Limelight – Issue 57

Limelight – Issue 57

Mortgages Market Study: FCA proposes changes to its mortgage sales requirements LIMELIGHT A Tenet Group Publication for Appointed Representatives of TenetLime

Issue 57 n

Summer 2019

THERE’S ALWAYS TIME TO LEARN SOMETHINGNEW

ALSO IN THIS EDITION Market Watch - Find out more about changes within the Buy to Let Market Events - Book your place on our latest mortgage events and our 2019 Adviser Forum

PLUS: Limelight gets ‘Up Close and Personal’ with Lime’s Technical Services & Research team

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THIS IS FOR FINANCIAL ADVISER USE ONLY AND SHOULDN’T BE RELIED UPON BY ANY OTHER PERSON.

Mortgages Market Study: FCA proposes changes to its mortgage sales requirements LIMELIGHT A Tenet Group Publication for Appointed Representatives of TenetLime

Issue 57 n

Summer 2019

ALSO IN THIS EDITION Market Watch - Find out more about changes within the Buy to Let Market Events - Book your place on our latest mortgage events and our 2019 Adviser Forum

PLUS: Limelight gets ‘Up Close and Personal’ with Lime’s Technical Services & Research team

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Editor’s Foreword Natalie Yarwood Marketing Consultant

Contents

TenetLime Support 4-5 Industry Update

Simon Broadley gives us an industry overview Market Watch Find out more about changes within the Buy to Let Market Mutata aut Mori – change or die Richard Conway shares some insight into the change taking place within TenetLime New five year technology deal with Intelliflo

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Hello and welcome to Limelight: In this issue, TenetLime’s Managing Director Simon Broadley looks back on the past quarter, with the FCA’s Mortgages Market Study findings being one of the main talking points, as well as the FCA’s Business Plan for 2019/20, the increased FOS compensation limit and the Implementation of Intelligent Office (iO). Find out more on pages 4 & 5 . In our Market Watch update, Paul Hewitt looks into changes within the buy to let market and the impact of tax relief changes for residential landlords. Read more on page 6 for more information . We get to know Bryony Morris and Paul Hewitt from Lime’s Technical Services & Research team, who feature in our ‘Up Close and Personal’ this edition. As well as getting to know them both some more, we shine the light on how Technical Services & Research team can help you with your mortgage research and case queries. Learn more about Bryony and Paul from our Technical Services & Research team on pages 10 & 11 . Finally, we look at how Intelligent Office will benefit your business and improve your efficiency via IT for the future. What’s more, we look at what you can do now to ensure you are ready for migration. Find out more on page 8 . We hope you enjoy reading this edition of Limelight. Best wishes Natalie Yarwood

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Find out how Intelliflo will add value to your business 10-11 Up Close & Personal Get to know Paul and Bryony from TS&R 13 Leading Lights 14 Tenet Events Book your place at one

of Tenet’s upcoming events. Plus save the date for 2019’s Adviser Forum

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Provider Support 19

Age Partnership What’s next for the equity release sector? Canada Life Why choose Canada Life for Individual Protection? Together Exploring why over-50s over-indexing in the bridging loan market. Plus much more…

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Editor: Natalie Yarwood

LIMELIGHT is a Tenet Group publication 5 Lister Hill, Horsforth, Leeds LS18 5AZ. Tel 0113 239 0011 Fax 0113 239 5322

Terms and Conditions. Although every effort has been made to ensure the accuracy of the information contained in this publication, The Tenet Group cannot accept responsibility for any errors it may contain. The Tenet Group cannot be held responsible for the loss or damage of any material, solicited or unsolicited. No reproduction of any part of this publication, in any form or by any means, without prior written consent from The Tenet Group. The views expressed in this publication do not necessarily reflect those of the advertisers or the publishers.

