-
(1)
This sourcebook3 applies to every firm that:1
13- (a)
carries on a home finance activity3 (subject to 31the business loan and loans to high net worth mortgage customers7 application provisions3); or
3 - (b)
communicates or approves a financial promotion of qualifying credit, of a home purchase plan,6of a home reversion plan3or of a regulated sale and rent back agreement.6
36
- (a)
-
(2)
Where a firm has outsourced activities to a third party processor, any rule in MCOB which requires the third party processor, when acting as such, to disclose its identity to a customer must be read as requiring disclosure of the identity of the firm (or appointed representative, as appropriate) which is taking responsibility for the acts and omissions of the third party processor when carrying on the outsourced activities.1
1
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Timeline guidanceMCOB 1.2 General application: who? what?
1 Firms which outsource regulated activities are reminded of the guidance on outsourcing in SYSC 3.2.4 G and SYSC 84.
Firm types and the 3home finance 3activities
- (1)
This sourcebook applies to activities carried out in respect of regulated mortgage contracts, equity release transactions, home purchase plans, and regulated sale and rent back agreements. Together, these products are referred to as home finance transactions.
5555377 - (2)
Lifetime mortgages and home reversion plans are together referred to as equity release transactions.3
- (3)
The application of most of this sourcebook is expressed by reference to four types of firm: lenders/providers, administrators, arrangers, and advisers. Arrangers and advisers are together referred to as intermediaries. This includes those firms that provide business loans to customers under a regulated mortgage contracts (see MCOB 1.2.3 R to MCOB 1.2.9 G). A single firm may fall into more than one of these types. PERG 4 contains detailed guidance on regulated mortgage activities and PERG 14 contains detailed guidance on home purchase activities,6reversion activities3and regulated sale and rent back activities.6
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7Business loans and loans to high net worth mortgage customers: application of MCOB7
In relation to a regulated mortgage contract for a business purpose
-
(1)
MCOB applies if the customer is not a large business customer; and
-
(2)
if MCOB applies, a firm must either:
- (a)
comply with MCOB in full (disregarding the tailored provisions for regulated mortgage contracts for a business purpose in the remainder of MCOB); or
- (b)
comply with MCOB in full, but taking account of all7 those tailored provisions, including MCOB 1.2.7 R.
7
- (a)
7In relation to a regulated mortgage contract with a high net worth mortgage customer, a firm must either:
-
(1)
comply with MCOB in full (disregarding the tailored provisions for regulated mortgage contracts with high net worth mortgage customers in the remainder of MCOB); or
-
(2)
subject to MCOB 1.2.9C R, comply with MCOB in full, but taking account of all those tailored provisions, including MCOB 1.2.7 R.
7Where any provision of MCOB is expressed to apply in respect of a high net worth mortgage customer, it applies in respect of joint borrowers (or potential borrowers) if one of them satisfies that definition in his own right.
8In relation to an MCD regulated mortgage contract with a high net worth mortgage customer, to comply in full with MCOB, a firm does not need to comply with those provisions in MCOB that are expressed not to apply to MCD regulated mortgage contracts.
7Certain other provisions of MCOB apply in all cases in respect of high net worth mortgage customers or of transactions which are solely for a business purpose. The application of the tailored and other provisions for high net worth mortgage customers and transactions for a business purpose are summarised in the table at MCOB 1.2.4B G.
7 Table of provisions applicable to business loans and high net worth mortgage customers: this table belongs to MCOB 1.2.4AG |
Provisions |
Tailored provisions or applicable in all cases? |
For business loans only, are the provisions applicable to all business loans, or only where the loan is solely for a business purpose? |
Applicable in all cases |
Applicable only where loan is solely for a business purpose |
|
Tailored |
Applicable to all business loans |
|
Tailored |
Applicable to all business loans |
|
Tailored |
Applicable to all business loans |
|
Tailored |
Applicable to all business loans |
|
Various of the provisions in MCOB 11.6 |
Applicable in all cases |
Applicable only where loan is solely for a business purpose |
Tailored |
Applicable to all business loans |
|
Tailored |
Applicable to all business loans |
-
(1)
In order for a loan to fall within the definition of a regulated mortgage contract, at least 40% of the total of the land to be given as security must be used as or in connection with a dwelling. Therefore, the variation in approach provided for in MCOB 1.2.3 R(2) can only apply where the loan being used for a business purpose is secured against a property at least 40 per cent of which is used as a dwelling. It cannot apply to a loan secured on property that is used solely for a business purpose.
