PERG 4.10B 1Regulation of buy to let lending

Article 72I of the Regulated Activities Order (Registered consumer buy-to-let mortgage firms) excludes certain consumer buy-to-let credit business from the Regulated Activities Order. Instead that business is regulated under Part 3 of the MCD Order. This section provides more detail about the regulation of consumer-buy-to-let business.

Article 72I of the Regulated Activities Order excludes CBTL business from the regulated activities listed in PERG 2.9.28G.

The exclusion only applies to a person included on the FCA register described in PERG 4.10B.16.

There are three main conditions for regulated mortgage activities to be CBTL business:

1. (1)

   the activities must relate to buy-to-let credit agreements (see PERG 4.10B.5G);

2. (2)

   the borrower must be acting as a consumer (see PERG 4.10B.10G(2)); and

3. (3)

   the activities must come within the definition of CBTL business (see PERG 4.10B.8G).

1. (1)

   A buy-to-let credit agreement means either:

   1. (a)

      a contract that at the time it is entered into has the following characteristics:

      1. (i)

         a lender provides credit to an individual or trustees (the 'borrower');

      2. (ii)

         the contract provides for the obligation of the borrower to repay to be secured by a mortgage on land in the United Kingdom3;

      3. (iii)

         at least 40% of that land is used, or is intended to be used, as or in connection with a dwelling2 (or, where trustees are the borrower, by an individual who is a beneficiary of the trust2 or by a related person)2; and

      4. (iv)

         provides that the land secured by the mortgage is subject to the requirements in (2); or

   2. (b)

      is an MCD article 3(1)(b) credit agreement which provides that the land, or existing or projected building, to which it relates is subject to the requirements in (2).

2. (2)

   The requirements are that the land, or existing or projected building (as applicable):

   1. (a)

      cannot at any time be occupied as a dwelling by the borrower or by a related person; and

   2. (b)

      is to be occupied as a dwelling on the basis of a rental agreement.

Related person is described in PERG 4.4.19.

PERG 4.4.6AG explains why the requirement in PERG 4.10B.5G that the borrower does not use the land as a dwelling does not take the contract out of the definition of regulated mortgage contract altogether without having to rely on the consumer buy-to-let exclusion described in this section.

CBTL business means the activities in the table in PERG 4.10B.9G.

A CBTL credit agreement means a contract that meets the following conditions:

1. (1)

   it meets the definition of a buy-to-let credit agreement in PERG 4.10B.5G; and

2. (2)

   it 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.

1. (1)

PERG 4.4.32G explains when a borrower is regarded as entering into a buy-to-let credit agreement for the purpose of a business carried on, or intended to be carried on, by the borrower.

1. (2)

   A person administers a CBTL credit agreement if the person carries on administering a regulated mortgage contract in respect of the CBTL credit agreement, or would carry on that regulated activity in respect of the CBTL credit agreement if it was not a person included on the FCA register described in PERG 4.10B.16.

A person is acting as a CBTL arranger if the person:

1. (1)

   is not a lender as described in the first row of the table in PERG 4.10B.9G;

2. (2)

   is not merely introducing, either directly or indirectly, a borrower to a lender or credit intermediary;

3. (3)

   is acting in the course of the person’s trade, business or profession, for remuneration, which may take a pecuniary form or any other agreed form of financial consideration; and

4. (4)

   meets one or more of the following conditions:

   1. (a)

      the person presents or offers CBTL credit agreements to consumers; or

   2. (b)

      the person assists consumers by undertaking preparatory work or other pre-contractual administration in respect of CBTL credit agreements other than as referred to in (a); or

   3. (c)

      the person concludes CBTL credit agreements with consumers on behalf of the lender.

Under article 6(1) of the MCD Order a person is acting as a CBTL adviser if in the course of that person’s trade, business or profession, the person provides personal recommendations to a consumer in respect of one or more transactions relating to CBTL credit agreements.

