Treasury U-turns on buy-to-let regulation

In a consultation paper on how the UK will implement the requirements of the European Mortgage Credit Directive the Treasury said it has no choice but to impose national law on part of the buy-to-let market.

Paul Smee, CML director general, said: "With the mortgage market review out of the way, we now enter round two of regulatory change as a result of the European Mortgage Directive.

“We are hopeful that most of the impact should be modest, as much of it was anticipated and helpfully built in to the new rules in the first place.

"It is frustrating though that, despite earlier assurances, the buy-to-let position turns out not to have been adequately resolved, resulting in a new proposal for regulating part of the buy-to-let mortgage market.

“The regulatory regime now being proposed is based not on any evidence of a need for additional consumer protection, but purely on ensuring that the European legal requirements are met."

The European Mortgage Credit Directive will be enacted into law in March 2016.

In response to the consultation paper the CML has issued an explanatory note for the market which explains the implications:

Will all buy-to-let loans be regulated?

No. The Treasury considers that, in most cases, buy-to-let landlords make an active decision to become a landlord, an activity for which they will receive an income and for which they will be taxed as a business. As such, the Treasury does not consider that lending to these borrowers should be regulated in consumer terms.

Which buy-to-let loans will be regulated?

The Treasury considers that, to meet the requirements of the Directive, it is necessary to put a regulatory framework in place for those cases where borrowers are not making an active decision to acquire a property to become a landlord, and where they do not seem to be acting in a business capacity ("consumer" buy-to-let). Examples might include cases where the property has been inherited, or previously lived in by the borrower, but the borrower is unable to sell it and so lets it instead. The proposed new regulation will only apply to relevant new loans (not existing loans), and not until March 2016.

How will lenders know whether to treat a loan as a normal buy-to-let or a "consumer" buy-to-let loan for regulatory purposes?

The Treasury's consultation paper states that: "in many cases lenders will be able to establish this through their underwriting processes. But the draft legislation also allows firms to rely on a borrower declaration, confirming that they are acting as a business, as long as the lender does not have reasonable cause to suspect that the customer declaration is incorrect."

How much buy-to-let lending is likely to fall under the new regulatory framework?

Both the Treasury and the CML believe that the proportion of buy-to-let mortgage transactions falling within the scope of the proposed regulatory framework would be small. However, the government has not yet undertaken a detailed impact assessment. Its consultation paper says it would value views from respondents as to how many transactions may fall within the framework.

I thought the Directive was going to allow buy-to-let to be exempt from having to be formally regulated, and understood the appropriate framework would be achieved on a voluntary basis - what's changed?

Government legal opinion is now that it would be unlawful under the Mortgage Credit Directive to exempt all buy-to-let lending from the UK's statutory regulatory framework. This opinion has only emerged since the Directive was finalised.

Does the decision to regulate imply that there is a need for additional consumer protection in the buy-to-let lending market?

No. This decision has not been driven by any assessment or evidence of consumer detriment. It is purely a technical interpretation of what the Government believes is required legally to comply with the European Directive.

What are the next steps, and when will the new system take effect?

In addition to the Treasury's consultation on the legislation to implement the European Mortgage Credit Directive in the UK, there will also soon be another consultation from the Financial Conduct Authority on the practical application of the framework to deliver the new requirements. The Treasury consultation closes on 30 October (16 October for the costs and benefits aspects). The Government aims to have finalised legislation by March 2015 and the new changes will formally take effect in March 2016.