PS12/16: Mortgage Market Review: Feedback on CP111/31 and final rules

Policy Statement

Financial Services Authority

October 2012

Mortgage Market Review

Feedback on CP11/31 and final rules

PS12/16

«««

PS12/16

Mortgage Market Review: Feedback on CP11/31 and final rules

Contents

Abbreviations used in this paper 3

1. Introduction 5

2. Advice 12

3. Transitional arrangements 16

4. High net worth and business lending 22

Annex 1: Detailed feedback on CP11/31

Annex 2: Table of changes from the draft rules to the nal rules

Annex 3: Cost benet analysis

Annex 4: List of non-condential respondents to CP11/31

Annex 5: Equality Impact Assessment (EIA)

Appendix 1: Made rules (legal instrument):

• Made rules– Mortgage Market Review (Conduct of

Business) Instrument 2012

• Made rules – Prudential sourcebook for Mortgage and

Home Finance Firms, and Insurance Intermediaries

(Non-Bank Lenders) Instrument 2012

This Policy Statement reports on the main issues arising from Consultation Paper 11/31

(Mortgage Market Review: Proposed package of reforms) and publishes final rules.

Please address any comments or enquiries to:

Lynda Blackwell

Conduct Policy Division

Financial Services Authority

25 The North Colonnade

Canary Wharf

London E14 5HS

Telephone:

020 7066 8794

Email: [email protected].uk

Copies of this Policy Statement are available to download from our website –

www.fsa.gov.uk. Alternatively, paper copies can be obtained by calling the FSA

order line:

0845 608 2372.

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Abbreviations

used in this paper

BIPRU

Prudential sourcebook for Banks, Building Societies

and Investment Firms (FSA Handbook)

CBA

Cost benet analysis

CCA

Consumer Credit Act

Consultation Paper

CRD

Capital Requirements Directive

DSR

Debt Service Ratio

EIA

Equality Impact Assessment

ESIS

European Standardised Information Sheet

European Union

FCA

Financial Conduct Authority

FPC

Financial Policy Committee

FSA

Financial Services Authority

FSB

Financial Stability Board

FSCP

Financial Services Consumer Panel

FSMA

Financial Services and Markets Act 2000

FTB

First-time Buyer

HPP

Home Purchase Plan

IDD

Initial Disclosure Document

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4 Financial Services Authority October 2012

IRB

Internal Rating Based Model

HNW

High net worth

HOLD

Home Ownership for people with Long-term Disabilities

KFI

Key Facts Illustration

LTV

Loan-to-value (ratio)

MCD

Mortgage Credit Directive

MCOB

Mortgages and Home Finance: Conduct of Business

sourcebook (FSA Handbook)

MIPRU

Prudential sourcebook for Mortgage and Home Finance Firms,

and Insurance Intermediaries (FSA Handbook)

MMR

Mortgage Market Review

PERG

Perimeter Guidance Manual (FSA Handbook)

PRA

Prudential Regulation Authority

RDR

Retail Distribution Review

RAO

The Financial Services and Markets Act 2000 (Regulated

Activities) Order 2001

RTB

Right-to-buy

SRB

Sale and rent back

SVR

Standard Variable Rate

SYSC

Senior Management Arrangements, Systems and Controls

(FSA Handbook)

TPA

Third Party Administrator

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Introduction

1.1 In December 2011, we published our proposed package of reforms for the mortgage market

together with a cost benefit analysis (CBA) setting out our best estimates of the impact of

our proposals (CP11/31 Mortgage Market Review: Proposed package of reforms

1.2 This Policy Statement reports on the responses to that consultation and the decisions we

have reached.

What does this Policy Statement contain?

1.3 This Policy Statement contains feedback on the responses we received to CP11/31. The

main body highlights the key issues respondents raised about the proposals in CP11/31

and the decisions we have made as a result.

1.4 There are a number of annexes and an appendix:

• Annex 1 summarises the feedback we received to the policy questions asked in

CP11/31 and our policy response;

• Annex 2 summarises the main changes made to the draft rules in CP11/31;

• Annex 3 restates the high-level CBA conclusions from CP11/31 and provides a

regional breakdown of the impacts;

• Annex 4 lists the non-confidential respondents to CP11/31;

• Annex 5 contains the Equality Impact Assessment; and

• Appendix 1 contains the amendments being made to the FSA’s Handbook.

1 CP11/31, Mortgage Market Review: Proposed package of reforms, (December 2011): www.fsa.gov.uk/static/pubs/cp/cp11_31.pdf

2 Mortgage Market Review (Conduct Of Business) Instrument 2012 and Prudential Requirements For Non-Deposit Taking Lenders

Instrument 2012

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1.5 We have also published separately an update to the Data Pack

, which was published as a

supplement to CP11/31.

Who should read this Policy Statement?

Firms

1.6 You should read this Policy Statement if you are:

• a lender or other home finance provider;

• a home finance administrator; or

• a firm that advises on or arranges mortgages or other home finance products.

If you are a body that represents any of these firms, this Policy Statement will also be of

interest to you.

Consumers

1.7 You should read this Policy Statement if:

• you have a mortgage or other home finance product; or

• you are planning to take one out.

If you are a body that represents consumers or an interest group representing those with

protected characteristics, this Policy Statement will also be of interest to you.

Outcome of our consultation

1.8 Responses to our consultation have been positive overall, with the industry welcoming the

less prescriptive approach we have taken to the responsible lending requirements and

acknowledging that the latest package would help achieve the MMR’s overall aim of

ensuring continued access to the mortgage market for the vast majority of customers who

can afford it, while addressing the tail of poor mortgage lending seen in the past.

1.9 The entire final MMR package is summarised in Table 1 at the end of this chapter. We are

taking forward, substantively unchanged, the majority of the proposals consulted on in

CP11/31. This includes the removal of the non-advised sales process, the strengthened

arrears charging rules, and the three key elements of the responsible lending reforms, i.e.

3 MMR Data Pack, (October 2012): www.fsa.gov.uk/static/pubs/cp/mmr-datapack2012.pdf

4 The protected characteristics are age, disability, gender, pregnancy and maternity, race, religion and belief, sexual orientation

and transgender.

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• The affordability assessment: a lender must verify income and be able to demonstrate

that the mortgage is affordable taking into account the borrower’s net income and, as a

minimum, the borrower’s committed expenditure and basic household expenditure.

• The interest rate stress test: the lender must also take account of the impact on

mortgage payments of market expectations of future interest rate increases.

• The interest-only rules: the lender must also assess affordability on a capital and

interest basis, unless there is a clearly understood and believable alternative source

of capital repayment.

1.10 We are also proceeding with the enhanced prudential requirements for non-deposit taking

lenders (‘non-banks’). In the feedback, respondents expressed a preference for standalone

rules for non-banks rather than cross-referencing to the relevant existing rules for banks.

The rules made by the FSA Board are not written on a standalone basis and maintain the

cross-referencing to the banking rules. However, we recognise that the banking rules,

derived from EU legislation, can be complex and difficult to navigate and we will therefore

continue to consider ahead of implementation how the regime could be made more

accessible, while preserving delivery of the policy outcomes consulted on in CP11/31.

1.11 Chapters 2 to 4 focus on those conduct areas where we have rethought our approach in

light of the feedback. Those areas are:

• Advice (Chapter 2): where we clarify what we understand by regulated advice and

explain that we are changing our approach to contract variations by allowing them to

be completed without the need for advice, provided there is no increase in the amount

outstanding under the mortgage.

• The transitional rules (Chapter 3): where we explain our changed approach in

allowing lenders to make their own decisions about whether to make exceptions to the

responsible lending rules provided there is no increase in the amount outstanding under

the mortgage.

• Our approach to high net worth and business lending (Chapter 4): where we explain

our decision not to provide a complete carve-out from the MMR proposals but instead

to provide a tailored, higher-level approach for both.

1.12 We have made one other substantive change which we explain in our response to Q14 in

Annex 1. We are requiring lenders to keep responsible lending records for the period the

mortgage remains with the lender, and not just for three years, as consulted on in CP11/31.

5 The relevant prudential rules for banks are set out in the Prudential sourcebook for Banks, Building Societies and Investment Firms

(BIPRU), which forms part of the FSA Handbook: http://fsahandbook.info/FSA/html/handbook/BIPRU

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1.13 Given the extensive consultation with the market previously

and the extent of consensus

reached, the detail and background to the majority of the MMR reforms is not repeated in

this Policy Statement. Detailed feedback to CP11/31, together with our policy response is in

Annex 1. We have also summarised in Annex2 the non-material rule changes made in light

of responses and our further internal review.

Cost benefit analysis

1.14 Respondents to the CBA included in CP11/31 felt that the estimated size of the impacts of

the responsible lending proposals appeared reasonable. Annex 3 restates the high-level CBA

conclusions and provides, as requested in feedback, a regional breakdown of the impacts.

1.15 In relation to the advice proposals, a number of respondents felt that we had underestimated

the compliance costs of the removal of the non-advised sales process. We have updated our

compliance cost estimate to reflect the clarifications and changes discussed in Chapter 2.

The updated compliance cost estimate is in Annex 3.

Equality and diversity implications of the MMR

1.16 The feedback to CP11/31 confirmed our analysis that none of the MMR proposals directly

discriminate against any protected groups.

There are, however, some elements of our

responsible lending, distribution and disclosure and niche market proposals that could

cause adverse effects and possible inadvertent indirect discrimination. The detail of this and

the mitigants we propose are set out in the Equality Impact Assessment at Annex 5.

EU and international developments

1.17 In finalising our rules, we continue to pay close attention to impending European legislation.

The Directive on Credit Agreements Related to Residential Property, known commonly as

the Mortgage Credit Directive (MCD), is at an important stage. Both Council (representing

Member States) and Parliament have now adopted views on the proposed Directive. This

has allowed three-way negotiations involving the Commission, Council and Parliament to

begin. Agreement through these discussions (known as a ‘trilogue’) would pave the way for

the legislation. Failing that, the proposal would go through a second reading in Parliament,

which might significantly extend the time before the Directive becomes law.

6 DP09/3, Mortgage Market Review, (October 2009): www.fsa.gov.uk/pubs/discussion/dp09_03.pdf

CP10/2, Mortgage Market Review: Arrears and Approved Persons, (January 2010): www.fsa.gov.uk/pubs/cp/cp10_02.pdf

CP10/16, Mortgage Market Review: Responsible Lending, (July 2010): www.fsa.gov.uk/pubs/cp/cp10_16.pdf

CP10/28, Mortgage Market Review: Distribution & Disclosure, (November 2010): www.fsa.gov.uk/pubs/cp/cp10_28.pdf

7 See footnote 4 on page 7.

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1.18 We have been engaging with the European institutions over the possibility of a directive for

many years. They have welcomed learning of the UK regulatory experience and the depth

of our MMR research and analysis.

1.19 Many parts of the Commission’s original proposal closely match MMR concerns, including

the need for greater professionalism among firms, having close regard to the consumer’s

interests, and the need for a robust assessment of individual affordability. The changes we

are making in these areas are in line with the proposed Directive.

1.20 In one or two respects the proposed legislation is less closely aligned with the UK proposed

regulatory approach. One of these is the scope, which in the form originally proposed by

the Commission would apply a standard approach to a great many niche mortgage markets

(such as buy-to-let, bridging, high net worth and shared equity). Not all of these are

markets that we currently regulate.

1.21 A second clear difference is the European proposal’s greater focus on disclosure, which is

likely to mean that some further rule change will be needed to introduce extra disclosure

requirements. This does not mean we should not proceed with our MMR approach of

re-focusing our disclosure regime on key messages, but firms should be aware that further

information may be required to be given on top of this in future. In other respects, we

consider that we now know enough about the likely form of the directive to finalise the

MMR rules.

1.22 Our revised rules will also ensure UK regulation reflects key Financial Stability Board (FSB)

Principles for sound mortgage underwriting.

The first two of these FSB Principles deal

with assessing affordability. The MMR changes will mean that these Principles – on income

verification and a reasonable debt service coverage – are clearly met. MMR requirements

for lenders to have clearly documented responsible lending policies also help deliver FSB

Principles requiring an implementation and supervisory framework.

1.23 As with the Directive, the MMR analysis has allowed us to contribute to the Principles, and

ensure the approaches align.

Implementation timetable

1.24 Our Board has now made the rules in Appendix 1. With the exception of MCOB11.8.1E

(discussed further below), the rules will come into effect on 26 April 2014, in 18 months’ time.

1.25 We have given careful consideration to all of the feedback received about the implementation

timetable. We recognise that the cumulative impact of the MMR will lead to significant

changes on the part of firms to policies, processes, systems and staff training and this will

make the usual 12-month period challenging for firms, particularly the smaller firms.

8 FSB Principles for Sound Residential Mortgage Underwriting Practices, Financial Stability Board, (April 2012):

www.financialstabilityboard.org/publications/r_120418.pdf

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10 Financial Services Authority October 2012

1.26 We have also had regard to current market conditions. We concluded in CP11/31 that with

subdued conditions persisting in the mortgage market, both the micro and macroeconomic

impact of the MMR is small. This remains valid given the housing market conditions.

