The FSA will expect a firm to ensure that charges made to a customer arising from the sale of a repossessed property and charges arising in relation to a mortgage shortfall debt are not excessive and are subject to the same considerations as apply with respect to arrears charges under this chapter.

1. (1)

   Principle 6 requires a firm to pay due regard to the interests of its customers and treat them fairly. A firm is also under an obligation, as a consequence of MCOB 5 (Pre-application disclosure), MCOB 6 (Disclosure at the offer stage), MCOB 7 (Disclosure at start of contract and after sale) and MCOB 9 (Lifetime mortgages: product disclosure), to make charges transparent to customers. This chapter reinforces these requirements by preventing a firm from imposing unfair and excessive charges.

2. (2)

   The level of charges under a regulated mortgage contract is not typically a matter for regulation. However, in certain limited circumstances, the FSA believes that customers should be protected from unfair and excessive charging practices. This chapter considers four specific circumstances, where:

   1. (a)

      the charges imposed upon a customer seeking to terminate a regulated mortgage contract before the end of the term of the contract do not reflect the cost of termination to the firm;

   2. (b)

      the charges imposed on a customer in payment difficulties are not based upon the costs incurred by the firm;

   3. (c)

      the charges (including rates of interest) imposed on a customer under a regulated mortgage contract are excessive and contrary to the customer's interests; and

   4. (d)

      the charges made to a customer in connection with a firmentering into or making a further advance on a regulated mortgage contract or administering a regulated mortgage contract, or arranging or advising on a regulated mortgage contract or a variation to the terms of a regulated mortgage contract are excessive.

A firm can choose the method it employs for calculating early repayment charges in accordance with MCOB 12.3.1 R. A firm should not use the 'Rule of 78' (as contained in Schedule 2 of the Consumer Credit (Rebate on Early Settlement) Regulations 1983), which is not appropriate as it effectively overstates the cost to the mortgage lender.

A firm may calculate the same level of early repayment charge for all regulated mortgage contracts of a similar type (for example a tranche of regulated mortgage contracts offering a particular fixed rate of interest), rather than on the basis of the individual regulated mortgage contract with the particular customer.

A firm may calculate the same level of arrears charges for all regulated mortgage contracts where the customer is in arrears, rather than on the basis of the individual regulated mortgage contract with the particular customer.

Firms are also subject to requirements on information provision and standards relating to arrears and repossessions (see MCOB 13 (Arrears and repossessions)).

When determining whether a charge is excessive, a firm should consider:

1. (1)

   the amount of its charges for the services or products in question compared with charges for similar products or services on the market;

2. (2)

   the degree to which the charges are an abuse of the trust that the customer has placed in the firm; and

3. (3)

   the nature and extent of the disclosure of the charges to the customer.

Firms are also subject to requirements relating to responsible lending (see MCOB 11).

Firms are reminded that, in relation to a regulated mortgage contract for a business purpose in circumstances where MCOB 7.7.1 R applies, if there is a new early repayment charge or a change to the existing early repayment charge, MCOB 7.7.1 R(2) requires a firm to notify the customer within five business days of the maximum amount payable as an early repayment charge.

1 Firms are also reminded that in accordance with MCOB 1.2.3 R, they should either comply in full with MCOB or comply with all tailored provisions in MCOB that relate to business loans.