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MCOB 12.1 Application

Who?

MCOB 12.1.1 R

This chapter applies to a firm in a category listed in column (1) of the table in MCOB 12.1.2 R in accordance with column (2) of that table.

What?

MCOB 12.1.3 R

This chapter applies where a firm:

  1. (1)

    enters into, or makes a further advance on, a home finance transaction1; or

    1
  2. (2)

    administers a home finance transaction;1 or

    1
  3. (3)

    arranges or advises on a home finance transaction1 or a variation to the terms of a home finance transaction1.

    11
MCOB 12.1.4 R

The payment shortfall4 charges and excessive charges requirements in this chapter1 will continue to apply to a firm after a regulated mortgage contract has come to an end following the sale of a repossessed property. The excessive charges requirements will continue to apply to a firm after a home reversion plan has ended.1 References in this chapter to 'customer' will include references to a former customer as appropriate.

1 4
MCOB 12.1.5 G

The FCA 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 saleshortfall1 are not excessive and are subject to the same considerations as apply with respect to payment shortfall4 charges under this chapter.

1 4

Charges under regulated mortgage contracts which had previously been regulated credit agreements

MCOB 12.1.5A R

5The rules in MCOB 12.4 (Payment shortfall charges: regulated mortgage contracts) and MCOB 12.5 (Excessive charges: regulated mortgage contracts, home reversion plans and regulated sale and rent back agreements) apply to:6

  1. (1)

    second charge regulated mortgage contracts entered into before 21 March 2016, in relation to charges imposed on a customer for events occurring on or after 21 March 2016; and6

  2. (2)

    regulated mortgage contracts which are legacy CCA mortgage contracts secured by a first charge legal mortgage, in relation to charges imposed on a customer for events occurring on or after the earliest of:6

    1. (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; 6

    2. (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 6

    3. (c)

      21 March 2017.6

MCOB 12.1.6 R

1This chapter does not apply to a firm carrying on reversion activities or regulated sale and rent back activities3 in respect of a customer acting in his capacity as an unauthorised reversion provider or as an unauthorised SRB agreement provider.3

MCOB 12.2 Purpose

MCOB 12.2.1 G
  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 this sourcebook's disclosure requirements,1 to make charges transparent to customers. This chapter reinforces these requirements by preventing a firm from imposing unfair and excessive charges.

    1
  2. (2)

    The level of charges under a regulated mortgage contract,2home reversion plan1 or regulated sale and rent back agreement2 is not typically a matter for regulation. However, in certain limited circumstances, the FCA believes that customers should be protected from unfair and excessive charging practices. This chapter considers four specific circumstances, where:

    2
    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,2home reversion plan1 or regulated sale and rent back agreement2 are excessive and contrary to the customer's interests; and

      2
    4. (d)

      the charges made to a customer in connection with a firmentering into, making a further advance on, administering, arranging or advising on a regulated mortgage contract,2home reversion plan or regulated sale and rent back agreement2, or arranging or advising on a variation to the terms of a regulated mortgage contract, 2home reversion plan or regulated sale and rent back agreement2are excessive.1

      122

MCOB 12.3 Early repayment charges: regulated mortgage contracts2

Early repayment charges to be expressed as cash and to be reasonable

MCOB 12.3.1 R

A firm must ensure that any regulated mortgage contract that it enters into does not impose, and cannot be used to impose, an early repayment charge other than one that is:

  1. (1)

    able to be expressed as a cash value; and

  2. (2)

    a reasonable pre-estimate of the costs as a result of the customer repaying the amount due under the regulated mortgage contract before the contract has terminated.

MCOB 12.3.2 G

A firm can choose the method it employs for calculating early repayment charges in accordance with MCOB 12.3.1 R. A firm3 should not use the 'Rule of 78' , which is not appropriate as it effectively overstates the cost to the mortgage lender.

3 3
MCOB 12.3.3 G

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.