WELCOME - 3

Under the omnipresent shadow of Brexit, 2019 is not proving to be a great year for growth, with house prices remaining subdued, just 0.9% higher in April than the same month last year, and continuing Bank of England uncertainty. It’s not all negative however and the current competitive lending landscape is driving a lot of positive activity for consumers, with a healthy stream of new products and reducing rates. This can also be the cause of a few casualties, with Magellan Homeloans for example ceasing to trade in March, blaming an unsustainable market. Fleet Mortgages also withdrew from the mortgage market in January, but we understand it has a new funding line and is returning to the buy to let market soon, with a new range of products. Talking of buy to let, our Market Watch feature this edition focuses on the buy to let market where residential landlords are increasingly feeling the pressure due to the tax relief changes. Read the full article on page 6. FCA’s Business Plan 2019/20 Outside of supporting a smooth transition, post-Brexit, the FCA’s priorities for the coming year were mapped out in its latest business plan and included working to improve firms’ culture and governance and operational resilience, fighting financial crime and improving the treatment of customers. No surprises therefore as we are generally seeing continuations on current themes. Ensuring the fair treatment of customers will be achieved by monitoring firms’ practices, including the information they give prospective and current customers. This will include remedies proposed in the Mortgages Market Study and will be fed into by current work being carried out in a market study on general insurance pricing practices and a focus on competition in the cash savings market. We’ll touch more on the Mortgages

Industry OVERVIEW

Simon Broadley Managing Director, TenetLime Ltd

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Market Study further on, but in their other areas, the regulator will consider what action will best address any perceived issues,

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(MMS) final report itself, in the last issue of Limelight I focused on the two key areas that could drive change within the industry - a proposed digital comparison tool to help select the ‘right’ adviser and the desire to support ‘mortgage prisoners’ in switching to a better rate. Another topic under the FCA’s microscope is related to concerns about ‘making it easier for consumers to choose the right mortgage’. It cited the prominence a mortgage has, making up 80% of total UK household liabilities, and thus the importance in selecting the best value product. The regulator identified that 30% of customers could have found a cheaper equivalent mortgage deal; at an annual average saving of £550 per year. This was consistent across both intermediary and direct mortgage sales, which then drove further questions around the reasons for this. The stand-out reason was clarity - particularly clarity of certain eligibility criteria. The study covered how pricing is naturally driven by criteria, and thus where there is uncertainty around eligibility, there is potential for a consumer to be paying for more than they need to (e.g. a higher maximum LTV, or maximum age than they require). The study stated ‘a consumer should buy a mortgage for which they just meet the eligibility criteria’. Easier said than done of course, but they did refer to the types of criteria where they believed the product chosen had stricter requirements than other equivalents. This was due to the transparency of the criteria in question and maximum LTI and minimum credit score were shown as the two biggest offenders. What I find encouraging is – against the backdrop of these findings – is that those consumers using intermediaries were much less prone to taking a mortgage product that was costlier than it should be, with ‘only around 20%’ missing out on ‘significant savings’. It is recognition of the vital part advisers play in ensuring that UK consumers find the most suitable mortgage for them. And given the increasing proportion of mortgages sold through advisers, the study did not propose to intervene any further. I’d see this as a direct reflection of the diligence of all our members – and the wider intermediary market – in maintaining high standards of professionalism. What the study did hope for however, was a greater level of understanding from consumers on the mortgage products they would be likely

including whether price interventions may be appropriate. The regulator also prioritised identifying business models that drive unaffordable lending, with particular focus on some retail lending products, including some subprime credit and second charge mortgage products, which are designed to benefit from consumers not repaying their debts. The message on financial crime is that it is still very much on the agenda and firms must remain diligent and declare any criminal activity that they become aware of, as well as have appropriate safeguards in place. Over the coming year, the regulator expressed its intention to monitor firms’ progress in improving their AML controls as one indicator of whether the potential harm to consumers and market integrity is likely to have reduced. In summary, all firms need to ensure that their client’s needs, (both new and existing) are at the heart of everything they do in pursuit of a good client outcome, delivered by appropriate and fairly priced products and services. This is underpinned by good MI capabilities and ensuring client files are complete and in order. Mortgages Market Study As I write, the FCA has published its consultation on mortgage advice and selling standards, which includes proposals to change its mortgage advice rules to make it easier to offer execution-only options to borrowers and to equalise treatment of advised and execution- only sales. It will also require mortgage advisers to keep a record of why they did not recommend a cheaper mortgage, if the product recommended was not the cheapest policy that met the customer’s needs and circumstances. These proposals are one part of a package of remedies from the Mortgages Market Study. ‘unnecessarily channelled’ into advice and said its rules on advice could have been a barrier to the development of tools that help consumers choose and buy a mortgage. Based on the fact that the original study found that the mortgage market is working well for most customers, these developments are concerning – if it ain’t broke, don’t fix it comes to mind! We will therefore be keeping a close eye on how this progresses and as ever, represent your best interests via my board position within AMI and other channels. Looking back to the Mortgages Market Study In March, the regulator also stated it was concerned consumers were being