Allowing an extra six months for implementation will not introduce significant consumer

protection risks. Therefore we are giving firms 18 months to implement the MMR reforms.

1.27 MCOB11.8.1E, however, comes into effect now (on 26 October 2012). This is a new

evidential provision aimed at protecting those borrowers who find themselves ‘trapped’

with their current lender. We are switching this provision on with immediate effect as it is

aimed at protecting not only those borrowers who may find themselves trapped in future

following the implementation of the MMR, but also those borrowers who find themselves

trapped today because they do not meet current tightened lending criteria. This is discussed

more fully in our response to Q16 in Annex 1.

UK regulatory reform

1.28 The FSA Board has made the rules in Appendix 1, which contain references to the FSA, to

current UK financial services legislation and to other parts of the existing FSA Handbook.

These references will need to be reviewed and updated to reflect the assumption of

responsibility for financial services regulation by the Financial Conduct Authority (FCA)

and the Prudential Regulation Authority (PRA) in 2013, and to reflect any other relevant

amendments to the Financial Services and Markets Act 2000 (FSMA) and to the current

FSA Handbook as a result of UK regulatory reform.

1.29 Updated provisions will be made by the Boards of the FCA and PRA when they acquire

their legal powers.

Next steps

1.30 We are now planning a firm engagement programme for the implementation period, to help

firms understand the MMRreforms, encourage firms to carefully address any systems

changes that may be needed as a result of them, and to keep firms informed of the next

steps in our implementation strategy.

1.31 We also intend to conduct a formal review of the impact of our proposals not more than

five years after implementation.

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Table 1 – Summary of the MMR regulatory reform package

Mortgage Market Review

Key proposals consulted on and position unchanged

Responsible lending

Lender responsible for affordability checks.

Income to be veried in all cases.

As a minimum, committed and basic essential expenditure to be taken into account.

Stress testing against future interest rate increases.

Interest-only where credible repayment strategy.

Distribution

All interactive sales (e.g. face to face and telephone) advised, except where the customer is a mortgage

professional, or high net worth mortgage customer

, or business borrower

, where execution-only optional.

Execution-only allowed for non-interactive sales (e.g. internet and postal).

Requirement on intermediaries to assess affordability removed.

Every seller required to hold a relevant mortgage qualication.

Firms must act in the customer’s best interests.

Disclosure

IDD replaced with a requirement for rms to disclose ‘key messages’ to the customer.

The ‘trigger points’ for presentation of the KFI changed to reduce information overload for customers.

Arrears management

The number of times fees for missed payments can be charged limited.

The arrears charges and forbearance rules widened to cover all payment shortfalls.

The costs which can and cannot be recovered through arrears charges claried.

Lenders prevented from removing concessionary rates because of payment problems.

Non-deposit taking mortgage lenders (non-banks)

Risk-based capital requirement.

Increase in quality of capital.

High-level systems and controls to manage liquidity risk.

Application on a solo-basis and not to rms in run-off.

Key proposals consulted on and position reconsidered

Responsible lending

Transitional arrangements (see Chapter 3).

Record-keeping requirements (see Q14 Annex 1).

Distribution

Need for advice in relation to post-contract variations (see Chapter 2).

High net worth mortgage customers and business lending

Tailored regulatory approach recognising particular lending characteristics (see Chapter 4).

9 The definition of high net worth mortgage customer has been amended. See Chapter 4.

10 Business borrowers have been added as another group who can opt-out in the light of the feedback to CP11/31 (see Chapter 4)

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12 Financial Services Authority October 2012

Advice

Advised sales

2.1 A summary of the feedback to all of the questions asked about distribution in CP11/31 and

our policy responses are set out in Annex 1.

2.2 In this chapter, we consider two particular issues raised in the feedback:

• the boundary between providing information and giving advice; and

• advising on contract variations.

2.3 This is an area where we have revised our approach in light of the feedback to CP11/31

and our subsequent discussions with respondents.

Boundary between information provision and regulated advice

2.4 In CP11/31 we proposed removing the non-advised sales process and requiring that sales

involving some form of ‘interactive dialogue’ between the firm and the customer should

generally be advised.

2.5 This approach was welcomed by intermediaries and most consumer groups. However, it

was a source of concern for some lenders and their representatives.

2.6 It is clear both from feedback to CP11/31 and our subsequent discussions with firms that

there has been a misunderstanding about the scope of our advice proposals. Some firms

interpreted our proposals as meaning that every customer conversation would be construed

as providing regulated advice and therefore subject to our advice rules.

2.7 We recognise that this would have major implications for firms who use unqualified

‘pre-screeners’ to gather background information and provide general information to

11 CP11/31, Mortgage Market Review: Proposed package of reforms, (December 2011): www.fsa.gov.uk/static/pubs/cp/cp11_31.pdf

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customers prior to any sale commencing, as those ‘pre-screeners’ would need to be

appropriately trained and qualified.

2.8 We did not intend that every conversation with a customer would be subject to our advice

rules. The Regulated Activities Order

defines what regulated mortgage advice is, i.e.

advice on the merits of the customer entering into (or varying the terms of) a particular

regulated mortgage contract or contracts. As a result of this, our view is, and always has

been, that where a firm steers a customer towards particular identifiable products that the

customer could enter into, that is regulated advice. It is perfectly possible for a firm to have

a discussion about mortgage products in general or to gather information about the

customer’s general mortgage needs, without that being regulated advice.

2.9 The Perimeter Guidance on regulated activities connected to mortgages (PERG)

explains

the distinction. Given the confusion about the boundary apparent from the feedback to

CP11/31, we propose to review PERG over the course of the next year. The aim would be

to ensure that any changes considered appropriate following that review would be made in

time to be implemented alongside the MMR rules.

Contract variations by lenders

2.10 The biggest challenge to our advice proposals concerned the impact on contract variations

undertaken by lenders, such as rate switches, further advances, amending the term and

amending the repayment type. Where we refer to contract variations we also mean new

contracts with the existing lender that have the same effect.

2.11 Lenders and their trade bodies were concerned that all contract variations would be

captured by the advice requirements and that this contradicted the near-final Approved

Persons rules.

These rules explicitly exclude lender staff involved in these transactions

from being Approved Persons where there is no additional borrowing. The concern was

that under our advice proposals, these individuals would be required to give advice, but

would not be approved to do so.

2.12 We agree that it would be inappropriate for this to be the case and therefore we have

amended our approach to bring it into line with the Approved Persons near-final rules.

We think that it is appropriate that purely administrative contract variations are

undertaken on an execution-only basis, where the total sum outstanding under the

mortgage will not increase. Where the total sum outstanding will increase, for example

where there is a further advance, advice will be required.

12 The Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) (No. 1) Order 2003:

www.legislation.gov.uk/uksi/2003/1475/article/13/made

13 http://fsahandbook.info/FSA/html/handbook/PERG/4

14 PS10/9, Mortgage Market Review – Arrears and Approved persons – Including feedback to CP10/2, (July 2010):

www.fsa.gov.uk/pubs/policy/ps10_09.pdf

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14 Financial Services Authority October 2012

2.13 In relation to rate switches (including retention deals), we believe that requiring advice

across all interactive channels is not a proportionate approach and therefore execution-only

sales should be permitted in some circumstances.

2.14 For example, where a borrower is coming to the end of their current deal and the firm has

written to them outlining all available products (without steering the borrower towards any

of those products). The borrower can select the product they want and send the instructions

back to the lender to make the change.

2.15 However, some borrowers may wish to complete the switch by telephone or in a branch.

Our general approach would not allow this as a sale over the telephone or in a branch is

an interactive sale and therefore advice would need to be given. However, our view is that

where it is a simple product switch and nothing more, it would be acceptable for the lender

to act on the borrower’s instructions over the telephone, or in the branch, and proceed on

an execution-only basis.

2.16 If the discussion with the borrower goes beyond simply acting on their instructions,

however, it would become an advised interactive sale.

2.17 Forbearance will remain exempt from the advice requirements. We believe it is clear what

constitutes forbearance and firms should refer to MCOB13

and the guidance on

mortgage forbearance

for further clarity.

2.18 To help demonstrate our approach, the following table outlines when firms are required to

provide advice and when execution-only is permitted for typical contract variations.

Table 2 – The application of advice and execution-only to contract variations

Contract variations Advice or

execution-only

Rate switches

This includes product switches and retention deals. Retention deals are usually lender driven,

once the borrower comes to the end of their current product. Product switches are usually

borrower driven when they will request a new product from their lender. Both have the same

effect and are classed as rate switches under the final rules.

No increase in the current balance outstanding and the firm presents all the

products for which the borrower is eligible via a non-interactive channel (e.g.

in writing). The borrower selects their product via a non-interactive channel.

Execution-only

No increase in the current balance outstanding and the firm presents all the

products for which the borrower is eligible via a non-interactive channel, but

accepts the borrower’s choice of product via an interactive channel.

Execution-only

No increase in the current balance outstanding, but the firm steers the

borrower to a particular product or products (interactive or non-interactive).

Advice

The borrower wants to borrow more and is offered a new product. Advice

15 http://fsahandbook.info/FSA/html/handbook/MCOB/13

16 FG11/15: Forbearance and Impairment Provisions –‘Mortgages’, (October 2011):

www.fsa.gov.uk/library/policy/final_guides/2011/fg11_15.shtml

This table is for illustration purposes and is not an exhaustive list.

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Variations to existing contracts, or new replacement contracts intended to have the same effect,

via an interactive channel.*

*Variations carried out on a non-interactive basis, can be offered on an execution-only basis, including

where there is additional borrowing.

Further advances

This involves an increase in the current amount outstanding. Advice

Addition or removal of a party to the contract

Involving no increase in the current amount outstanding. Execution-only

Involving an increase in the current amount outstanding. Advice

Change in monthly payment – (including extending term or changing the payment method)

Involving no increase in the current amount outstanding. Execution-only

Involving an increase in the current amount outstanding. Advice

Porting – This involves taking the existing mortgage to a new property

Involving no increase in the current amount outstanding. Execution-only

Involving an increase in the current amount outstanding. Advice

Consent to let – Allowing the borrower to let their property, which was previously owner-occupied

Involving no increase in the current amount outstanding. Execution-only

Involving an increase in the current amount outstanding. Advice

2.19 We are also clarifying how the responsible lending rules will apply to contract variations.

This is discussed in detail in Chapter 3.

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16 Financial Services Authority October 2012

Transitional arrangements

Introduction

3.1 In this chapter we consider the transitional arrangements and the related issue of contract

variations. A summary of the feedback to all questions asked about the transitional

arrangements is set out under Q15 to Q19 in Annex 1.

3.2 This is an area where we have revised our approach in light of the feedback to CP11/31

and our subsequent discussions with respondents.

Transitional arrangements and contract variations

3.3 In CP11/31 we proposed some transitional arrangements designed to mitigate the impact of

the new responsible lending rules on existing borrowers who:

• cannot demonstrate affordability for their new mortgage as required by the new

affordability requirements; or

• do not have an acceptable repayment strategy, according to the new

interest-only requirements.

3.4 We proposed several conditions that would have to be met for the borrower to qualify for

the transitionals.

3.5 The vast majority of respondents agreed that we should take steps to mitigate the impact of

our responsible lending proposals on borrowers. However, most respondents felt that, as

drafted, the proposals were too restrictive to help many borrowers and too complex to be

widely adopted by lenders.

18 CP11/31, Mortgage Market Review: Proposed package of reforms, (December 2011): www.fsa.gov.uk/static/pubs/cp/cp11_31.pdf

See the eligibility criteria set out at paragraph 3.358 in CP11/31.

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3.6 We agree that it would benefit borrowers to have more flexibility than was permitted in the

original proposals. For example, we can see that borrowers may benefit from taking on

higher payments to fix their rate in periods where interest rates are expected to rise.

Similarly, we can see that they may benefit from some material variations to a mortgage,

such as a change in term.

3.7 We have amended the rules. The final rules:

• simplify when an affordability assessment is required for all existing borrowers when

they make changes to their existing mortgage – either as a contract variation, or as a

new replacement contract;

• only require an affordability check where there is additional borrowing, or a material

impact on affordability; and

• simplify the transitional arrangements, to make them more flexible and more practical.

In particular, we are allowing lenders to make their own assessment about making

exceptions to the affordability and interest-only rules.

Existing borrowers – contract variations and new regulated

mortgage contracts

3.8 Under both our existing rules and the MMR proposals, an affordability assessment is

required whenever a lender enters into a regulated mortgage contract with a customer,

whether or not there is an impact on affordability. For example, an affordability assessment

is required when a customer moves to a new rate with their existing lender, if the

transaction is structured as a new mortgage contract, even where they are not borrowing

any more money. By contrast, an affordability assessment is not required for the same

transaction if it takes effect through a contract variation, even where there might be a

material impact on affordability.

