Mortgage Credit Directive Order 2015 (MCDO) – Changes to the definition of a Regulated Mortgage Contract

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S19 of the Financial Services and Markets Act 2000 states that no person may carry on a regulated activity in the United Kingdom, or purport to do so, unless he is:
  • an authorised person;
  • exempt person; or

This is known as the "General Prohibition".

An activity is a regulated activity if it is an activity specified within the Regulated Activities Order 2001 (RAO), is carried on by way of business, and relates to an investment of a specified kind, or, is carried on in relation to property of any kind.

The RAO also identifies circumstances where activities can be carried on, or carried on by certain persons, and be excluded under the ROA from being regulated activities.  

An authorised person will be a person holding the relevant FCA permission to carry on the regulated activity. An exempt person will be a person exempt from the general prohibition because an exemption order identifies them as a specified person or a person falling within a specified class. Examples of exempt persons include Appointed Representatives or a member of a Recognised Professional Body (RPB) such as solicitors.

A person who contravenes the general prohibition is guilty of an offence and liable to imprisonment, a fine, or both. Additionally, the agreement made will be unenforceable and the borrower is entitled to recover any money or property paid or transferred by him under the agreement, and compensation for any loss sustained by him as a result of having parted with it.

An authorised person acting outside their permissions may also be committing a criminal offence but in most cases are more likely to be subject to disciplinary action.

The regulated activities are set out in the RAO. Of particular relevance to the Banking Team are the following:

  1. Advising on regulated mortgage contracts (RMC);
  2. Arranging RMC's
  3. Entering into an RMC; and
  4. Administering an RMC.

Prior 21st March 2016 Regulated Mortgage Contracts (RMC) were agreements for the advancement of monies  secured by first legal mortgage on land in the UK, 40% of which was used or intended to be used as or in connection with a dwelling by the borrower or a related person. Therefore, buy to let agreements avoided regulation on the basis borrowers would not occupy the mortgaged land and second charge lending fell within the Consumer Credit regime because the credit was secured by second rather than first legal mortgage.

However, the MCDO changed the definition of an RMC and since the 21st March 2016, a mortgage, secured on land in the EEA, 40% of which is used or intended to be used as or in connection with a dwelling is an RMC. The removal of the words "first legal mortgage" and there being no restriction that land must be within the UK has made the definition of an RMC significantly wider in scope. Additionally, there is no longer a requirement that 40% of the land is used or intended to be used as or in connection with a dwelling by "the borrower or a related person".

This expansion of the RMC definition has meant that not only first, but second and subsequent charge lending falls within the definition of an RMC, subject to exemptions. Additionally, although the MCDO has added new exemptions to enable commercial BTL's to continue being unregulated, Consumer Buy to Let (CBTL) are now regulated by the FCA under a new CBTL regime set out in Part 3 of the MCDO which is subject to a registration regime.