Under article 6(2) of the MCD order a person who provides personal recommendations to a consumer in respect of one or more transactions relating to CBTL credit agreements is not acting as a CBTL adviser if the recommendations are provided:

1. (1)

   in an incidental manner in the course of a professional activity and that activity is regulated by legal or regulatory provisions or a code of ethics governing the profession which do not exclude the making of those recommendations; or

2. (2)

   in the context of managing existing debt as an insolvency practitioner where that activity is regulated by legal or regulatory provisions or as part of public or voluntary debt advisory services which do not operate on a commercial basis.in the context of managing existing debt as an insolvency practitioner where that activity is regulated by legal or regulatory provisions or as part of public or voluntary debt advisory services which do not operate on a commercial basis.

1. (1)

   The definitions of CBTL arranger and CBTL adviser are largely the same as those under the legislation which implemented the MCD3.

2. (2)

   There is guidance on these terms in PERG 4.10A (Activities within scope of3 the Mortgage Credit Directive).

3. (3)

   The main difference between the definitions in this section and those in PERG 4.10A is that this section only relates to CBTL credit agreements.

Part 3 of the MCD Order has a procedure for the FCA to include a person carrying on one of the activities described in PERG 4.10.9G in a register.

There are two types of person subject to the regime:

1. (1)

   firms with Part 4A permissions (including firms with an interim permission to carry on one or more regulated activities under article 56 of the Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) (No 2) Order 2013)); and

2. (2)

   unauthorised persons described in article 8(3) of the MCD order.

1. (1)

   There are detailed conditions for admission to the register that apply to an unauthorised person described in article 8(3) of the MCD Order.

2. (2)

   These detailed conditions do not apply to a firm in PERG 4.10B.17(1). The conditions for a firm in PERG 4.10B.17(1) to be included on the register are simpler.

Part 3 of the MCD Order has a detailed regulatory regime for firms subject to that regime.

There is another exclusion for buy-to-let contracts in addition to the one in article 72I of the Regulated Activities Order (see PERG 4.10B.1G for article 72I).

A contract is excluded from the definition of regulated mortgage contract if, at the time it is entered into, it meets the following conditions:

1. (1)

   it is a consumer buy-to-let mortgage contract within the meaning of the MCD Order (see PERG 4.10B.10G for an explanation of what this means); and

2. (2)

   it is either:

   1. (a)

      of a kind outside the scope of the MCD3 by virtue of the exclusions summarised in PERG 4.10A.5G(1) to (8); or

   2. (b)

      a bridging loan (see PERG 4.13.6G).

The RAO refers to the contract described in PERG 4.10B.21G as an “exempt consumer buy-to- let mortgage contract”.

1. (1)

   The exclusion for exempt consumer buy-to-let mortgage contracts has the effect that a person whose business covers exempt consumer buy-to-let lending does not have to consider its position in respect of Part 3 of the MCD Order or consider the exclusion in PERG 4.10B.2G.

2. (2)

   However, exempt consumer buy-to-let lending is not excluded from the regime in Part 3 of the MCD Order altogether. This is because the Part 4A permission of a firm that has permission to carry out any of the following activities:

   1. (a)

      arranging (bringing about) regulated mortgage contracts;

   2. (b)

      making arrangements with a view to regulated mortgage contracts;

   3. (c)

      credit broking;

   4. (d)

      advising on regulated mortgage contracts;

   5. (e)

      entering into a regulated mortgage contract;

   6. (f)

      administering a regulated mortgage contract;

   is subject to a requirement that the firm does not carry on any activity that would constitute CBTL business as defined in PERG 4.10B.9G unless the firm is registered as described in PERG 4.10B.16.

3. (3)

   That requirement covers the exempt consumer buy-to-let lending referred to in (1).

Another purpose of the exclusion in PERG 4.10B.2G is that it provides an exclusion in relation to credit broking.

Part 3 of the MCD Order does not apply to all mortgage contracts secured on buy-to-let property.

The regime is only relevant to credit secured on residential property. If a loan to a buy-to-let borrower is secured on commercial property, the loan is not a residential mortgage contract and this chapter does not apply.

The Part 3 regime is only relevant to consumer borrowers. Non-consumer borrowers fall outside Part 3. Many will be excluded from regulated mortgage activities altogether by the exclusions for loans to business borrowers in PERG 4.4.17G to PERG 4.4.21G.