The new Consumer Buy-to-let Regime

1. Background

 The consumer buy-to-let (CBTL) market is expected to make up only a small part of the UK's mortgage business, perhaps 5 to 10% of the total.  However, the introduction of a new regime to supervise this section of the market is one of the significant changes being implemented in the UK under the MCD, as both the EU and UK legislators recognise that this type of lending to consumers intending to act as landlords is different to the lending offered to consumers who are purchasing their own homes.  Lenders entering into CBTL mortgages must comply with the new requirements (CBTL Regime) which are set out in Part 3 of the Mortgage Credit Directive Order 2015 (MCD Order), which sets out the necessary changes to legislation required by the UK transposition of the MCD. The requirements include being registered on a new CBTL register, and complying with the CBTL conduct standards.  Lenders who fail to comply with these requirements risk sanctioning by the FCA.

Existing UK mortgage regulation generally excludes most buy-to-let mortgages whether they are entered into with a consumer or not.  In contrast, the provisions under the MCD affect mortgages entered into with consumers, regardless of their purpose. As such, the MCD allows member states the option to exempt CBTL lending from the detailed MCD requirements, providing that there is an appropriate framework in place.  The UK has chosen this approach, and is introducing the CBTL Regime to ensure that these type of mortgages are adequately supervised.  

2. Scope of the CBTL Regime

The MCD Order has helpfully set out what is meant by both a buy-to-let mortgage contract and a CBTL mortgage contract, with a CBTL mortgage contract being defined as a "buy-to-let mortgage contract which is not entered into by the borrower wholly or predominantly for the purposes of a business carried on, or intended to be carried on, by the borrower". 

Under the MCD, a buy-to-let is broadly a contract which at the time it is entered into is one that either:

• satisfies the conditions specified in article 61 of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (RAO) to be a regulated mortgage contract; or
• is a regulated credit agreement within article 60B of the RAO which falls within Article 3(1)(b) of the MCD

and, in either case, the contract also provides that the land subject to the mortgage or to which the article 3(1)(b) agreement relates, cannot at any time be occupied as a dwelling by the borrower or a related person and is to be occupied as a dwelling on the basis of a rental agreement.

It will be a matter of fact as to whether a mortgage contract will satisfy the conditions under the MCD Order to be a buy-to-let, so the key to establishing whether a proposed contract will be a CBTL will be determined by an analysis of whether or not the borrower is entering into the contract with the lender "wholly or predominantly for purposes of a business carried on or intended to be carried on by the borrower".

3. Business purpose

The MCD Order indicates that there is a presumption that the mortgage is for a business purpose where the agreement contains a declaration by the borrower that this is the case.  Whilst useful, this presumption is somewhat circular since it provides no guidance on how the borrower demonstrates that the borrowing is for a business purpose.

More helpfully the MCD Order also specifies two cases where, subject to the buy-to-let satisfying certain conditions, the borrower will be regarded as entering into the buy-to-let mortgage for a business purpose.  In summary, the first case is where the property has never been nor can ever be occupied as a dwelling by the borrower or a related person, and the second case applies where the borrower already owns property that is rented out to an unrelated person.  If the mortgage contract can satisfy either of these two scenarios the mortgage will be regarded as being entered into for a business purpose and will not be regarded as subject to the CBTL Regime.

For a significant number of mortgages it is likely that one of these two scenarios will apply.  However, there will be a residual number which will be caught under the CBTL Regime, and FCA guidance on this indicates that this will be where either the property has been inherited or where the borrower has previously lived in a property but is unable to sell it so resorts to a buy-to-let arrangement.

4. What’s next

From 21 March 2016, the various types of firm that deal in CBTL mortgages (either as lender, administrator, intermediary, arranger or adviser) must register with the FCA satisfying a series of conditions in accordance with the MCD Order, and pay the applicable fee, or else they will be committing a criminal offence. Firms that have previously been authorised in relation to consumer credit must also register, although there is a streamlined process in place for them. Forms are available on the FCA’s website (or through its Connect service for FCA authorised firms). Once registered, there are then ongoing data reporting obligations on CBTL lenders once a quarter from 1 April 2016 onwards, they will be subject to conduct rules set out in the MCD Order and the FCA Handbook, and they fall under the compulsory jurisdiction of the Financial Ombudsmen Service for any complaints handling.

If you require further information on anything covered in this briefing please contact Katy Ruddell ([email protected]; 020 3375 7343), Grania Baird ([email protected] ; 020 3375 7443), Julia Hartley ([email protected] ; 020 3375 7551, or your usual contact at the firm on 020 3375 7000.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances. 

© Farrer & Co LLP, February 2016