to qualify for, at the earliest possible stage, utilising APIs to drive multiple decisions in principle from lenders. They continue to work with a cross-section of lenders, intermediaries and fintechs to explore such possibilities. There was pushback within the industry around the level of focus the study gave to price when conducting the study, and thus the idea of simple decision in principle based largely on price isn’t a perfect one. You know better than anyone, that there are numerous factors to be considered when picking the ‘right’ mortgage, and it is my view that the best place for a consumer to select the right mortgage is in conjunction with the expertise of qualified advisers with a broad range of lending products to choose from. Increased FOS compensation limit From 1st April, the Financial Ombudsman Service compensation limit increased from £150,000 to £350,000 for complaints about actions by firms on or after that date. There has been a lot of concern within the market about what the effect on advice firms and professional indemnity insurers will be, with the FCA estimating that PII insurance premiums could go up by 140 per cent and may force 1,000 ‘higher-risk’ advisers to leave the market. The worst-case scenario modelled by insurers sees premium hikes of between 200 and 500 per cent! We are pleased to report that there is no change to our own captive PII policy however in relation to this, as we don’t set a single claim limit, so cover will be the same for FOS or legal cases, and our PII cover provides the same comprehensive cover for all sectors. Implementation of Intelligent Office (iO) Without doubt, this implementation is the number one priority for us as a leadership team and the entire business in 2019 and we are currently on track, working towards a launch in Q4 of this year. We’re keeping you updated via our weekly Intelligent Office (iO) communications and our dedicated iO extranet area. We recognise that iO is an emerging player in the mortgage and protection market but they are keen to work in partnership with us to increase their foothold as a leading mortgage IT provider. If you turn to page 8, you can read more about the benefits that the system will offer for brokers. In terms of the regulatory environment however, technology is a very effective way of reducing the strain and helping ensure compliance within a world that we know is all too often subject to change.

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transition, exit, the FCA’s for the coming ere mapped its latest ness plan

TENETLIME SUPPORT - 5

MARKET WATCH with TENETLIME’s Research & Technical Specialist BUY TO LET MARKET CHANGES With the end of the final phase of tax relief changes for residential landlords due in April 2020, the impact this is having on the BTL market is increasingly noticeable with a number of lenders entering the limited company BTL market. Limited company BTL mortgages are increasing in popularity with landlords due to the more favourable tax situation of holding a BTL property within a limited company. Since April 2017, when the tax relief changes began phasing in, landlords with a portfolio of personally owned properties have gradually seen their profits reduce, tax bills increase, and are therefore deciding to transfer properties into an SPV (Special Purchase Vehicle) limited company. It’s worth briefly revisiting these tax relief changes and the impact they are having on the BTL market in view of the fact that advising on limited company BTL mortgages will become more of the norm rather than the exception. Providing tax advice to BTL landlords is not permitted for mortgage advisers without the relevant qualifications, but understanding how the system works is important for advisers who offer BTL mortgages, so they have a greater comprehension of the differences between standard BTLs and limited company BTLs. Until April 2017, landlords could deduct 100% of their mortgage interest and other allowable costs from their rental income, before calculating their tax liability. This is gradually being phased out by reducing the allowable deduction of mortgage interest from rental income by 25% each year until this hits 0% from April 2020. This change is effectively shifting the taxation from net profit to gross income. From 6 April 2020, tax relief for finance costs (mortgage interest) will be restricted to the basic rate of income tax, currently 20%. Relief will be given as a reduction in tax liability instead of a reduction to taxable rental income. Allowable costs (not mortgage interest related) will continue to be allowed to be deducted. HMRC estimate that 82% of landlords who are below the higher rate tax threshold (£50,000 for 2019/2020) won’t have any additional tax to pay, so the changes mainly affect higher rate tax payers. A basic example for a higher rate tax payer would be: Previous tax system (2016/2017) New tax system (from April 2020) Rental income £12,000 Rental income £12,000 Mortgage interest £6,000 Mortgage interest nil deduction Allowable costs £2,000 Allowable £2,000 Taxable Income £4,000 Taxable Income £10,000 Tax due (40% rate) £1,600 Tax at 40% rate £4,000 Profit £2,400 Mortgage Interest Relief (20%) -£1,200 Tax due £2,800 Profit £1,200