Early repayment charges to be disclosed in illustrations

MCOB 12.3.4 R

Before:

  1. (1)

    entering into a regulated mortgage contract with a customer; or

  2. (2)

    making a further advance on an existing regulated mortgage contract; or

  3. (3)

    changing all or part of a regulated mortgage contract from one interest rate to another;1a firm must disclose to the customer:

    1. (a)

      in the illustration provided in accordance with MCOB 5, MCOB 7.6.7 R, MCOB 7.6.18 R, MCOB 7.6.22 R, MCOB 7.6.31 R, or MCOB 9; and

    2. (b)

      in the illustration provided as part of the offer document in accordance with MCOB 6.4.1 R(1) and MCOB 9.5;

    the maximum amount payable as an early repayment charge in respect of that regulated mortgage contract, if an early repayment charge applies.

Early settlement charges on second charge regulated mortgage contracts

MCOB 12.3.5 G

The effect of article 29 of the MCD Order is that various provisions of, or made under, the CCA continue to apply to “consumer credit back book mortgage contracts” (as defined in article 2 of the MCD Order). These include the5 Consumer Credit (Early Settlement) Regulations 2004, which5 continue to apply to a second charge regulated mortgage contract entered into before 21 March 2016 and to a legacy CCA mortgage contract5.

4

MCOB 12.4 Payment shortfall charges: regulated mortgage contracts4

MCOB 12.4.1 R
  1. (1)

    A firm must ensure that any regulated mortgage contract that it enters into does not impose, and cannot be used to impose, a charge or charges 4for a payment shortfall4 on a customer unless the firm is able objectively to justify that the4 charge is equal to or lower than 4a reasonable calculation4 of the cost of the additional administration required as a result of the customer having a payment shortfall4. 1

    4444
  2. (2)

    [deleted]4

    4
MCOB 12.4.1A E

The imposition of a charge for a payment shortfall4 on a customer who is adhering to an arrangement under which the customer and the firm agree that the customer will make payments of a set amount per month (or other agreed period) on agreed dates may be relied upon as tending to show contravention of MCOB 12.4.1R (1)3

4
MCOB 12.4.1B R

When:5

  1. (1)

    a customer has a payment shortfall in respect of a regulated mortgage contract;5

  2. (2)

    a payment is made which is not sufficient to cover all of the amounts that are currently due under that contract and the firm must therefore decide how to allocate the payment; and5

  3. (3)

    as part of that decision, the firm is considering the respective priority to be given to:5

    1. (a)

      the current month’s periodic instalment of capital or interest (or both);5

    2. (b)

      the payment shortfall; and5

    3. (c)

      interest or charges resulting from the payment shortfall,5

    the firm must set that order of priority in a way that will minimise the amount of the payment shortfall once the payment has been allocated.5

4 4 4 4 3
MCOB 12.4.1C G

5 MCOB 12.4.1BR does not preclude a firm applying part or all of a payment received to fees and charges not resulting from the payment shortfall (such as ground rent settled on behalf of the customer).

MCOB 12.4.1D G

5A firm may recalculate the periodic instalment of capital or interest (or both), provided that any such recalculation is consistent with the firm’s obligations under the Handbook.

If a firm exercises a power under the terms of a mortgage contract to recalculate periodic instalments of capital or interest (or both) using a mortgage balance that includes charges (such as arrears management charges) or interest arising because one or more monthly instalments were missed, the firm does not have to keep a record of the amount of each periodic instalment of capital or interest (or both) omitting any element of such charges or interest to comply with MCOB 12.4.1BR.

MCOB 12.4.2 G

For each type of payment shortfall charge (for example, a monthly arrears management charge), a 4firm may calculate the same level of additional administration costs and payment shortfall charges4 for all regulated mortgage contracts where the customer is in payment shortfall4, rather than performing a calculation 4on the basis of the individual regulated mortgage contract with the particular customer.