-
(2)
Whether a regulated mortgage contract is, or is solely,7 for a business purpose will be a matter of fact to be determined by a firm (in accordance with MCOB 1.2.9D R where applicable) 7depending on the individual circumstances of each case. In the FCA's opinion, a regulated mortgage contract secured, for example, on the borrower's own home, but used to finance the purchase of a single buy-to-let property will not be for a business purpose.
In determining whether a customer is a large business customer for the purposes of MCOB 1.2.3 R(1), a firm will need to have regard to the figure given for the customer's annual turnover in the customer's annual report and accounts or business plan. In addition, a firm may rely on information provided by the customer about the annual turnover, unless, taking a common-sense view of this information, it has reason to doubt it.
7Business loans and loans to high net worth mortgage customers: additional requirements if tailored route is used7
In relation to a regulated mortgage contract for a business purpose or with a high net worth mortgage customer7, if a firm has opted for the tailored route, it must adopt the following modifications to the sourcebook:3
3 3-
(1)
11substitute an alternative description of the facility provided under the regulated mortgage contract for 'mortgage' where that term is used in any disclosure;7
33337 -
(2)
substitute the term 'illustration' for ‘Key facts illustration’ when opting to use the tailored business loans or loans to high net worth mortgage customers rules in 7MCOB 4.9, MCOB 5.7, MCOB 6.7 or MCOB 7.7; and
7 -
(3)
limit disclosure to facilities provided under the regulated mortgage contract.
-
(1)
Firms are reminded of the requirement in MCOB 3A.2.1R8 that any communication should be fair, clear8 and not misleading when substituting an alternative for the term 'mortgage' in accordance with MCOB 1.2.7 R(1).
88 -
(2)
Possible alternatives to the term 'mortgage' include, for example, 'secured overdraft', 'secured loan' or 'secured business credit'.
7
The disclosure rules in MCOB place particular emphasis on the description of borrowing. Where the regulated mortgage contract is for a business purpose or with a high net worth mortgage customer7 who is not a consumer under an MCD regulated mortgage contract8, a firm should reflect this emphasis in any disclosure by first describing any borrowing before addressing the other facilities provided under the regulated mortgage contract.
Home purchase plans3
For detail of the tailored provisions applying to home purchase plans, see the section on 'home purchase plans' set out in each relevant chapter.
Provisions for professional customers
Requirement for evidence before treating a loan as being solely for business purposes, or a customer as a high net worth mortgage customer or a professional customer
7A firm may not treat a customer as being a high net worth mortgage customer for the purposes of MCOB unless either:
-
(1)
it is aware, from evidence already in its possession as a result of a business relationship between it and the customer, that the customer satisfies the definition of high net worth mortgage customer; or
-
(2)
it has first obtained a written statement which:
- (a)
confirms that the customer satisfies the definition of high net worth mortgage customer;
- (b)
specifies the period for which it is valid, which includes the time when the regulated mortgage contract is entered into; and
- (c)
is signed by a suitably qualified professional adviser of the customer who is not an associate of the firm or of the customer.
- (a)
10Where the regulated mortgage contract is a legacy CCA mortgage contract, the firm should not treat the customer as a high net worth mortgage customer for the purposes of MCOB unless it is aware from evidence in its possession that the customer satisfied the definition of high net worth mortgage customer at the time the contract was entered into.
7A firm must keep the evidence in MCOB 1.2.9CR (1) and MCOB 1.2.9ER, the business plan in MCOB 1.2.9DR and the written statement in MCOB 1.2.9CR (2) for not less than three years from the date on which it was obtained or, if later, used to satisfy MCOB 1.2.
Authorised professional firms
MCOB does not apply to an authorised professional firm with respect to its non-mainstream regulated activities except for MCOB 3A (Financial promotions and communications with customers).8
8Authorised professional firms should be aware of the following:
-
(1)
PROF 5 (Non-mainstream regulated activities); and
-
(2)
MCOB 3A.1.3R8 (Authorised professional firms) and the exception in article 55 of the Financial Promotion Order (Communications by members of the professions) which applies in relation to financial promotion of qualifying credit or of a home reversion plan3 of authorised professional firms under MCOB 3A.1.9R(2)8 (Exemptions).
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Pre-contractual arrangements by a 3home finance provider3
In MCOB the activities of a home finance provider which would be arranging but for article 28A of the Regulated Activities Order (Arranging contracts or plans 3to which the arranger is a party), are to be treated as arranging and therefore also as home finance activities.3
3The effect of article 28A of the Regulated Activities Order would normally mean that arrangements made by a party to a home finance transaction3 would not fall within the home finance activity3 of arranging. So in a direct sale, a home finance provider3 would not be carrying on the regulated activity of arranging but, where the transaction proceeds to completion, would instead be involved in a regulated activity comprising entering into a home finance transaction3. However, the provisions in MCOB on arranging home finance transactions3 are applied to pre-contractual arrangements by a home finance provider3.