3.9 To address this, we have amended the rules so that an affordability assessment is not

required for an existing borrower, staying with their existing lender, if there is no increase

in the current amount outstanding (i.e. no additional borrowing) – unless there is a material

impact on affordability. This is the case whether the transaction takes effect through a

contract variation, or a new regulated mortgage contract.

3.10 So, for example, an affordability assessment will not be required for a change that does not

have a material impact on affordability, such as a rate switch or retention deal; or where

the borrower is porting their mortgage or moving to a new property (with no increase in

the current amount outstanding).

3.11 However, an affordability assessment will be required where there is additional borrowing, or

there is deemed to be a material impact on affordability. Whether a change has a material

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18 Financial Services Authority October 2012

impact on affordability will vary according to the circumstances of the case. We will assume,

in the absence of evidence to the contrary, that the following changes are likely to be material:

• extending the term of the loan beyond the borrower’s expected retirement;

• changing the repayment type; or

• removing a party to the contract.

3.12 This approach is consistent with our approach to advice and contract variations, as

discussed in Chapter 2.

3.13 These changes to the rules will mean that the transitional arrangements are required in

many fewer situations.

The revised approach to transitional arrangements

3.14 Despite this change, there will be situations where the responsible lending rules continue to

bite for existing borrowers. This includes where:

• there are material changes to affordability (such as those set out in paragraph 3.11 above);

• the borrower does not have an acceptable repayment strategy for an interest-only

mortgage; or

• the borrower wishes to move their mortgage to another lender.

3.15 We recognise that in such scenarios, while an affordability assessment should apply because

there may be a material impact on affordability, there may be some situations where, due to

extenuating circumstances, such a change may be in the interests of the borrower and lead

to a better outcome than remaining in their current situation. We also recognise that it is

not possible for us to predict every such circumstance in the rules.

3.16 Therefore, our revised approach allows lenders flexibility to make their own decisions

about making exceptions to the affordability and interest-only rules for existing borrowers.

This will apply whether or not it materially affects affordability, as long as:

• there is no increase in the current amount outstanding (i.e. no additional borrowing),

except product or arrangement fees, which may be added to the mortgage balance

(firms are reminded of the new provisions that will apply when adding fees or

charges to a loan

(MCOB 4.6A); and also our existing rules on excessive charges

(MCOB 12.5)); and

• the lender has judged that the proposed transaction is in the customer’s best interests.

20 See paragraphs 5.121 to 5.130 in CP11/31.

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3.17 These transitional arrangements will be able to be used by lenders to take on borrowers

from other lenders.

3.18 We have considered whether additional borrowing should be allowed under the transitional

arrangements. A few respondents to CP11/31 supported this. However, we cannot see a

way to control the gaming issues that would arise, or the opportunity for borrowers to take

on mortgage commitments which they cannot afford, which would defeat the objective of

our responsible lending rules. We are not, therefore, allowing additional borrowing.

3.19 There is one exception to this. Where the additional funds are being advanced by the

existing lender for essential repairs or maintenance work to the property, we are allowing

this, subject to certain criteria, including that:

• the value of the property is at risk if the repairs or maintenance work are not carried out;

• the additional borrowing is to be used for the repairs or maintenance work; and

• the firm has credible evidence of the cost of the repairs or maintenance work.

3.20 The aim of the transitional arrangements is to help existing borrowers who are being

prevented from borrowing because of the stricter MMR requirements. We are therefore

retaining an eligibility condition, which states that the transitional arrangements will not

apply where a borrower has, since the implementation of the MMR, taken on additional

borrowing and increased the size of their mortgage (other than to finance any relevant

product or arrangement fee, or essential repairs or maintenance work). This is to prevent

the transitional arrangements being used where the inability to meet lending criteria is a

result of changed circumstances or real underlying affordability issues and not the MMR.

3.21 The transitional arrangements apply to existing borrowers who have a mortgage in place

when the MMR rules come into force. We have amended the transitional arrangements to

make it clear that they also apply to borrowers with mortgages that were entered into

before the introduction of mortgage regulation in 2004 (MCOB11.7.1R(1)(a)).

3.22 We already indicated in CP11/31 that we will expect lenders to have robust systems and

controls around the use of the transitional arrangements. As a result of our amended

approach, we also expect firms to include:

• an exceptions policy, which should form part of the lender’s wider responsible

lending policy;

• record keeping, including a record of the rationale behind each lending decision made

under the transitional arrangements; and

• producing clear management information to monitor the application of these exceptions.

3.23 Table 3 illustrates the circumstances where an affordability assessment is required for a

post-sale contract variation, and where the transitional arrangements apply.

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20 Financial Services Authority October 2012

Table 3 – Existing borrowers – affordability assessments and

transitional arrangements

Post-sale variations Responsible lending requirements

When is an affordability assessment required (for a variation to an existing contract, or a new

replacement contract intended to have the same effect with the existing lender)?

Full requirements are set out in MCOB 11.6

Rate switches

This includes product switches and retention deals. Retention deals are usually lender driven, once the

borrower comes to the end of their current product. Product switches are usually borrower driven, when they

will request a new product from their lender. Both have the same effect and are classed as rate switches under

the final rules.

Involving no increase in the current amount

outstanding.

No affordability assessment is required (even if the rate

switch results in higher payments).

Involving an increase in the current amount

outstanding.

An affordability assessment will be required.

Further advances

Involving an increase in the current amount

outstanding.

An affordability assessment will be required.

Addition or removal of a party to the contract

Involving no increase in the current amount

outstanding.

This is likely to be a material change, and if so an

affordability assessment will be required.

Involving an increase in the current amount

outstanding.

An affordability assessment will be required.

Changes that have a material impact on affordability (e.g. extending term beyond expected retirement,

or changing the payment method)

Involving no increase in the current amount

outstanding.

An affordability assessment will be required.

Involving an increase in the current amount

outstanding.

An affordability assessment will be required.

Porting – This involves taking the existing mortgage to a new property

Involving no increase in the current amount

outstanding.

No affordability assessment is required.

Involving an increase in the current amount

outstanding.

An affordability assessment will be required.

Forbearance

An affordability assessment is not required for

a variation made solely for the purposes of

forbearance (as per MCOB 11.6.3R(3)).

Not applicable.

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Transitional arrangements Responsible lending requirements

When can the transitional arrangements be applied (for a variation to an existing contract, a new

replacement contract intended to have the same effect, or a new contract with the same or a

different lender)?

Full requirements are set out in MCOB 11.7.

Involving no increase in the current amount

outstanding (whether or not there is a material

impact on affordability).

The transitional arrangements may be applied.

Involving an increase in the current amount

outstanding (except for essential repairs or

maintenance work).

An affordability assessment will be required, so the

transitional arrangements cannot be applied.

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22 Financial Services Authority October 2012

High net worth and

business lending

Lending to high net worth customers

4.1 In CP10/16

, we indicated that this could be a market where our approach to affordability

may need to vary. Almost all respondents thought that high net worth (HNW) customers

would benefit from an alternative approach because of the complex nature of their incomes

and the potentially short loan terms (typically five years).

4.2 In CP11/31

, we therefore proposed some tailoring for HNW customers, including:

• permitting HNW customers to opt-out of advice;

• making provision for interest roll-up mortgages; and

• a tailored approach to disclosure.

4.3 We have also been considering whether a more fundamental change in our approach to

HNW customers would be appropriate, including considering whether our regime should

apply at all to those customers with higher levels of income or wealth, on the basis that it is

perfectly reasonable for these customers to take greater risks and that regulation is not

needed to protect them from the decisions they make. While they still ultimately face the

loss of their home, they are more likely to have access to a range of professional advisers,

and will have more options available to them in the event that they experience financial

difficulties – for example, by downsizing rather than becoming homeless. So we asked an

open question in CP11/31 about whether it would be appropriate to allow some form of

carve-out from mortgage regulation.

4.4 We suggested that there might be two ways to do this – either by completely disapplying

the mortgage rules or by allowing HNW customers to elect whether to forgo the protection

of the rules.

21 CP10/16, Mortgage Market Review: Responsible Lending, (July 2010): www.fsa.gov.uk/pubs/cp/cp10_16.pdf

22 CP11/31, Mortgage Market Review: Proposed package of reforms, (December 2011): www.fsa.gov.uk/static/pubs/cp/cp11_31.pdf

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Feedback to CP11/31

4.5 As we explain in more detail in Annex 1, most respondents to the consultation recognised

that HNW customers merit a different regulatory approach to that proposed for the

mainstream mortgage market. There was some limited support for an approach that would

allow HNW customers to opt-out of mortgage regulation, although firms operating in this

sector felt that this approach would be difficult to operate in practice.

4.6 However, many respondents felt that wealth does not necessarily equate to financial

capability, and did not agree that customers with a greater degree of wealth would

necessarily make sound financial decisions. They were therefore cautious about completely

disapplying the protection of the mortgage rules.

4.7 However, many respondents involved in lending to HNW customers felt that the MMR

proposals (and some aspects of existing MCOBrequirements) did not fit well with the

bespoke service offered to many HNW customers, and therefore would need to be

amended. For example:

• firms would not generally consider it necessary or appropriate to drill down into the

details of basic expenditure, such as utility bills and council tax, for very wealthy

customers; and

• wealthy customers tend to be very asset-rich, and mortgage payments may be serviced

through these assets (including through their sale).

Our approach to high net worth mortgage customers

4.8 We recognise that applying all the MMR proposals, particularly the full affordability

checks, is not proportionate for very wealthy customers and that a different regulatory

approach is appropriate. However, there has not been strong support for carving HNW

customers out of mortgage regulation completely.

4.9 The approach we are taking, therefore, aims to recognise the characteristics of lending to

HNW customers, by applying higher-level requirements than for mainstream mortgages.

This will be based on the following key elements:

• Disclosure – A tailored approach will apply, as proposed in CP11/31.

• Advice – Interactive sales may be conducted on an execution-only basis.

• Responsible lending – Requirements will be set at a higher level than for

mainstream mortgages.

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24 Financial Services Authority October 2012

The definition of a high net worth mortgage customer

4.10 To appropriately apply any of these elements, we first need to define who we consider to be

a ‘high net worth’ customer.

4.11 In CP11/31, we proposed to define a HNW customer as having a minimum net annual

income of £1m or minimum net assets of £3m.

4.12 As we explain in Annex 1, respondents broadly agreed with the proposed definition for net

assets, but did not agree with the proposed definition of net annual income, as they thought

£1m was much too high.

4.13 In response to feedback (as discussed in Annex 1, Q81) in we have amended the income

part of the definition to a net income of £300,000. Therefore, we are defining a HNW

mortgage customer as a customer with a minimum annual net income of £300,000, or

minimum net assets of £3m.

4.14 This definition applies to the customer applying for the mortgage but it is also met where

the obligations of that customer are guaranteed by a person who satisfies the income or

assets criteria.

4.15 We are not being prescriptive about what assets can be taken into consideration in making

up the minimum net asset figure of £3m. It is up to the lender to decide this. Therefore it

would be possible for the mortgaged property to be included in the total (net of any

outstanding mortgage).

4.16 Where there is more than one applicant, at least one of the applicants must meet the

definition in their own right (as per MCOB1.2.3BR). This means that the income or assets

of two or more applicants cannot be added together to meet the definition and thereby

circumvent the responsible lending rules that would otherwise apply.

4.17 Where assets are held jointly (such as may happen in the case of property), a lender should

consider the value of the customer’s actual share of assets.

4.18 We are aware that we have recently published a Consultation Paper

on restrictions on the

retail distribution of unregulated collective investment schemes and close substitutes. In this

paper, we refer to secondary legislation that allows financial promotions to be exempt from

Financial Services and Markets Act 2000 (FSMA) marketing restrictions if certain

conditions are met.

Exemptions are available in the legislation for customers who are

certified as ‘high net worth individuals’.

Among the criteria for customers to be

23 In the case of a property held by ‘joint tenants’ both owners are deemed to own 100% of the value of the property. Therefore, the full

value of the asset could be considered for the purposes of an individual meeting the definition of a HNW mortgage customer. If the

property is held by tenants in common, the actual proportion of the individual’s share of the property could be considered.

24 CP12/19, Restrictions on the retail distribution on unregulated collective investment schemes and close substitutes, (August 2012):

www.fsa.gov.uk/static/pubs/cp/cp12-19.pdf

The Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (FPO) and the Financial Services and Markets Act

2000 Promotion of Collective Investment Schemes) (Exemptions) Order 2001(PCIS Order). The exemptions in these Orders are

determined by HM Treasury.

See article 48 of the FPO and article 21 of the PCIS Order.

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categorised as high net worth under the orders are having an annual income of more than

£100,000 or having investable net assets of more than £250,000.

4.19 We are choosing to apply a different definition of HNW in the mortgage market. HNW

customers face the same risks when they take out a loan secured against their homes as any

other customer. This includes the risk that they may ultimately lose their home. When setting

the scope of mortgage regulation in 2004, the then government was not persuaded that a

specific exemption for HNW customers was required and felt that they should be afforded

the same protections as any other customer. Our current mortgage rules reflect this and apply

to all regulated mortgage contracts, including those taken out by HNW customers.

