on advising in this space will need to apply for the required permissions from the Financial Conduct Authority. There will be a fee for this, and advisers should make sure that they apply sooner rather than later as they will not be able to advise in this area of the market until they have the required authorisation.
Conversely, a loan will be classified as BBTL when a customer is deemed to be, or has identified themselves as, acting by way of a business in taking out a BTL mortgage. Lenders will require a signed declaration from the borrower to confirm they are acting wholly for business purposes, so this is something that advisers should be aware of if their client is looking to take out a BTL mortgage for business purposes.
Under the new rules, second-charge lending is going to be regulated. Brokers will therefore need to decide their position on advising on second-charge mortgages before the changes come into force in March. After the deadline, brokers will have three choices in regards to second-charge loans.
They can decide to fully advise on second-charge loans themselves, not advise on them at all, or refer their clients to a third party. If brokers choose not to advise on them at all, they will need to bring this to their clients’ attention so they are aware that it is still available as an option.
The rules under which brokers can refer to themselves as independent has also changed under the MCD. After the deadline, advisers may only refer to themselves as independent if they advise on every area of the market in which they operate. For example, for firms in the residential market, if your business does not include regulated bridging or second charges, you will not be able to refer to yourself as independent. Likewise, for firms in the equity release market, if you advise on lifetime loans and not home reversion, you cannot call yourself independent for this market.
In summary, although these three areas can be seen as those undergoing the most significant changes, it is still crucial that brokers familiarise themselves with all of the new rules to understand how they will impact on their future processes and business.
Changes such as the introduction of a seven-day reflection period in the sales process, and the shift from Key Facts Illustration (KFI) documents to the European Standardised Information Sheet (ESIS) will have an effect on brokers’ obligations during the advice process after the rules come into force, so it is crucial that they are aware of these changes prior to the deadline in March.
Jeremy Duncombe is a director of Legal & General Mortgage Club
MCD preparations checklist
| Checklist | Action |
| Received permission from the FCA to advise in the consumer BTL market | |
| Decided position on second-charge loans | |
| Regularly follow MCD news from lenders and the regulator | |
| Considered whether you wish to remain independent, and the new requirements for being able to do so |
Key points
The final deadline for the MCD of 21 March is fast approaching.
The main changes that require action can be narrowed down to three key points: the regulation of second charge loans, definition of independence and second-charge loans, definition of consumer buy-to-let mortgages (CBTL).
There is also a shift from KFI documents to the ESIS.