3 3 3 3 3 3MCD application
- (1)
8The provisions in the table in (2) apply only in relation to an MCD regulated mortgage contract.
- (2)
This table belongs to (1).
Chapter
Provisions
Whole chapter
MCOB 3A.2.4R(2) and MCOB 3A.5
Whole chapter
MCOB 4.4A.4R (1)(a) and (3), MCOB 4.4A.8R (1)(d) and MCOB 4.4A.8R (2)(e)
Whole chapter
Whole chapter
Whole chapter
Whole chapter
Whole chapter
Whole chapter
Whole chapter
- (1)
8 For any regulated mortgage contract which is not an MCD regulated mortgage contract, a firm may elect to comply with any part of MCOB as if the contract was an MCD regulated mortgage contract.
- (2)
Where the contract in (1) is an MCD exempt lifetime mortgage that is not a retirement interest-only mortgage12, the firm must continue to provide an illustration in accordance with the relevant requirements in MCOB, rather than an ESIS.
8The purpose of MCOB 1.2.16 R is to allow a firm to apply provisions of MCOB which implement the MCD for an MCD regulated mortgage contract to regulated mortgage contracts that are not MCD regulated mortgage contracts, save in respect of MCD exempt lifetime mortgages (other than retirement interest-only mortgages)12 where the firm must continue to provide an illustration in accordance with the relevant requirements in MCOB, rather than an ESIS.
8A firm that makes the election in MCOB 1.2.16 R to treat an MCD exempt bridging loan as if it were an MCD regulated mortgage contract must calculate the APRC for the MCD exempt bridging loan by applying the following additional assumptions:
- (1)
the total amount of credit must be deemed to be drawn down in full and for the duration of the MCD exempt bridging loan; and
- (2)
if the duration of the MCD exempt bridging loan is not known, the APRC must be calculated on the assumption that the duration of the credit is 12 months.
Identifying MCD credit agreements
- (1)
8To meet the definition of an MCD credit agreement (including a foreign currency loan), a contract must come within the definition at the time it is entered into.
- (2)
The effect of (1) is that:
- (a)
a contract which, at the time it is entered into, comes within the definition of an MCD regulated mortgage contract (and a foreign currency loan where applicable) remains an MCD regulated mortgage contract (and a foreign currency loan where applicable) throughout its remaining term, even if there are subsequent periods of time when some or all of the conditions set out in the definition are not satisfied; and
- (b)
unless the contract is subsequently replaced with a new contract which meets the conditions in the definition, a contract which does not start out as an MCD regulated mortgage contract or a foreign currency loan cannot subsequently become one, even if the contract is subsequently amended so that it meets all the conditions set out in definition.
- (a)
Applicability of MCOB to regulated mortgage contracts which had previously been regulated credit agreements
- (1)
10By virtue of amendments to articles 60B, 60C and 61 of the Regulated Activities Order which came into force on 21 March 2016, certain regulated credit agreements became regulated mortgage contracts (but see the transitional provisions described in (3) below). The provisions of MCOB that apply to these regulated mortgage contracts include:
- (2)
Where a regulated mortgage contract is a second charge regulated mortgage contract which was entered into before 21 March 2016, MCOB applies to the contract from 21 March 2016.
- (3)
Where a regulated mortgage contract is a legacy CCA mortgage contract secured by a first charge legal mortgage, MCOB applies to the contract from the earliest of:
- (a)
the date on which the lender first acts in compliance or purported compliance with rules in the FCAHandbook which apply to regulated mortgage contracts in respect of the contract;
- (b)
the date from which the lender notifies the borrower in writing that it will act in compliance with such rules in respect of the contract; and
- (c)
21 March 2017.
- (a)
Application of MCOB where agreements are facilitated by a P2P platform
- (1)
13A provision of MCOB that applies to a mortgage lender, a home purchase plan provider, a home reversion provider or a SRB agreement provider also applies to a P2P platform operator facilitating a regulated mortgage contract, home purchase plan, home reversion plan or regulated sale and rent back agreement where the lender, plan provider, reversion provider or agreement provider does not require permission to enter into the transaction. It applies subject to the provisions in MCOB 15.