4.20 Our changed approach, in the light of the market feedback, recognises that there is a very

small subset of genuinely wealthy customers, whose wealth is significantly above average.

This level of wealth gives these customers specific advantages, in particular, a considerably

reduced risk of becoming homeless in the event that they experience financial difficulties.

The HNW definition for mortgages will therefore exclude most customers, and will ensure

that the tailoring is targeted at the most wealthy.

4.21 To make the distinction clearer between the HNW definition that applies in relation to

the mortgage rules and the HNW definitions used elsewhere in the FSA’s Handbook, we

have amended the defined term from ‘high net worth customer’ to ‘high net worth

mortgage customer’.

4.22 In CP11/31 we proposed that, before a firm could treat a customer as being HNW, they

should obtain a written statement from a suitably qualified professional adviser to confirm

that the customer meets the definition of a HNW mortgage customer. In response to

feedback, we have amended this requirement (see MCOB1.2.9CR(1)), to allow firms also

to use evidence that they have obtained through their business relationship with the

customer, for example, if they manage their assets.

The application of the new approach

4.23 The tailoring that we proposed for lending to HNW mortgage customers for disclosure

(MCOB4.9, 5.7, 6.7, 7.7 and 13.7) and charges (MCOB12.6) is proceeding on the basis

consulted on in CP11/31. Firms may decide to either comply with MCOBin full, or to use

the tailored approach, but not to mix and match, on the basis that it would be very

confusing for a borrower.

4.24 We are applying a different approach for the new advice and responsible lending provisions

for HNW mortgage customers. A firm may decide when to use these provisions

independently of whether they adopt the tailored provisions for disclosure and charges. This

is because we cannot see how a firm’s approach to disclosure (which might be purely driven

by systems or process considerations) should determine whether a lender can apply the new

27 We estimate that borrowers with a net income of £300,000 accounted for around 0.2% of mortgage sales in 2011. See Exhibit 22.6

in MMR Data Pack (October 2012).

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26 Financial Services Authority October 2012

provisions for advice or responsible lending. Therefore a firm may choose different

approaches to the disclosure and charges tailoring, and the advice and responsible lending

provisions for HNW mortgage customers.

Advice

4.25 As proposed in CP11/31, we are allowing a HNW mortgage customer to get a mortgage on

an execution-only basis, even where the sale is interactive – provided the customer has

confirmed in writing that they are aware of the consequences of losing the protections of the

rules on suitability, and have made a positive election to proceed with an execution-only sale.

4.26 Many HNW mortgages are not commoditised in the same way as residential mortgages, so the

structure of the deal and the interest rate may vary according to the individual circumstances

of the customer. Therefore, it will not always be possible for a HNW mortgage customer to

provide the product details that we would normally require for an execution-only sale, such as

the rate of interest and the interest rate type. We have amended the rules for HNW mortgage

customers so that they do not have to provide this information to purchase a product on an

execution-only basis.

4.27 Unlike customers in the mainstream mortgage market, HNW mortgage customers are not

required to get advice in the unlikely event that they fall into one of the vulnerable

categories (i.e. debt consolidation, right-to-buy, equity release or sale and rent back). This is

because of the greater resources available to HNW mortgage customers and the likelihood

that they will have access to the services of other professional advisers.

Responsible lending

4.28 The lender is required to assess whether the customer will be able to pay the sums due (to

cover the sums advanced and the interest) and demonstrate that it is affordable for the

customer, as required by the main overarching responsible lending rule (MCOB11.6.2R).

However, the rules beneath this do not drill down into the same level of granular detail as

for mainstream mortgages, giving the lender some flexibility to meet the requirements in a

way that is appropriate for the customer.

4.29 When making their assessment of affordability for HNW mortgage customers, the lender

may base their assessment on both the income and the assets of the borrower. They must

also consider the expenditure of the borrower, by considering whether they will have

sufficient resources to cover their credit commitments, basic essential expenditure and basic

quality of living costs.

However, we are not prescriptive about how they do this, and

expenditure can be considered in general terms (i.e. it may be possible for a lender to

develop a general approach applied across customers or particular groups of customers).

28 We are retaining the use of the terms ‘basic essential expenditure’ and ‘basic quality of living costs’ for business lending and lending

to HNW mortgage customers. While developed for use in our rules for mainstream mortgages, we believe their use in business and

HNW lending will be helpful for firms in understanding the types of expenditure that we expect them to consider.

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4.30 In addition, the lender will be required to:

• obtain evidence of the income and/or assets that they are basing their affordability

assessment on;

• take account of the impact of likely future interest rates on affordability; and

• take account of known or likely future changes to the income and expenditure of

the customer.

4.31 The interest-only rules continue to apply in their entirety, because we believe that the

interest-only rules are flexible enough to be adapted to the needs of different types of

customers, including HNW mortgage customers.

4.32 The requirement to have a responsible lending policy, and record keeping and monitoring

apply in full, subject to some minor amendments to reflect the revised approach to

responsible lending.

4.33 As we discuss further at Q70, Annex 1, a specific exception has been made for secured

overdrafts for HNW mortgage customers from the rules around extending the terms of a

bridging loan (MCOB11.6.55R).

Disclosure

4.34 We have made some small adjustments to the disclosure rules in light of the amended

approach to execution-only sales for HNW mortgage customers (see MCOB5.4.18BR).

These set out when a firm must provide a KFI, and when a customer has to be told they

can request one.

Business lending

4.35 In CP11/31, we proposed to read across the majority of the MMR proposals to business

lending (i.e. regulated mortgage contracts made for a business purpose), but proposed a

limited amount of tailoring, including rules in relation to interest roll-up mortgages and

professional standards.

4.36 We also asked a wider question about whether it might be appropriate to carve out

business loans from our proposed new regime entirely. There is an argument that if a

business borrower and lender want to take an informed risk, and the business borrower is

happy to use their home as collateral for a business venture, then why should that

individual be prevented from doing so? However, we must also consider those who are less

able to protect their own interests and who arguably do need regulatory protection – such

as a sole trader borrowing against their home as a last resort to keep their business afloat.

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28 Financial Services Authority October 2012

4.37 So a key question for us was how would we draw a line between those small business

borrowers who can take a risk, and should be allowed to do so, and those who cannot?

Also, how would we prevent any potential carve-out from being exploited as a means of

avoiding our new affordability requirements?

4.38 We asked for feedback on these questions and also had a number of discussions with

lenders active in regulated business lending to help inform our policy approach.

Feedback to CP11/31

4.39 As we set out at Q89 in Annex 1, respondents’ views on a carve-out were polarised.

Lenders and trade bodies strongly supported some form of carve-out. But consumer

representatives were very concerned about the risks this would pose.

4.40 Consumer representatives were not convinced that potential business borrowers would

always take an informed business risk, particularly where the boundary between their

personal and business finances is blurred, as it might be when lending is secured on

personal assets to raise business capital.

4.41 In addition, they had strong concerns about the risk of gaming, as customers might claim

that they are borrowing for a business purpose to avoid the strengthened regime put in

place through the MMR.

4.42 In contrast, representatives from the industry thought that business borrowers are better

able to make financial decisions. They felt that the MMR proposals would not be easily

transferable to business lending, as they do not reflect the way that business banking works

in practice, i.e. where the focus of underwriting is the circumstances of the business, and

the ability of the business to repay the loan. They also felt that application of the full set of

MMR proposals to business lending would be disproportionately onerous, given the very

small proportion of business lending that is regulated, and would not add any significant

benefit to these customers.

Our approach to business lending

4.43 We recognise that the full package of MMR proposals is not workable for business lending

and that, to a large extent, business borrowers have higher levels of financial capability

than consumers in general.

4.44 However, we have not been convinced that business lending should be entirely carved out

of mortgage regulation.

4.45 Our view is that some business borrowers, particularly some of the smaller business

borrowers who are captured by mortgage regulation, do need consumer protection when

putting their homes at risk, and we cannot see how gaming would be prevented if business

lending was completely carved-out of mortgage regulation. While we accept that much of

current business lending practice is prudent in today’s constrained market, we see a clear

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risk of gaming developing if we were to disapply our regime completely. Particularly

outside the traditional business banking environment, where lenders may see opportunities

to increase market share through bypassing our affordability assessments.

4.46 We have therefore not carved business lending out of our mortgage regime. However, we

have applied an alternative approach, which recognises the characteristics of business

lending where this differs from mainstream residential mortgages. This approach will be

based on the following key elements:

• Disclosure – The existing rules are tailored for business loans and that tailoring

will continue.

• Advice – Interactive sales may be conducted on an execution-only basis.

• Responsible lending – Requirements are set at a higher level than for mainstream

mortgages, and recognise that a mortgage may be repaid from the resources of a business.

The application of the new approach

4.47 Reflecting the fact that business borrowing is likely to be individually negotiated and so sits

poorly with the standard approach to disclosure, our existing rules are specially tailored

where the regulated mortgage contract is for a business purpose. This relates mainly to

disclosure requirements (as set out in MCOB4.9, 5.7, 6.7, 7.7 and 13.7) and to charges

(MCOB12.6). We are not changing these requirements, or the situations where they can be

used. We currently require a firm to either comply with MCOBin full, or use the tailored

approach in its entirety for any particular regulated business loan. This means that a firm

cannot mix and match whether they use the tailored provisions or full MCOBrequirements

as this would be very confusing for a borrower. This approach continues for these existing

tailored provisions.

4.48 We are, however, applying a different approach for the new advice and responsible lending

provisions. These provisions apply only where the loan is solely for a business purpose.

Examples where this might apply include:

• raising a loan solely for a business purpose on a customer’s previously

unencumbered home;

• taking a further advance that is solely for a business purpose (even though the main

mortgage may have been taken out for the purchase of the home, or other personal use,

such as home improvements or debt consolidation); and

• remortgaging to raise additional funds, as long as the additional funds are being raised

solely for a business purpose (even though the existing outstanding mortgage balance

may have been taken for purchase of the home or other personal use).

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30 Financial Services Authority October 2012

4.49 The new provisions will not include the following scenarios, where there is an element of

personal use to the loan, and where the full MCOBrequirements for advice and responsible

lending will therefore apply:

• remortgaging for several purposes, e.g. debt consolidation and a business purpose; or

• taking a further advance for several purposes, e.g. home improvements and a

business purpose.

4.50 As with our existing tailored approach, we do not capture buy-to-let finance under the

business lending rules. We do not regulate mortgages secured on buy-to-let properties. In cases

where a regulated mortgage contract is secured on the borrower’s home to finance the

purchase of a single buy-to-let property, there is already existing guidance (MCOB1.2.5G(2)),

which states our opinion that this would not be for a business purpose and therefore falls

under the main affordability rules.

4.51 The use of these provisions is not dependent on whether the firm is using the existing

tailored approach for business loan disclosure. This is because we cannot see how a firm’s

approach to disclosure (which might be purely driven by systems or process considerations)

should determine whether a lender can apply the new provisions for advice or responsible

lending. Therefore, a firm may decide to apply the advice and responsible business lending

provisions whether or not they apply the tailored disclosure provisions. We include

guidance on this in the rules (see MCOB1.2.4BG).

4.52 It will still be up to a firm to determine whether a loan is for a business purpose (as set out

in MCOB1.2.5G(2)). To prevent gaming of the new provisions for advice and responsible

lending, we require a firm to have sight of a credible business plan before determining

whether the loan is solely for a business purpose (MCOB1.2.9DR). The aim of this

requirement is for the firm to assess whether there is a legitimate business proposition that

has not been fabricated for the reason of obtaining mortgage finance for other (i.e. personal)

reasons – rather than for underwriting purposes (although we recognise that in practice the

same business plan may also be used by the lender when assessing affordability).

Advice

4.53 We have amended the rules to allow loans solely for a business purpose to be obtained on

an execution-only basis, even in interactive sales, as for HNW mortgage customers and

mortgage professionals. The customer must confirm in writing that they are aware of the

consequences of losing the protections of the rules on suitability, and make a positive

election to proceed with an execution-only sale.

4.54 Many business loans are not commoditised in the same way as residential mortgages, so the

structure of the deal and the interest rate may vary according to the circumstances of the

individual transaction. So it will not always be possible for a business borrower to specify

the product details that we would normally require for an execution-only sale, such as the

rate of interest and the interest rate type. Therefore, where the loan is solely for a business

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purpose, we are not requiring this information to be given before proceeding with an

execution-only sale.

4.55 Unlike HNW mortgage customers, business borrowers are required to get advice if for

some reason they also fall into one of the vulnerable categories (i.e. debt consolidation,

right-to-buy, equity release or sale and rent back). This situation is relatively unlikely to

occur (given that the purpose of the loan must be solely for a business purpose), but if it

does, our view is that the borrower should receive advice, given that the loan will be

secured against their home.

Responsible lending

4.56 We have applied a different approach to assessing affordability for loans solely for a

business purpose. The main, over-arching responsible lending rule (MCOB11.6.2R) will

still apply, requiring the lender to assess whether the customer will be able to pay the sums

due, and to demonstrate that the mortgage is affordable for the customer. However, the

affordability rules beneath this will not drill down into the same granular detail as for

mainstream mortgages, giving the lender appropriate flexibility in their underwriting of

business loans.

