Mortgage Credit Directive

On 21 March 2016, the Mortgage Credit Directive (MCD), 2014/17/EU came into force and a new supervisory regime commenced as part of the Gibraltar Financial Services Commission’s (GFSC) regulatory remit.

We will explain here what ‘services’ or activities provided by firms will be caught under the MCD, outline the approach we are taking in relation to the MCD and provide information on what firms need to be doing.

What is the MCD?

The MCD is an EU Directive which aims to create an EU wide mortgage-credit market with a high level of consumer protection by introducing harmonised rules in respect of the provision of credit for residential property. This means more protection for consumers when they, for example, take out a mortgage to buy a property or when they secure loans on their residential property. Its purpose is to establish a high level of protection for consumers whilst addressing irresponsible lending and borrowing within the EU.

What particular areas are targeted under the MCD?

The MCD:

Introduces the requirement to provide pre-contractual information through the European Standardised Information Sheet (ESIS) - a standardised format - and the calculation of the Annual Percentage Rate of Charge (APRC);
Sets out principles for marketing and advertising;
Encourages the concept of responsible lending practices;
Includes provisions requiring the lender to assess the creditworthiness of the consumer, and imposes disclosure obligations on the part of the consumer;
Requires the application of appropriate standards to valuations, where these are carried out;
Introduces standards for the provision of advisory services;
Introduces minimum knowledge and competence requirements for staff as well as remuneration requirements;
Establishes a regulatory regime for creditors and credit intermediaries, as well as containing provisions which allow for the regulation and supervision of non-credit institutions; and,
Permits tied credit intermediaries and appointed representatives.

Who is a consumer for the purposes of the MCD?

A consumer is any individual who is acting for purposes which are outside their trade, business or profession. Corporate entities do not fall within the definition of consumer under the MCD and therefore the MCD does not cover commercial lending to companies.

Which loans does it cover?

It covers all loans made to consumers to buy a property as well as loans to consumers that are secured by a mortgage or another comparable security. These are known as credit agreements in the MCD.

What ‘services’ are caught by the MCD?

The following services, in relation to the provision of this type of credit agreement, fall within the remit of the MCD and will be regulated activities:

Acting as a creditor
This entails a firm granting or promising credit in the course of its trade, business or profession.
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Creditor Example:
firm that provides a house-buyer with a mortgage.
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Acting as a credit intermediary
The scope of credit intermediary relates to the following activities carried out as way of business and for remuneration:
- presenting or offering credit agreements,
- assisting consumers by undertaking preparatory work or other pre-contractual administration in respect of credit agreements, or
- concluding credit agreements with consumers on behalf of the creditor.
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Credit Intermediary Example:
A firm that assists a house-buyer in selecting a mortgage from a bank and in completing the relevant documentation
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Provision of advice to a consumer as a creditor or as a credit intermediary This entails a firm acting as either a creditor or as a credit intermediary (see above) and providing any form of advice to a consumer on credit agreements.

How do I know if the MCD applies to me?

If you are unsure whether your firm currently carries out services which may be caught by the MCD, please see the following questions below.

Should you answer positively to any of the following questions, please contact the GFSC.

Does your firm provide finance to enable consumers to purchase a residential property?
Does your firm provide finance to enable consumers to acquire or retain property rights in an existing or projected building?
Does your firm provide finance to enable consumers to acquire or retain property rights in land?
Does your firm provide loans that are secured against a residential property?
Is your firm remunerated for providing any of the following services:
- Presenting or offering credit agreements;
- Assisting consumers by undertaking preparatory work or other pre-contractual administration in respect of credit agreements;
- Concluding credit agreements with consumers on behalf of the creditor.
- Does any other individual or firm provide, on behalf of the firm, any of the services specified in question 5?
Does your firm provide advice on credit agreements to consumers?

If the MCD applies to me, by when do I need to be licensed?

Firms conducting any of the above activities fall within the remit of the MCD and will need to be licensed by March 2016.

Was there a transitional period?

The transitional period ended on 21 March 2017.

There was a transitional provision in the Directive which enabled credit intermediaries already carrying out credit intermediation activities before 21 March 2016 and which had not been authorised to continue to carry out their activities until 21 March 2017.

There was also a transitional provision that enabled creditors, credit intermediaries or appointed representatives that had been performing activities regulated by the MCD prior to 20 March 2014 an extended period until 21 March 2017 to comply with the knowledge and competence requirements for staff as set out under the MCD.

There were no transitional periods for any other services under the MCD.

How do I go about getting licensed?

Please contact the GFSC here in the first instance to arrange a meeting to discuss your requirements.

We encourage firms to contact us as early as possible so we can make the necessary arrangements before the deadline approaches.

What are the licence fees for the different services?

Information about these will be available in early 2016.

Do I need to be licensed?

This depends on your business model. Creditors and credit intermediaries must be licensed, however credit intermediaries tied to only one creditor can choose either to:

be authorised; or
operate under the authorisation of the creditor to which they are tied (see next section).

'Tied credit intermediaries' and 'Appointed representatives'

The MCD introduces the concept of 'tied credit intermediaries' and 'appointed representatives'.

Tied credit intermediaries can be linked to one or more creditors and advise only on their products. Credit intermediaries tied to only one creditor may act on behalf of, and under the full and unconditional responsibility of, the creditor, without being authorised. Given that creditors are fully and unconditionally responsible for the acts and omissions of a tied credit intermediary, creditors must ensure that the tied credit intermediary complies with professional requirements and monitor its conduct.

Appointed representatives are natural or legal persons who perform credit intermediation activities and act on behalf of, and under the full and unconditional responsibility of, only one credit intermediary. Such persons would not require authorisation.

The GFSC is working on developing a regime for firms seeking to have tied credit intermediaries and appointed representatives.

Is there a tool to assist firms in calculating the APRC?

Yes. The APRC is the total cost of the credit to the consumer, expressed as an annual percentage of the total amount of credit. An MCD APRC simulator has been published by the European Commission to help users calculate the APRC of a given credit. Please click here to access the simulator. The simulator is accompanied by a report presenting examples and instructions on how to use the tool.

What is the ESIS form?

The MCD brings in the requirement on firms to provide prospective borrowers with an ESIS. Firms may need to change their internal systems and processes to provide the ESIS.

The MCD requires creditors and credit intermediaries to provide personalised information for prospective consumers so that they may compare credit products available on the market, assess their implications and make an informed decision whether to proceed. This information must be delivered in the form of the ESIS.

Under the MCD, must you give advice in order to offer credit?

No. A creditor or credit intermediary may offer credit without giving advice.

However, in order for the consumer to be aware of the services being provided to them, a creditor or credit intermediary must explicitly say whether or not they are giving advice as well as what would constitute 'advice' in these circumstances. If advice is being offered, creditors or credit intermediaries must explain whether they are considering only a single lender’s products, or products from the whole market.

Next Steps

Creditors or credit intermediaries involved in lending will need to carefully consider how the MCD will affect them. Affected firms should consider how the new rules apply to their business and take steps to implement any required changes to comply within the appropriate deadlines. Firms should contact us as early as possible to enable us to consider and determine applications in good time before 21 March 2016.

For further information on the MCD, as well as the MCD text, click here.

For information and guidance issued by the EBA on MCD, click here.