- (2)
A provision of MCOB that applies to a mortgage administrator or a home purchase administrator also applies to a P2P platform operator administering a regulated mortgage contract or home purchase plan on behalf of a lender or plan provider who did not require permission to enter into the transaction. It applies subject to the provisions in MCOB 15.
- (3)
Subject to MCOB 1.2.22R(5), MCOB 1.2.22R(4) applies where:
- (a)
a P2P platform operator facilitates an arrangement under which a number of persons provide home finance to a single customer, either individually under separate contracts, or jointly and severally under a single contract;
- (b)
by virtue of MCOB 1.2.22R(1), a provision of MCOB (as modified by MCOB 15) applies to the P2P platform operator;
- (c)
the provision as modified requires the P2P platform operator to make a disclosure or notification in respect of the entirety of the arrangement; and
- (d)
the provision requires one or more of the home finance providers under the arrangement to make the same disclosure or notification in respect of their individual contract, or their share of the joint and several contract.
- (a)
- (4)
The home finance provider is not required to comply with the provision referred to in MCOB 1.2.22R(3)(d).
- (5)
MCOB 1.2.22R(4) does not apply where the provision in question is one which applied immediately before IP completion day16 and a failure to secure15 compliance with the provision would have been incompatible with EU law at that time15.
- (1)
13The purpose of MCOB 1.2.22R(3) to 1.2.22.R(5)14 is to avoid imposing overlapping requirements on the P2P platform operator facilitating a home financing arrangement and any firms who may participate in that arrangement as finance providers, to the extent that was compatible with EU law immediately before IP completion day1615, in particular the MCD and the Distance Marketing Directive. The table below provides non-exhaustive guidance on MCOB provisions with which a firm may need to comply, notwithstanding MCOB 1.2.22R(3) and MCOB 1.2.22R(4).
- (2)
This table belongs to (1).
MCOB provisions |
Description |
Provision of a European Standardised Information Sheet (ESIS): timing |
|
Distance contracts with retail customers |
|
Distance contracts with retail customers |
|
Notification of payment changes and other material changes to terms and conditions |
|
Further advances |
|
Rate switches |
|
Addition or removal of a party to the contract |
|
Changes to the amount of each payment due |
13In this section and in MCOB 15:
- (1)
a reference to a P2P platform operator facilitating a regulated mortgage contract, home purchase plan, home reversion plan or regulated sale and rent back agreement is a reference to the platform facilitating persons becoming the lender and borrower, home purchase provider and home purchaser, reversion provider and reversion occupier, or agreement provider and agreement seller under an agreement which comprises that transaction; and
- (2)
a reference to a regulated mortgage contract that is facilitated by a P2P platform operator excludes a CBTL credit agreement.
13 MCOB 15 contains rules and guidance that apply in relation to regulated mortgage contracts and other home finance transactions facilitated by P2P platform operators. It includes rules that disapply other parts of MCOB that would otherwise apply by virtue of MCOB 1.2.22R(1) or 1.2.22R(2), and rules that apply or modify the application of certain other MCOB provisions in such circumstances. MCOB 15 also includes guidance that will be relevant to such a P2P platform operator whether or not a lender or provider falls within the definition of a mortgage lender, home purchase provider, reversion provider or SRB agreement provider.
MCOB 1.3 General application: where?
Location of the customer
Except as set out in this section, MCOB applies if the customer of a firm carrying on home finance activities2 is, at the time that the home finance activity is carried on, resident in:9
2 8- (1)
9the United Kingdom; or
- (2)
9an EEA State, where the activity is carried on:
- (a)
from an establishment maintained by the firm (or its appointed representative) in the United Kingdom; and
- (b)
in respect of a regulated mortgage contract entered into before IP completion day.
- (a)
Financial Promotion
Distance contracts with retail customers
Parts of MCOB relate to distance contracts (or distance mortgage mediation contracts and distance home purchase mediation contracts2) with consumers3. These expressions are derived from the Distance Marketing Directive, and the following paragraphs provide some guidance to firms on their meaning:
3-
(1)
The rules which implemented the Distance Marketing Directive apply8 for distance contracts with 'any natural person who is acting for purposes which are outside his trade, business or profession', for which the term 'consumer' has been adopted. Examples of individuals who would be regarded as consumers3include:
33 -
(2)
To be a distance contract, a contract must be concluded under an 'organised distance sales or service-provision scheme' run by the contractual provider of the service who, for the purpose of the contract, makes exclusive use (directly or through an intermediary) of one or more means of distance communication 3up to and including the time at which the contract is concluded. So:
3- (a)
the firm must have put in place facilities designed to enable a customer to deal with it exclusively at a distance, such as facilities for a customer to deal with it purely by post, telephone, fax or the Internet. If a firm normally operates face-to-face and has no facilities in place enabling a customer to deal with it customarily by distance means, the rules which implemented the8Distance Marketing Directive3 will not apply. A one-off transaction effected exclusively by distance means to meet a particular contingency or emergency will not be a distance contract; and
3 - (b)
there must have been no simultaneous physical presence of the firm and the other party to the contract throughout the offer, negotiation and conclusion of the contract. So, for example, contracts offered, negotiated and concluded over the Internet, through a telemarketing operation, or by post will normally be distance contracts.