4.57 When a mortgage is being raised for a business purpose, we recognise that the loan may

be repaid from:

• the resources of a business; or

• the personal resources of a borrower (e.g. if funds are being raised for a new

business venture).

4.58 We are accommodating both of these situations in the rules.

4.59 Where the loan is being repaid through the resources of a business, we require the lender

to assess whether that business will be able to repay the mortgage. We are not being

prescriptive about how the lender should do this, and the rule just requires the lender to

base this assessment on the strength of the resources of the business (MCOB11.6.26R(2)

(b)). This may include consideration of factors such as cash flow, assets and liabilities.

4.60 If the borrower is reliant on the business for their personal income, then we require the

lender, as a minimum, to consider in general terms whether a business can support the

borrower’s basic essential and basic quality of living costs.

We are not being prescriptive

about how the lender does this, and we are being clear in the rules that this can be done in

general terms. Therefore, it may be possible for a lender to develop a general approach

applied across borrowers, or across particular groups of borrowers. Alternatively, they

might consider how much the borrower draws from the business for their personal use.

29 We are retaining the use of the terms ‘basic essential expenditure’ and ‘basic quality of living costs’ for business lending and lending

to HNW mortgage customers. While developed for use in our rules for mainstream mortgages, we believe their use in business and

HNW lending will be helpful for firms in understanding the types of expenditure that we expect them to consider.

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32 Financial Services Authority October 2012

4.61 Where the loan is being repaid through the personal resources of the borrower, the lender

must make their assessment of affordability through an assessment of the income, assets

and committed expenditure of the borrower, and a general consideration of their basic

essential expenditure and basic quality of living costs. Once again, we are not being

prescriptive about how the lender should do this.

4.62 In addition, whether the mortgage will be repaid by business or personal resources, the

lender is also required to:

• obtain evidence of the income or assets of the borrower, or the resources of the business;

• take account of the impact of likely future interest rates on affordability; and

• take account of known or likely future changes to the financial position of the business.

4.63 The interest-only rules continue to apply in their entirety, because we believe that they are

flexible enough to be adapted to the needs of different types of customers, including those

borrowing for business.

4.64 The requirement to have a responsible lending policy, and record keeping and monitoring,

still apply in full, subject to some minor amendments to reflect the revised approach to

responsible lending.

4.65 As we discuss further at Q70 in Annex 1, we have made a specific exception for secured

overdrafts that are solely for a business purpose from the rules around extending the terms

of a bridging loan (see MCOB11.6.55R).

Disclosure

4.66 We have made some small adjustments to the disclosure rules in light of the amended

approach to execution-only sales for business lending (see MCOB5.4.18BR(2)). These

set out when a firm must provide a KFI, and when a customer has to be told they can

request one.

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Detailed feedback

on CP11/31

Introduction

1. In this Annex we summarise the feedback received to our proposals in CP11/31

and set

out our policy response. Feedback to some of our distribution proposals is discussed in

detail in Chapter 2. Feedback to our proposed transitional arrangements is in Chapter 3.

Feedback to our proposed approach to high net worth and business lending is in Chapter 4.

Responsible lending and borrowing

Q1: Do you agree that lenders should detail how they incorporate

anti-fraud controls into their affordability assessments in their

responsible lending policy?

2. The majority of respondents agreed in theory that anti-fraud controls should be

incorporated into firms’ responsible lending policies.

3. However, many lenders were concerned about including detailed information on their

anti-fraud controls in what is a fairly widely circulated document, as this could actually

facilitate fraudsters’ understanding of how to get around fraud controls. They therefore

felt that lenders should be able to keep details of their anti-fraud controls separately from

their responsible lending policies, and out of the public domain.

1 CP11/31, Mortgage Market Review: Proposed package of reforms, (December 2011): www.fsa.gov.uk/static/pubs/cp/cp11_31.pdf

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Our response

We want to ensure that lenders are joined up in the way they think about fraud,

and explicitly consider fraud in the context of their underwriting processes.

However, we recognise that it may not be appropriate to widely circulate

the details of anti-fraud controls. Therefore we have amended the rules

(MCOB11.6.20R) to allow the responsible lending policy to be set out in more

than one document. This would allow cross reference to a separate document

with a more restricted circulation.

Q2: Do you have any comments on our income proposals?

4. The majority of respondents were in favour of the proposals, supporting what they saw as

a sensible and proportionate approach that provides lenders with an appropriate level of

flexibility to income. Many lenders also welcomed the recognition of the role of electronic

data and the removal of references to human intervention as a requirement in the income

verification process.

5. A small group of lenders supported the continuation of ‘fast-tracked’ mortgages and

expressed disappointment that income verification would be required across the board.

6. Some consumer representatives had concerns that the flexibility allowed in the rules could

be exploited by firms to avoid undertaking a rigorous assessment of income. They also had

concerns about the robustness of lenders’ automated processes and risks around allowing

the consideration of projected income.

7. While most respondents thought that the rules themselves would not necessarily affect

the availability of mortgages to particular consumer groups, several noted the need for

lenders to show a flexible approach to customers with ‘non-standard’ income, such as

self-employed customers or contractors. However, many were concerned that uncertainty

about the future supervisory approach might result in lenders adopting an overly

cautious approach to such cases.

8. Several lenders thought that lenders who do not hold current accounts (mainly smaller

lenders) would be at a competitive disadvantage, because they would not be able to

evidence income from their own internal sources. In addition, they may not be able to

access some sources of electronic income data – e.g. if bank account turnover data held by

credit reference agencies is only available on a reciprocal basis, i.e. to firms who themselves

supply this data to the agencies.

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Our response

We believe we have struck an appropriate balance of exibility in the income

proposals. We are therefore proceeding with the rules largely unchanged, other

than some minor amendments and clarications.

In relation to the concerns raised about supervision, we are carrying out internal

training for supervisors and extensive rm engagement and education to ensure a

consistent understanding of the rules.

We do not believe that implementing the income rules will signicantly change

the competitive situation of smaller lenders. Those lenders with current accounts

can already use their own data to evidence income for their existing customers,

and most smaller lenders already collect evidence of income, whether provided by

the customer or an intermediary.

Q3: Do you agree with this approach to expenditure? Do you have

any comments on the categories of expenditure?

Do you have any practical concerns about implementing

this approach?

9. The expenditure proposals were welcomed by most respondents, who supported the move

away from ‘free disposable income’, as proposed in CP10/16, to what they considered a

more balanced, proportionate and practical approach. Several respondents, including a

trade body, noted that many lenders will be able to comply with these proposals without

making significant changes to their existing practices.

10. However, some trade bodies and lenders felt that this may be more difficult for smaller

lenders, who may have less sophisticated systems, and less customer data available to base

expenditure assumptions on. This again led to concerns that larger lenders will have an

unfair competitive advantage.

11. Uncertainty over the future supervisory approach was noted, with firms reiterating

concerns that this would result in lenders taking an overly conservative approach,

assuming unnecessarily high levels of expenditure, which could unnecessarily restrict

the amount creditworthy customers are able to borrow.

12. Several consumer representatives argued that we should adopt a more prescriptive approach

to the types and levels of expenditure to be considered, for example, by requiring these to be

set with reference to some form of external benchmark. They felt this would ensure a more

consistent approach between lenders and reduce the potential for lenders to compete by

using deliberately low expenditure assumptions.

13. In contrast, one consumer representative argued that the affordability assessment should

either not include any allowance for basic quality of living costs, or confine the allowance

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to a small percentage on top of basic essential expenditure. They thought the proposals

might harm the borrowing opportunities of responsible and creditworthy customers, by

taking account of discretionary spending that could be curtailed to repay the mortgage.

14. Some consumer representatives highlighted the potentially significant costs of childcare and

suggested that they should be moved into the category of basic essential expenditure, rather

than basic quality of living costs.

Our response

Given the support received, we are proceeding with the proposed expenditure

approach, subject to some minor amendments to improve the clarity of the rules.

Although lenders with large volumes of transactional data may use this to model

expenditure, this is not the only way to meet the rules, and many smaller lenders

already use expenditure assumptions in their affordability assessments.

In relation to the concerns raised about supervision, we are carrying out internal

training for supervisors, and extensive rm engagement and education, to ensure

a consistent understanding of the rules.

We believe that the rules are sufciently tight to prevent rms from gaming the

expenditure rules, particularly in conjunction with record keeping and monitoring

requirements, so we are not setting any specic external benchmark.

We are not changing the categories of expenditure, for example moving childcare

into the basic essential expenditure category. The guidance in the rules clearly

gives childcare as an example of the type of expenditure that might form part of

basic quality of living costs.

Q4: Do you have any comments on our proposed approach to

assessing affordability against future interest rate increases?

15. Most respondents saw the need for future interest rate rises to be factored into affordability

assessments, and were broadly in favour of the proposals.

16. Some lenders were concerned that the volatility of market expectations for interest rates

could make it difficult for them to manage the rates they use to test the impact of rate

changes on affordability, with some asking for clarification on how often they should

review their rate.

17. There was some confusion around applying the minimum 1% rate, with several firms

under the impression that this minimum could be applied at any time in the economic

cycle, rather than only where the market expects rates to fall or rise by 1% or less over the

next five years, as stated in CP11/31.

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18. Several respondents, particularly consumer representatives, saw potential for some gaming

or manipulation of the market through these proposals, such as:

• fixed rates of five years or longer becoming more popular to avoid the need to consider

future interest rate rises;

• lenders competing on stress test rates, e.g. when they want to increase their market

share; and

• lenders pegging their stress test to the most favourable external source according to

their needs at a particular time.

19. One consumer representative thought that the interest rate stress test may prove overly

restrictive in subdued market conditions when underwriting standards are already tight,

and insufficiently restrictive in boom market conditions, when underwriting standards

loosen. To address this, they suggested that the minimum interest rate should be varied

counter-cyclically, set at zero in subdued market conditions, and potentially set higher than

the minimum 1% in boom conditions.

20. Some larger lenders argued that they should be able to use their own interest rate forecasts,

as they already produce similar forecasts for other reasons.

21. A number of practical points were also raised. Some lenders were keen to keep the details

of their interest rate assumptions confidential (other than for regulatory scrutiny), to

prevent their affordability requirements from being gamed. Several respondents questioned

the rate to which the stress test should be applied (e.g. the initial rate or the lender’s

standard variable rate (SVR)). Some had more general concerns about the regulatory risks

of failing to accurately predict the future.

Our response

We are proceeding with the interest rate stress test proposals without any

substantive changes.

We are not prescribing how often rms must review the ‘stress’ rate that they

use to test affordability against future interest rate increases. We expect them

to manage this themselves, in the context of market expectations. However, as

market expectations can be volatile, we recognise that some degree of smoothing

will be undertaken by rms for practical reasons. There is no requirement for rms

to amend their stress rate on every minor change in market expectations.

We believe that there are enough controls in the rules to prevent gaming, such

as the record keeping and monitoring requirements. If there was a movement

towards more ve-year xed rates, this would not contradict the policy intention,

which is to consider affordability in the context of interest rate increases over

the next ve years.

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The new interest rate stress test rules will come into effect after regulatory

reform and any decision about whether to vary the minimum stress test counter-

cyclically will be a matter for the Financial Policy Committee, and not the

Financial Conduct Authority.

We indicate (in MCOB11.6.19G) that it is not acceptable for lenders to rely on

their own forecasts of interest rates. However, this does not necessarily prevent

a lender from using its internal view of future interest rates, provided they

can justify the basis used to form this view by reference to some independent

forecast of market expectations, such as the forward sterling rate published on

the Bank of England website.

There is no requirement in our rules for rms to make their interest rate

assumptions public. It is up to rms to manage this as they would any other

assumption used in their affordability assessment.

We will not be prescribing in the rules which rate the stress test should be tied

to (e.g. the initial rate or the SVR). We expect rms to apply an appropriate

approach, considering the impact of expected interest rate changes over the next

ve years on the customer’s ability to make their mortgage payments.

The purpose of this requirement is not for lenders to predict the future, but

for them to take reasonable steps to factor expected interest rate rises into

affordability assessments. It will not prevent all customers from experiencing

nancial difculties – but will reduce the likelihood of them nding mortgages

unaffordable due to expected changes to interest rates.

Q5: Do you agree with our assumption that 90% of lenders already

apply a stress test?

22. Most respondents, including lenders and trade bodies, agreed with our assumption that

90% of lenders already apply a stress test.

23. Several lenders felt unable to comment on the practices of other lenders, on the basis that

they did not have that information available to them, but some of these did confirm that

their own firm applies a stress test.

Q6: Do you think that lenders are currently applying a stress test

of a similar degree to the test we propose?

24. Most respondents agreed that lenders are currently applying a stress test of a similar degree

to that proposed. Some lenders agreed that their own stress test is similar, but felt unable to

comment on other lenders’ stress-tests.