Paul Hewitt

This example demonstrates the difference in profitability that a higher rate tax payer may experience from April 2020. Although, some landlords with larger BTL portfolios may find they could be making a loss if their mortgage interest cost is 75% or more of their rental income. If they wish to continue running their portfolio as a profitable business, the use of limited company structures will help them counteract changes to tax relief. Buying a BTL property through a limited company, or transferring existing BTL properties into a limited company, can be complex and more expensive to arrange but it can save landlords money in the long run. Properties within a limited company are exempt from the new tax rules and subject to corporation tax on profit after costs. In order to transfer the properties into a limited company, the properties must be legally sold, which brings four potential costs that the landlord needs to consider: • Stamp Duty Land Tax - on the sale from individual to the limited company • Capital Gains Tax – potentially due on the sale from individual to the limited company • Mortgage fees – potential ERCs on the existing mortgage being repaid at the point of property transfer and re-mortgage fees for the new limited company BTL mortgage • Solicitor’s fees – for the sale and purchase between individual and limited company The limited company can be setup in one of two ways, depending on the landlord’s requirements: • Special Purchase Vehicles (SPVs) – these only hold property and don’t operate in any other capacity • Trading Company – A company that trades as well as holds properties. Many BTL mortgage lenders will only lend to SPVs although there are a few who will also lend to trading companies. Depending on the lender’s requirements, a personal guarantee is usually required from each director of the limited company and from any shareholder with a 25% or greater shareholding. To summarise, when using a limited company to hold property: • Profits are subject to Corporation Tax (currently 19%) and exempt from the tax relief changes for residential landlords. If profits are drawn through dividends, then additional tax will be payable. • Higher rate tax payers could benefit from better tax planning by keeping profits within the limited company and withdrawing profits strategically to keep within tax thresholds • Profits within the limited company could be used to fund further BTL purchases • Limited company BTL mortgage products are at higher interest rates and arrangement fees can be higher in comparison to standard BTL mortgage products. Extra costs need to be factored in such as accountancy fees and solicitor’s fees. Providing tax advice to BTL landlords is not permitted by mortgage advisers without the relevant tax advice qualifications and clients should always be directed to a qualified tax advisor who will determine if the client should go down the limited company BTL route or not.

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Mutata aut Mori - change or die

Richard Conway General Manager, TenetLime

They say the only constant in life is change. Who ‘they’ are has never been clear to me, however they seem to be convinced, and right now, so am I.

Part of being the “Best Network” means adapting to the changing needs of our advisers and the wider market. The phrase ‘change or die’ is now being playfully used around the office to remind us of that very fact, and far from being in any danger of ‘dying’, we’re embracing change in all its forms. I mentioned in the last issue how we have set out to review what Lime means to you. What we like, what we don’t. How we can improve. Over the last few months, that work has gathered pace, and is now reaching the point where we can begin to work through the >Page 1 Page 2 Page 3 Page 4 Page 5 Page 6 Page 7 Page 8 Page 9 Page 10 Page 11 Page 12 Page 13 Page 14 Page 15 Page 16 Page 17 Page 18 Page 19 Page 20 Page 21 Page 22 Page 23 Page 24 Page 25 Page 26 Page 27 Page 28 Page 29 Page 30 Page 31 Page 32 Page 33 Page 34 Page 35 Page 36

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