- (a)
Use of intermediaries
The mere fact that an intermediary (acting for the supplier or for the consumer3) is involved, does not make the sale of a financial product or service a distance contract. There will not be a distance contract if there has been simultaneous physical presence of the intermediary and the consumer3 at some stage in the offer, negotiation and conclusion of the contract.1
3 3MCOB 1.5 Application to appointed representatives
-
(1)
Although MCOB does not apply directly to a firm's appointed representatives, a firm will always be responsible for the acts and omissions of its appointed representatives in carrying on business for which the firm has accepted responsibility (section 39(3) of the Act). In determining whether a firm has complied with any provision of MCOB, anything done or omitted by a firm's appointed representative (when acting as such) will be treated as having been done or omitted by the firm (section 39(4) of the Act).
-
(2)
Firms should refer to SUP 12 (Appointed representatives), which sets out requirements which apply to firms using appointed representatives.
MCOB 1.6 4Distinguishing regulated mortgage contracts and regulated credit agreements4
MCOB applies to regulated mortgage contracts. For certain categories of regulated mortgage contract, MCOB applies from the dates mentioned in MCOB 1.2.21G. A credit agreement secured on land5 that is not a regulated mortgage contract, for example because the borrower is not an individual or a trustee,5 may be a regulated credit agreement to which the CCA and CONC apply (see CONC 1.2.7G).5
4 2 4 2 1Principle 2 requires a firm to conduct its business with due skill, care and diligence. The purpose of MCOB 1.6.3 R is to reinforce this. The FCA would expect firms to take appropriate steps to determine whether any mortgage it proposes to enter into is subject to FCA regulation and, if so, whether it is a regulated mortgage contract or a regulated credit agreement4.
Before a firm enters into a mortgage, it must take all reasonable steps to establish whether that mortgage will be a regulated mortgage contract and therefore subject to MCOB.
If, notwithstanding the steps taken by a firm to comply with MCOB 1.6.3 R, it transpires that a mortgage which the firm has treated as unregulated or as a regulated credit agreement4 is in fact a regulated mortgage contract, the firm must as soon as practicable after the correct status of the mortgage has been established:
-
(1)
contact the customer and provide him with the following information in a durable medium:
- (a)
a statement that the mortgage contract is a regulated mortgage contract ; and
444 - (b) 4
- (i)
where the firm has treated the mortgage as unregulated, a statement that the mortgage contract is subject to FCA regulation, stating in particular the position with regard to redress and compensation; or4
- (ii)
where the firm has treated the mortgage as a regulated credit agreement, a statement that; 4
- (i)
- (a)
-
(2)
apply to the regulated mortgage contract all relevant MCOB requirements, such as those on disclosure (in MCOB 7) or on the treatment of customers in arrears (in MCOB 13).
-
(1)
MCOB 1.6.4 R(2) means, for example, that if a firm discovered immediately after completion that a loan was a regulated mortgage contract, the firm would be required to comply with MCOB 7.4 (Disclosure at the start of the contract).
-
(2)
Although MCOB 1.6.4 R recognises that firms may become aware that a mortgage is a regulated mortgage contract at a late stage, the FCA expects this to be an extremely rare occurrence. It could arise, for example, if a firm has acted on the understanding, verified as far as was practicable, that in respect of a particular mortgage contract less than 40% of the land would be used in connection with a dwelling. If it was discovered later that more than 40% of the land was used in connection with the dwelling (and provided that all the other legal requirements were met) the mortgage will be a regulated mortgage contract to which MCOB applies.
-
(3)
MCOB 1.6.3 R and MCOB 1.6.4 R do not override the application of MCOB to any regulated mortgage contract. MCOB applies notwithstanding a firm's genuine belief that a mortgage is unregulated or is a regulated credit agreement4. In deciding whether to take disciplinary action as a result of a breach of MCOB, the FCA will take into account whether the action by the firm was reckless or deliberate (see DEPP 6.2.1G (1)(a)). 3
3