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Our response

This conrms our understanding from discussions with market participants that

most lenders currently do take account of interest rate rises when assessing

affordability, and therefore conrms our view that our proposals will not have a

signicant impact on current market practice.

Q7: Do you have any comments on our proposal to drop the

requirement that affordability should be assessed on a

maximum term of 25 years?

25. There was a strong consensus in favour of dropping the requirement that affordability

should be assessed on a maximum term of 25 years. Respondents felt this was too restrictive,

and in particular would prevent younger customers from getting on the property ladder.

Instead, they felt that a customer’s individual circumstances should be taken into account.

26. Respondents also noted that dropping this proposal would be consistent with increasing life

expectancies and working lives of customers.

Our response

We have dropped this requirement.

Q8: Do you have any comments on our proposals to protect credit-

impaired consumers?

27. The majority of respondents supported the proposal to drop the buffer for credit-impaired

borrowers, agreeing that the strengthened responsible lending requirements will provide

greater protection for all borrowers, including the credit-impaired.

28. Many respondents also thought that the debt consolidation proposals, both in relation to

advice and assessing affordability, would protect credit-impaired customers.

Our response

We have dropped the credit impaired buffer proposed in CP10/16.

We will

proceed with compulsory advice for debt consolidation, and the affordability

requirements for credit-impaired customers consolidating debt (which we discuss

further below in response to Q12).

2 CP10/16, Mortgage Market Review: Responsible Lending, (July 2010): www.fsa.gov.uk/pubs/cp/cp10_16.pdf

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Q9: Do you think that our proposed enhanced sales standards will

provide adequate protection for right-to-buy consumers? Are

further measures required?

29. The majority of respondents agreed that the proposed enhanced sales standards will

provide adequate protection for right-to-buy (RTB) customers, particularly when coupled

with the strengthened responsible lending requirements. Nevertheless, some consumer

representatives urged us to keep a close eye on this sector given past experience and the

vulnerable nature of some RTB customers.

30. While the enhanced sales standards will protect RTB customers, several respondents,

including trade bodies and some lenders, noted that perhaps a bigger question for RTB

customers is whether they should exercise their right-to-buy at all, or remain as tenants,

which falls outside the remit of mortgage advice. They therefore felt that customers should

receive further advice and support in making this decision. Some lenders also felt that it

should be made clear in the advice process that mortgage advice is about the loan rather

than the decision to exercise the right-to-buy.

31. Some trade bodies and lenders felt that there was potential for conflict between the

government’s housing strategy, which aims to reinvigorate this market, and our more

cautious approach (e.g. references in CP11/31 to RTB lending as being ‘high risk’). They

felt this could result in a reduction in lender support for this aspect of the government’s

housing strategy.

Our response

In response to feedback, we intend to proceed with our proposals to require RTB

customers to receive advice (except in the unlikely event that a HNW mortgage

customer is exercising a right-to-buy). As we outlined in CP11/31 we believe that

RTB customers have been more at risk of taking on unaffordable borrowing and

additional protection is needed.

We do recognise that RTB customers may need help and support when making the

decision to purchase their home. However, this is separate to mortgage advice.

There is already a wide range of information available to support RTB customers.

The Department of Communities & Local Government has recently launched a new

website

and there is existing information via Directgov

and Money Advice Service.

Furthermore, RTB customers will also be pointed to these sources of information, as

well as other sources of money advice as part of their RTB documentation.

3 http://righttobuy.communities.gov.uk/

4 www.direct.gov.uk/en/HomeAndCommunity/BuyingAndSellingYourHome/HomeBuyingSchemes/DG_4001398

5 www.moneyadviceservice.org.uk/en/articles/right-to-buy-right-to-acquire-in-england-wales-and-n-ireland

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We have referred to RTB as being ‘higher risk’ in previous MMR publications,

because our data shows that RTB customers have been the borrower type most

likely to experience arrears and payment problems. However, we believe that the

enhanced sales standards and strengthened affordability requirements will improve

standards across this market. Therefore, we do not see a conict for lenders in

supporting this market, subject to appropriate sales and affordability assessments.

Q10: Do you think income multiples could work under our proposed

rules? If not, why?

32. Most respondents thought that income multiples could only work to a limited extent under

our proposed rules, in that they could sit alongside the affordability assessment, to apply a

maximum cap on lending, or provide an indication of maximum loan size (for customers or

intermediaries) before a full affordability assessment.

33. However, most could not see how they would work as the sole method of assessing

affordability. Although income multiples can take account of committed expenditure (e.g. if

a deduction is made from income before the multiple is applied), many respondents could

not see how essential expenditure, basic living costs or future interest rates could be

incorporated in a robust and demonstrable way. They therefore felt that income multiples

would not work as a standalone method of complying with our affordability rules.

34. In addition, some respondents, particularly consumer representatives, were strongly against

income multiples, because they saw them as a very blunt method of determining affordability.

35. There was some support from some smaller lenders and one trade body for income

multiples being allowed to continue under our rules – particularly for low volume lenders

where individual case underwriting is also employed, perhaps through some form of

‘hybrid’ model (i.e. where other affordability elements such as expenditure and future

interest rates are considered within or alongside the income multiple). Their view was that

income multiples had led to prudent lending and low arrears in the past, and replacing

them with an affordability model would have significant costs and few benefits.

Our response

We agree with respondents that it is difcult to see how income multiples could

work as the sole method of meeting the new affordability requirements.

This does not necessarily rule out the use of income multiples completely, if a

rm can demonstrate that their approach explicitly considers factors such as

expenditure and future interest rate increases (see MCOB11.6.7G). Nor does

it prevent income multiples being used as a cap on lending or to provide an

indication of loan size, before a full affordability assessment.

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Q11: Do you have any comments on our proposal to require lenders

to take into account information about future changes to

income and expenditure?

36. This proposal was generally welcomed, particularly the clarification that we did not expect

lenders to ‘crystal ball gaze’, and that lenders would only be expected to take factors into

account of which they should reasonably be aware when assessing the application.

However, several specific concerns were raised by respondents.

37. In relation to retirement age, some lenders felt that the wording used within the draft

handbook text was unclear, and they were unsure whether we expected lenders to assume

that all customers retire at state pension age, or whether they could consider the customer’s

actual expected retirement age (whether earlier or later than state pension age).

38. A few lenders also wanted more guidance about exactly when they should apply a higher

degree of scrutiny of income in retirement, for example, whether this would be required

perhaps five or ten years before the expected retirement date.

39. Trade bodies and several lenders were concerned about the interaction of our proposals with

equalities legislation. They questioned whether the lender might contravene their equalities

obligations if they ask mortgage applicants direct questions about some future events, such as

their intention to start a family or return to work after maternity leave. Trade bodies

suggested some specific wording that they thought was acceptable under equalities legislation,

which could be used in mortgage application forms: ‘Are you aware of any changes to your

circumstances that are likely to affect your ability to meet your monthly mortgage

repayments?’ They asked whether this would be sufficient to meet our requirements.

40. A trade body and a lender were concerned that these requirements will cause uncertainty

about how they should treat fixed-term contractors, and suggested that they would not be

able to lend to them because the end of their contract is a known event.

41. Several trade bodies and larger lenders thought the future viability of shared equity loans

might be affected by these proposals, if future payments on equity loans are required to be

factored into the affordability assessment - given that affordability is already tight for many

first-time buyers.

42. Several firms thought that lenders, through the act of underwriting the mortgage, might

give the impression that they were advising on pensions or giving customers a degree of

assurance that their pension arrangements were adequate.

43. A few respondents thought that lenders should be able to take account of potential positive

changes to future income and expenditure, as well as negative changes. One respondent

thought that such positive changes should include those arising from a customer’s expected

career progression and more general developments, such as improving economic prospects

and the strength of the labour market. Another respondent questioned whether significant

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reductions in energy bills resulting from energy efficiency improvements to the mortgaged

property could be factored into the assessment of expenditure.

Our response

As we said in CP11/31, it is not our intention to prevent older customers from

accessing mortgage nance. There is no reason why older customers cannot

obtain a mortgage under the new rules (as long as it is affordable).

We have made some amendments to MCOB11.6.15G(2) to make it clear that the

lender can base their assessment on the customer’s actual expected retirement

age, taking a common sense view, with state pension age used as a default if the

actual retirement age is not known.

We do not believe it would be appropriate to provide explicit guidance about

when a lender should start applying more scrutiny of income in retirement, as

this may vary according to the circumstances of the customer.

In response to concerns about rms breaching their equalities obligations if they

ask applicants direct questions about future events, MCOB11.6.14R requires rms

to take account of future changes to the income and expenditure of the customer

that they are, or should reasonably be, aware of from ‘information obtained during

the application process’. One way of meeting this requirement, may be to ask a

general question along the lines of that suggested (‘Are you aware of any changes

to your income or expenditure that are likely to affect your ability to meet your

mortgage payments?’). We discuss equalities issues further at Q105 to Q118.

When it comes to considering the income of xed-term contractors, the end

of a contract does not equate to the end of that customer’s ability to earn an

income. We do not expect a different approach to underwriting these cases than

has been taken in the past. For example, a lender will have a policy setting out

their approach to contractors based on factors such as their track record of past

contracts, and their general view on the likelihood of obtaining future contracts.

In relation to shared equity schemes, we continue to believe that a lender

providing a rst charge loan should take account of the effect that a shared

equity loan may have on the affordability of the rst charge loan. This may arise

from the following two aspects of the shared equity loan:

1. Interest payments or charges on the shared equity loan that become due

during the term. In this case, the lender should consider the impact of this

on the affordability of the rst charge mortgage, as they would for any other

nancial commitment.

2. Repaying capital that becomes due during the term. While it is not the

responsibility of the rst charge lender to determine how the shared

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equity loan will be repaid, this event could have a signicant impact on

affordability (e.g. if 20% of the value of the property must be repaid to

the shared equity lender at a certain point during the rst charge loan).

In some cases, capital repayment may be due fairly soon after the loan

is granted (e.g. ve to ten years) and lenders should consider whether

customers have a credible strategy for dealing with this and the rst

charge loan. We recognise that the customer might intend to sell the

property to repay the loan (as per MCOB 11.6.15G(3)), but this may

not always be the case. In other cases, repayment will not be due for

a considerable period of time in the future (e.g. around 20 years), and

the lender may be less concerned about the impact that this has on the

affordability of the rst charge loan. They might consider, for example,

that as the shared equity loan is only a small percentage of the customer’s

overall borrowing secured on the property, the customer’s ability to repay

the shared equity loan might be assisted by reasonable increases in income

over the 20-year period. We are not expecting the lender to ‘crystal-ball

gaze’ about customers’ circumstances in the future, but simply to take a

view on whether the shared equity loan is likely to cause the customer

difculty in repaying their rst charge loan.

We understand that the industry will be working to produce good practice

guidance on how lenders can meet this obligation, and we support these efforts.

If rms are concerned about giving customers the impression that they are giving

advice on pensions, when assessing a mortgage application, there is nothing

to stop rms from using some form of appropriate wording in written or spoken

communications to customers that this is not the case, as long as it is clear, fair

and not misleading, and does not breach any other rules.

The rules do not prevent known positive changes being considered in the

affordability assessment (e.g. evidence that the customer will be made a partner

in their rm, or has a contract that conrms a promotion or increase in salary;

or where energy efcient work has been undertaken to signicantly reduce

energy bills on the mortgaged property), but not uncertain developments, such

as improved economic prospects. Reliance on such events would risk detriment

if they subsequently fail to materialise, and run contrary to the overall MMR

approach, which aims to ensure that underwriting is based on factual and

credible information, supported by appropriate evidence.

Q12: Do you agree that to ensure these proposals work, we should

define a credit-impaired consumer? Do you agree with our

proposed definition?

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44. The consensus view was that a definition was required, to provide consistency in approach

across the market, and prevent gaming.

45. However, views about the proposed definition varied. Some agreed with the definition,

but others, particularly lenders, did not. For example, some lenders felt that more

emphasis should be placed on recent payment problems, or problems relating to secured

commitments. Others felt customers who had suffered temporary financial difficulties

would be penalised by the definition, whereas some customers with significant credit

problems might fall outside the definition (e.g. where a county court judgment was

registered more than three years ago, despite the fact it was still outstanding). Some

consumer representatives were concerned that customers under a high degree of financial

stress and just about to tip into credit problems (but with no current impaired credit)

would not be caught by the definition, and so would be vulnerable as they might be very

likely to consider a debt consolidation mortgage.

46. Few suggestions were made for alternative definitions.

Our response

We recognise there is no single denition that will precisely capture the credit-

impaired customers who would benet from the extra protection of the debt

consolidation rule (MCOB11.6.16R). There are numerous ways that we could

cut the denition to include or exclude certain categories and stages of credit

problem, but it would never be possible to capture all possible variations, or

include customers who may be about to suffer credit problems. We think the

proposed denition of ‘credit-impaired customer’ captures the majority of

customers with current credit problems.

As the sole purpose of this denition in the context of the mortgage rules is to

target the application of the debt consolidation requirements, we cannot see any

detriment arising from a customer falling into the denition, even if they are

recovering from credit problems.