4 4 4
MCOB 12.4.3 G

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

MCOB 12.4.4 R

4In calculating the cost of the additional administration required as a result of a customer having a payment shortfall, a firm must not take into account:

  1. (1)

    the following types of costs:

    1. (a)

      funding or capital;

    2. (b)

      general bank charges that are not incurred as a result of a customer having a payment shortfall;

    3. (c)

      unrecovered fees;

    4. (d)

      advertising costs; and

    5. (e)

      regulatory fines;

  2. (2)

    the costs of preparing financial reports for the firm unless there is an objectively justifiable reason to do so and the costs relate solely to the analysis and management of accounts in payment shortfall;

  3. (3)

    executive staff costs unless there is an objectively justifiable reason to do so and the costs relate to the day-to-day management of customers in payment shortfall.

MCOB 12.4.5 R

4In MCOB 12.4, ‘executive staff’ means the staff or business owners responsible for the management of the firm’s business.

MCOB 12.4.6 G
  1. (1)

    4For some firms, their executive staff will be the executive board members.

  2. (2)

    Executive staff costs relating to company strategy, including payment shortfall strategy, should not be included as costs relating to the day-to-day management of customers in payment shortfall.

  3. (3)

    General financial reporting costs, including all legal and regulatory reporting costs, should not be included as costs relating solely to the analysis and management of accounts in payment shortfall.

MCOB 12.4.7 G

4In calculating the cost of the additional administration required as a result of a customer having a payment shortfall, the firm:

  1. (1)

    may, where appropriate, take into account the following types of costs:

    1. (a)

      providing information or documents;

    2. (b)

      non-executive staff costs;

    3. (c)

      premises costs;

    4. (d)

      human resources costs; and

    5. (e)

      information technology costs;

  2. (2)

    should consider the extent to which the cost of the additional administration is shared with the rest of its business; and

  3. (3)

    should, where a type of cost is absent from the lists in (1) and at MCOB 12.4.4R (1), before taking it into account, consider whether it is appropriate to do so.

MCOB 12.4.8 R

4A firm must not impose a charge for a payment shortfall that is calculated as a proportion of the outstanding loan.

MCOB 12.5 Excessive charges: regulated mortgage contracts, home reversion plans and regulated sale and rent back agreements2

MCOB 12.5.1 R

A firm must ensure that any regulated mortgage contract,2home reversion plan1 or regulated sale and rent back agreement2 that it enters into does not impose, and cannot be used to impose, excessive charges upon a customer.

2
MCOB 12.5.2 R

A firm must ensure that its charges to a customer in connection with the firmentering into, making a further advance or further release on, administering, arranging or advising on a regulated mortgage contract,2home reversion plan or regulated sale and rent back agreement2, or arranging or advising on a variation to the terms of a regulated mortgage contract,2home reversion plan or regulated sale and rent back agreement2are not excessive.1

1 2 2
MCOB 12.5.3 G

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.

MCOB 12.5.4 G

Mortgage lenders 1are also subject to requirements relating to responsible lending (see MCOB 11).

1
MCOB 12.5.5 R

3A second charge lender may only charge interest on charges applied to a customer for breach of a second charge regulated mortgage contract if the interest is simple interest.

MCOB 12.6 Business loans and loans to high net worth mortgage customers: tailored provisions2

MCOB 12.6.1 G

Firms are reminded that, in relation to a regulated mortgage contract which is solely 2for a business purpose or is with a high net worth mortgage customer2, who is not a consumer under an MCD regulated mortgage contract,3 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.

MCOB 12.6.2 G

1 Firms are also reminded that in accordance with MCOB 1.2.3 R, they should comply in full with MCOB, but in doing so may opt to take account of2 all tailored provisions in MCOB that relate to loans solely for a business purpose or loans to high net worth mortgage customers2.

2 2 2

MCOB 12.7 Home purchase plans

Who?

MCOB 12.7.1 G

1The FCA believes that Principle 7 requires charges imposed by a firm on customers to be transparent and that imposing unfair or excessive charges is inconsistent with Principle 6.

Note: A firm should also have regard to its obligations under the Unfair Terms Regulations (for contracts entered into before 1 October 2015) or the CRA2and may find material on the FCA website concerning the FCA consumer protection powers useful.