There is nothing to stop lenders from applying the debt consolidation rule more

widely, if they wish to provide an extra layer of consumer protection for some

customers falling outside the denition.

Therefore, we are proceeding with the denition unchanged.

Q13: Which option do you prefer? Option 1, where the lender

would be required to take reasonable steps to ensure that

debts to be consolidated are repaid? Or option 2 where

the lender would be required to assume that debts to be

consolidated remain outstanding for purposes of assessing

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affordability? If you disagree with both options, what do you

suggest as an alternative?

47. Given the choice between the two options we proposed in CP11/31 for credit-impaired

customers consolidating debt, more respondents favoured option 1, on the basis that this

would be the most effective way to ensure that debts were repaid as expected, allowing

customers to fully benefit from debt consolidation mortgages. Some lenders noted that they

already have processes in place to repay debts directly to creditors. But many respondents,

particularly lenders, recognised the administrative difficulties and additional costs involved

in this, as well as the risk that the customer might immediately run up more debt once

debts have been cleared.

48. Option 2 was favoured by a small number of respondents, but most thought that this

option would restrict the availability of debt consolidation mortgages (because many

customers would not pass the affordability test if it is assumed that debts to be repaid will

remain outstanding).

49. However, many respondents suggested that both options should be available, providing

lenders with flexibility in deciding how to implement this requirement, and providing more

choice for customers.

50. Some consumer representatives strongly felt that these measures should be applied across

all customers, not just those with an impaired credit history.

Our response

In CP11/31 we concluded that it would not be proportionate to apply these

measures across all customers. We recognise that many customers are able to

take on the responsibility of repaying their debts directly. Our data shows that

customers with an impaired credit history have signicantly higher levels of

arrears when consolidating debt than those who do not, which is why we are

targeting only this group of customers.

However, because we are considering all customers consolidating debt as a

‘vulnerable group’ for the purpose of our distribution rules, they will all be

required to obtain advice.

In response to the feedback received, we are proceeding on the basis that both

options will be available.

Q14: Do you agree with our proposals to strengthen lender’s systems

and controls around responsible lending?

6 See Exhibit 16.10 in MMR Data Pack (October 2012).

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51. Most respondents supported these proposals, subject to some specific concerns.

52. Some lenders thought that it would be more appropriate for the very large lenders to be

able to sign off their responsible lending policies through an appropriately delegated local

committee of the board which would have a better understanding of the policy, and related

issues, than the main board.

53. Several lenders thought that responsible lending policies should be able to reference other

documents, rather than being required to be contained in one single document. This was

due to concerns about the length of the document, and the appropriateness of wide

circulation of some of the more sensitive elements of the policy (e.g. details of fraud

prevention measures, as discussed in Q1).

54. Some very small lenders, with no internal audit function, were concerned that the

requirement to audit compliance with their responsible lending policy once a year may

be very costly for them.

Our response

We recognise that the main board of a rm may not always be the most

appropriate body to consider the details of a responsible lending policy, e.g. if

the rm is a global rm where the board may not be familiar with UK mortgage

lending. However, we are keen to see the senior management of rms engaging

with and taking responsibility for the conduct-related mortgage-lending practices

within their rm.

Therefore, we are amending the wording of MCOB11.6.20R so that it refers to

the rm’s governing body rather than the rm’s board. ‘Governing body’ is a

dened term, referred to elsewhere in MCOB(e.g. in MCOB13) that is dened

in the FSA glossary as ‘the board of directors, committee of management or

other governing body of a rm or recognised body, including, in relation to a

sole trader, the sole trader’.

We understand that it may not be practical for the entire contents of a

responsible lending policy to be contained in one document, as required by the

new rules. We have therefore amended MCOB11.6.20R to reect this.

We accept that many small rms will not have an internal audit function.

Therefore, we have amended MCOB11.6.24R so that where a rm has an internal

audit function (or an outsourced equivalent), the annual review of compliance

with their responsible lending policy must be undertaken by that function.

However, where a rm does not, the review may be undertaken by the rm’s

internal compliance function (or an outsourced equivalent).

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In CP11/31 we proposed to extend responsible lending record keeping

requirements from one year to three years. We have decided to further extend

this requirement, so that lenders will be required to keep the records for the

period that mortgage remains with the lender, to show how they have met our

responsible lending requirements (i.e. the record keeping requirements set out in

MCOB11.6.60R).

We understand that most lenders already retain this data for this period, plus an

additional period after this, so we do not believe that this change will lead to

any material additional costs.

We have amended the record keeping schedule in MCOBto reect this (see

Appendix 1).

We are also extending the period for which a lender is required to keep a record

of their responsible lending policy, following any change made to that policy

– from three years from the date of the change, to as long as any mortgage to

which it relates remains outstanding.

We do not believe that this will result in additional costs to lenders as most

lenders already comply with this in practice.

Q15: Do you have any comments on our proposed transitional

arrangements? Do you think they will be sufficient to

address risks to consumers? Will they create any additional

risks to consumers?

55. The vast majority of respondents agreed with the aim of the transitional arrangements,

which is to mitigate the impact of the introduction of our new responsible lending

proposals on existing borrowers. However, there was a very strong consensus that, as

drafted, the proposals were too complex to be widely adopted by lenders, and too

restrictive to help many borrowers. Many respondents gave examples of borrowers who

would benefit from a change to their mortgage, but who would not be able do so because

they did not meet the criteria for the transitional arrangements – including borrowers who

want to fix their rate when rates are rising, or change from an interest-only to a repayment

mortgage. Several respondents thought that increased borrowing should also be allowed,

with some intermediaries suggesting 10% of the outstanding balance as an appropriate

maximum for this.

56. Lenders and trade bodies felt that lenders would not use the transitional arrangements to

take on borrowers from other lenders, because of their onerous nature, and because they

would be unable to price for risk. In addition, some commented that the risk of taking on

lending that does not fully meet the new responsible lending requirements would be

considered too great by many lenders.

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57. Most respondents favoured a more flexible approach to the transitional arrangements.

Several trade bodies suggested that lenders should be able to adopt their own exceptions

policy for existing borrowers who do not fully meet current responsible lending criteria.

They felt that this approach would give lenders the flexibility to consider individual

circumstances, and make sensible lending decisions, subject to appropriate controls being in

place. This approach was also favoured by most lenders and consumer representatives.

58. Some mortgage intermediaries suggested that advice should be mandatory wherever the

transitional arrangements were applied.

Our response

We recognise the complexity and inexibility in the original proposals. In

response to feedback, we are adopting a more exible approach, which will allow

lenders to make individual lending decisions based on an exceptions policy,

where they judge the transaction to be in the borrower’s best interests – as long

as there is no increase in the current amount outstanding (i.e. no additional

borrowing). Further details of our approach can be found in Chapter 3.

Our approach to advice, including for contract variations, is in Chapter 2.

Q16: Do you think that there is sufficient protection for mortgage

borrowers who are ‘trapped’ with their current lender? If not,

what additional protection do you suggest?

59. Many respondents reiterated their view that our proposed transitional arrangements would

need to be amended as described at Q15 to provide sufficient consumer protection, but

beyond this they did not suggest that any additional consumer protection would be required.

60. However, consumer representatives, and some intermediaries, were concerned about the

risks of the unfair treatment of borrowers ‘trapped’ with their current lender, such as ‘price

gouging’ (i.e. charging the borrower an unfavourable rate of interest to take advantage of

the fact that they are not able to move to a different lender). They therefore saw the need

for additional consumer protection, as they thought that relying on the principle of treating

customers fairly or unfair contract terms breaches would not be enough. Consumer

representatives saw the need for several specific amendments to the proposed transitional

rules, including:

• converting the draft guidance in CP11/31 at MCOB11.7.7 into a rule, so lenders

would be banned from treating mortgage prisoners less favourably than other

borrowers; and

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• making it compulsory for lenders to use the transitional arrangements, rather

than optional.

Our response

The changes we are making to the application of the affordability requirements

for contract variations, as set out in Chapter 2, along with the revised transitional

arrangements, will make it easier for lenders to help existing borrowers.

We will continue to expect lenders to treat their customers fairly, in according

with Principle 6 (‘treating customers fairly’). In response to feedback, we are

strengthening the protection for existing borrowers, by changing the guidance

to an evidential provision (MCOB11.8.1E). Under this provision, if the existing

lender takes advantage of a ‘trapped’ borrower or treat them any less favourably

than other customers with similar characteristics – for example, by offering less

favourable interest rates or other terms – then this may be relied on as tending

to show contravention of Principle 6.

As we explain further in the introduction, we are implementing this provision

with immediate effect.

We do not believe that it is appropriate to make these transitional arrangements

compulsory. Ultimately, it is for lenders to make lending decisions, and there may

be sound reasons for not proceeding with individual transactions.

Q17: Do you think the eligibility requirements are appropriate?

Should we allow these transitional arrangements to be used

where the new monthly payment is higher?

61. The consensus view was that the eligibility requirements were too restrictive, would not

take into account individual circumstances, or allow lender discretion – and as a result

would only help a small proportion of borrowers.

62. Many respondents pointed out that the rule preventing higher monthly payments might

actually cause consumer detriment (e.g. if a customer was prevented from taking a fixed

rate when rates were rising). The inability for lenders to price for risk, because of this

requirement, would prevent lenders from taking on borrowers from other lenders under the

arrangements.

63. Respondents therefore supported transitional arrangements that would allow increased

monthly payments.

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Our response

In response to feedback, we have amended our approach to both the eligibility

requirements and situations where the new monthly payment is higher (e.g. as a

result of a rate switch). See Chapter 3 for more details.

Q18: Should we allow the transitional arrangements to be used

where there is a material change to the mortgage, such as the

removal of a borrower following a divorce? How could gaming

be prevented?

64. There was strong support across the board for lenders being able to deal with material changes

on a case-by-case basis, according to the circumstances of the borrower. Lenders noted that

they already approach such changes in this way. Many respondents could not see how a

prescriptive set of rules would be able to cover the full range of borrower circumstances.

Our response

In response to feedback, we have revised our approach to how material changes

are dealt with under the transitional arrangements. See Chapter 3 for more details.

Q19: Do you think these arrangements will be practical to

implement? How could they be improved or simplified?

65. As explained at Q15, the vast majority of respondents supported a more flexible approach

to the transitional arrangements, based on an exceptions process.

Our response

See Chapter 3 for more details on our revised approach to the

transitional arrangements.

Q20: Do you agree that the draft rules on responsible lending in the

draft Mortgage Market Review (Conduct of Business) Instrument

2012, at Appendix 1, reflect the stated policy intention?

66. Most respondents agreed that draft rules on responsible lending reflect our stated policy

intention. Several respondents suggested drafting changes to make the rules clearer.

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Our response

We have taken the drafting suggestions into consideration when preparing the

nal rules. See Appendix 1 for the nal rules, and Annex 2 which summarises

the changes.

Interest-only mortgages

Q21: What is your view on our approach to assessing affordability

for interest-only mortgages?

67. The vast majority of respondents agreed with our approach to assessing affordability for

interest-only, i.e. that affordability may be assessed on an interest-only basis, where there is

a credible repayment strategy; and that the cost of the repayment strategy must be factored

into the affordability assessment as ‘committed expenditure’.

68. Several lenders asked for clarification on whether they would be allowed to assess

affordability for interest-only mortgages on a capital and interest basis, if they wanted to

and, if they did, whether they would still need to include the cost of the repayment strategy

as committed expenditure.

Our response

We are proceeding with the interest-only proposals unchanged.

MCOB11.6.48R states that a lender may assess affordability on an interest-only

basis. This does not prevent lenders assessing affordability for interest-only

mortgages on a capital and interest basis. If affordability is assessed on a capital

and interest basis, the cost of the repayment strategy does not need to be

included as committed expenditure.

Q22: Do you agree that we should apply a consistent approach to

regulating interest-only across the board, and that we should

not adapt our approach according to different consumer types?

69. The consensus view was that we should apply a consistent approach to regulating interest-

only, rather than adapting our approach to different consumer types, such as first-time

buyers, older customers, or high net worth (HNW) customers. Respondents thought that

assessing individual circumstances should be the most important consideration, and felt

that applying different approaches for different types of customer might prevent some

customers from accessing interest-only mortgages, even where it is an appropriate option.

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70. While most agree that the individual circumstances of a customer are the main factor in

determining eligibility for interest-only, a few thought that a different approach might be

required for specific niches such as HNW and business lending. A couple of respondents

thought we should explicitly set out our views regarding the needs of customers with

long-term disabilities, who may wish to take out a mortgage through the Home

Ownership for people with Long-term Disabilities (HOLD) scheme.

Our response

We are not adapting our approach to interest-only according to customer type.

Nor are we adopting a different approach to interest-only for HNW or business

lending. We consider our existing approach offers sufcient exibility for lenders

to offer interest-only mortgages to meet a wide variety of customer needs.

We do, however, propose a tailored approach to HNW and business lending in

general, which is set out in Chapter 4.

We do not intend to adopt a different approach to the HOLD scheme, as we

believe that our interest-only rules are exible enough to meet the needs of

different types of customers, including disabled customers. As we discuss in our

responses to Q107 and Q108, the rules do not prevent lenders from accepting the

eventual sale of property, as long as the customer is not relying on a speculative

repayment strategy.

Q23: Do you agree with our non-prescriptive approach to repayment

strategies, or do you have any comments

on this approach?

71. The majority of respondents agreed with the non-prescriptive approach and thought it

would enable lenders to meet the varied needs of individual customers and different market

sectors, while providing an appropriate level of protection for customers. Some consumer

representatives, however, wanted a more prescriptive approach, because they were

concerned that lenders might accept inappropriate or inadequate types of repayment

strategies, unless they were specifically prevented from doing so.

72. The biggest concern expressed by industry respondents related to the risks arising from

the flexibility inherent in the non-prescriptive approach – such as the judgements that

firms would be required to make, for example, when deciding what type of repayment

strategy to accept, or when assessing the credibility of each individual repayment strategy.

73. Several lenders and intermediaries expressed concerns about the future supervisory

approach to interest-only, and how we would judge firms’ lending decisions with the

benefit of hindsight. Respondents thought that this uncertainty would cause lenders to

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adopt an overly cautious approach for new interest-only lending, and so restrict the

availability of interest-only mortgages. Some thought we should be clearer about our view

of interest-only (e.g. is it a niche product only, or an acceptable mainstream product?), or

set out some form of minimum standards or guidance about repayment strategies that we

consider acceptable.

74. Some industry respondents questioned what we meant by a ‘speculative’ repayment strategy

(see MCOB11.6.41R(3)). For example, some suggested that a repayment strategy that

relied on investment returns is by its very nature speculative, and therefore would not be

permitted under the rules. There was also some confusion about where the line was drawn

between speculative and non-speculative repayment strategies; for example, whether

bonuses or lump sum payments could be considered as an acceptable repayment strategy,

or whether they would be seen as speculative.

Our response

We are proceeding with a non-prescriptive approach to repayment strategies.

As we explained in our responses to Q2 and Q3, in relation to the concerns raised

about supervision, we are carrying out internal training for supervisors and

extensive rm engagement and education to ensure a consistent understanding

of the rules.

As we stated in CP11/31, there is a consensus view that interest-only should be

a ‘niche’ product. We expect most mainstream lending to take place on a capital

and interest basis. We recognise that interest-only mortgages can be appropriate

in a wide variety of circumstances, so we do not think it would be useful, or

practical, to set out any form of minimum standards.

In relation to what might constitute a ‘speculative’ repayment strategy, we

mean a strategy where the borrower is reliant on uncertain external events,

such as property price increases or an inheritance. (We include these, in MCOB

11.6.46E, as examples of repayment strategies that, in the absence of evidence

to the contrary, would breach MCOB 11.6.41R(1) if accepted by a lender). We

do not mean more tangible repayment strategies, such as regular deposits into

a savings or investment product, or periodic repayment of capital from irregular

sources of income such as bonuses (which are included at MCOB 11.6.45G as

examples of repayment strategies that might be acceptable, depending on the

circumstances of the customer). The key consideration is whether the rm has

evidence that the customer has a clearly understood and credible repayment

strategy that, as far as the rm is reasonably able to assess at that time, has

the potential to repay the mortgage.

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Q24: Do you agree that lenders should be free to set their own

appropriate controls around repayment strategies?

75. Most respondents were in favour of this, with several citing the benefit of lenders being

able to manage their own risk, subject to concerns about our supervisory approach, as

discussed at Q23.

Our response

We are proceeding with this proposal.

Q25: What is your view of our proposals for lenders’

interest-only policies?

76. The majority of respondents were in favour of these proposals. Some specific concerns

were raised by lenders, similar to those expressed at Q14, in relation to the sign-off

process for large lenders, and the ability of the policy to reference other documents.

77. A few firms, mainly those active in the more niche areas, such as bridging and lending to

high net worth customers, were concerned that they would not be able to document all

possible repayment strategies in their interest-only policy.

Our response

We are proceeding with this proposal, subject to the amendments we are making

to MCOB11.6.20R, as explained in the response to Q14.

The rules do not require every possible repayment strategy to be set out in its

policy. Rather, the rules require the types of repayment strategy that the rm

considers acceptable, and the controls around those strategies, to be specied.

Therefore, if a lender accepts the sale of assets, we recognise that it might not

be possible for them to list every possible asset type in their policy. Instead, it

might be more appropriate to list different assets types, e.g. according to the

controls that apply to those asset types.

Q26: What are your views on our approach to requiring lenders

to assess the repayment strategy prior to entering into

the mortgage?

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78. There was a strong consensus in support of the high-level approach proposed, and several

lender respondents welcomed the changes made to clarify the limited nature of the expected

assessment (i.e. that it was not intended to be ‘crystal-ball gazing’). Nonetheless, some firms

continued to be confused about what we meant by a ‘credible’ repayment strategy, believing

that we intended firms to be sure that the repayment strategy would repay the capital at the

end of the term.

79. Some firms thought the assessment would be so burdensome that lenders would withdraw

from the market, or that the competencies required to make an assessment would not be

found in smaller lenders, therefore distorting competition.

80. Many firms were also concerned that the act of assessing the credibility of a repayment

strategy may:

• cause customers not to recognise that the principal responsibility for repaying the

mortgage remained with them;

• be seen by the customer as advice, or

• somehow be seen as giving the customer an assurance that the repayment strategy

will perform as expected, and therefore lead to an expectation that lender will

be liable if this fails to occur. This impression was reinforced by the proposal to

perform a mid-term check on the repayment strategy (as discussed in Q27).

Our response

We want to make it clear that we are not expecting rms to predict what will

happen in the future. We expect rms to assess, so far as it is reasonably able

to at the time of underwriting, that the repayment strategy has the potential

to repay the capital

, and nothing more. The fact that the lender has assessed

the repayment strategy should not be taken as a guarantee that it will repay the

mortgage. Responsibility for repaying the capital at the end of the term remains

with the customer, in line with the terms of the mortgage contract.

Lenders will need to make underwriting judgements about whether the repayment

strategy has the potential to repay the capital, as they already do. Lenders will

have to manage the risks around this if they lend on an interest-only basis. We

will expect lenders’ staff to be appropriately qualied to make the judgements

they are required to make in the context of the lender’s interest-only policy. If

a lender does not have staff competent to assess a particular type of repayment

strategy, then we would expect them to not accept that strategy.

7 Plus any interest reasonably expected to be accrued under the interest-only mortgage (e.g. in the case of an interest roll-up mortgage).

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To address possible misconceptions on the part of customers about, for example:

• their responsibility for repaying the mortgage;

• whether they are receiving advice about the repayment strategy or assurances

about its performance; or

• potential liability when things go wrong;

there is nothing to prevent lenders from using some form of wording in written

or spoken communications to get the appropriate message across to customers,

as long as it is clear, fair and not misleading, and does not breach nancial

promotions or other relevant rules. We do not intend to prescribe the messages

that rms should use.

Q27: What is your view of our proposals for the ongoing

management of interest-only loans? Do you foresee any

practical issues?

81. While the majority of respondents were broadly in favour of the proposals, many raised

similar issues to those discussed at Q26, in relation to assessing whether the repayment

strategy still has the potential to repay the mortgage.

82. In addition, lenders were particularly concerned about:

• the responsiveness of borrowers, requesting more clarity on what would constitute

reasonable efforts to contact the borrower;

• the actions they should take if it was discovered that there was likely to be a shortfall

on the strategy, with a few questioning the proportionality of requiring a check when

only limited options were available;

• the potentially significant costs incurred checking on borrowers’ repayment strategies

(particularly for larger lenders); and

• the risk that mid-term contact may result in a perceived further transfer of

responsibility for the repayment strategy from the borrower to the lender.

83. Some consumer representatives and intermediaries supported more frequent checks on the

repayment strategy during the life of the mortgage, considering a single check of limited use

as it provides only a snapshot in time that may change later.

84. Several respondents noted that a check during the term of a mortgage might not be

appropriate for mortgages with short terms (e.g. five years or less).

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Our response

We are not suggesting that a mid-term review of the repayment strategy will

enable all issues to be resolved. Nor are we suggesting that the onus for solving

the problem lies with the lender. As we made clear in CP11/31, the purpose of

the check is to raise awareness of the potential issues to both the lender and

the borrower. The responsibility for repaying an interest-only mortgage remains

with the borrower. The lender cannot be held responsible if what appears to be a

credible repayment strategy at the point of underwriting does not deliver. Similarly,

a mid-term check cannot be taken to mean that the lender is guaranteeing that

the repayment strategy will repay the capital at the end of the term.

If the mid-term check reveals a problem with the repayment strategy, it is the

responsibility of the borrower to bring it back on track. As explained in Q26, all

we expect a lender to do at the time of underwriting is to assess, as far as it is

reasonably able to do so, that the repayment strategy has the potential to repay

the capital, and nothing more.

Some borrowers will not engage with their lenders about this issue – and this is

recognised in the rules (MCOB 11.6.49R(3)). We do not propose to prescribe what

‘reasonable efforts’ to contact the borrower are. This will be for the lender to

determine and demonstrate, i.e. through record keeping. We have amended the

record-keeping rules to make this explicit (MCOB 11.6.60R(3)(c)).

We do not believe that this check will be particularly costly or onerous for

the lender. The rules do not specify the degree to which the check must be

undertaken – for example, there is no requirement for the lender to obtain

documentary evidence and re-underwrite the case. The rule (MCOB 11.6.49R)

merely requires the lender to make contact with the borrower, to check if the

repayment strategy is still in place, and check whether it is still reasonable to

expect that it has the potential to repay the mortgage. So while the lender may

choose to request documentary evidence of the repayment strategy from the

borrower, there is no specic requirement for them to do so – therefore they

could rely on information provided by the borrower.

We continue to believe there is value in the mid-term review, which will alert

both parties to potential issues at a point where there is still time to consider

remedial action – rather than waiting until the end of the term. This may be

the catalyst that prompts some borrowers to take action. Even relatively minor

changes (such as small overpayments made over several years) might signicantly

improve the borrower’s position and range of options by the end of the term.

Therefore, we are proceeding with this proposal.

We can, however, see that there may be a limited benet to a mid-term check

with a mortgage with a very short term, so we are disapplying this requirement

for bridging loans.

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We are carrying out a separate piece of thematic work to assess the issues faced

by existing interest-only borrowers without the means of capital repayment at

mortgage maturity. The results of this work will be communicated to the market

in due course.

Q28: Do you have any comments on the proposed changes to the

glossary term, or the consequential changes?

85. The majority of respondents supported the change to the glossary term from ‘repayment

vehicle’ to ‘repayment strategy’, noting that it is a suitably wide term. They also supported

the consequential changes.

Our response

We are proceeding with the proposed change to the glossary term and the

consequential changes.

Q29: Do you have any comments on the draft interest-only rules set

out in the draft Mortgage Market Review (Conduct of Business)

Instrument 2012 at Appendix 1? Do you think the rules reflect

the stated policy intention?

86. Respondents broadly agreed that the rules reflect the policy. However, there were a number

of suggestions to improve and clarify various specific rules.

Our response

We are proceeding with the substance of the rules as drafted, but are making

some small amendments following feedback, to ensure the rules better reect

the policy intention.

Distribution

Q30: Do you have any comments on our proposed approach to

intermediaries’ role in assessing affordability?

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87. Responses from the majority of consumer groups and intermediaries were supportive of the

proposal and welcomed the clarification of the responsibility for assessing affordability.

However, many lenders were less supportive and believed the intermediary would need to

assess affordability when giving advice.

88. These respondents were concerned that removing a regulatory responsibility from the

intermediary would absolve them from any responsibility and this could have unintended

consequences. As a result, lenders felt the responsibility for affordability should be shared.

89. A number of intermediary respondents suggested they will still need to see the customer’s

income and expenditure information to satisfy themselves that they are not supporting

fraudulent applications.

90. Finally, there was a concern from a minority of respondents that it may be difficult for

intermediaries to keep up with lenders’ criteria.

Our response

We believe that making the lender ultimately responsible for assessing

affordability is the right way forward and we have not amended our approach.

Intermediaries will still be required to ensure they have adequate systems

and controls to prevent nancial crime (SYSC 6.1.1R). Therefore an element of

income checking and verication will still be required to ensure the intermediary

is not supporting a fraudulent application. However, this is separate to the

advice requirements.

Q31(i):

Do you have any comments on our proposed approach,

which allows high net worth consumers and mortgage

professionals to opt-out of receiving advice and purchase

on an execution-only basis?

Q31(ii): Do you have any comments on our proposed definition

of a ‘mortgage professional’?

91. In response to CP11/28

, lenders and intermediaries felt that execution-only would only be

appropriate for a minority of customers and suggested that this would be high net worth

and mortgage professionals. However, most respondents to CP11/31 were unsupportive of

allowing these proposed opt-outs.

8 CP10/28, Mortgage Market Review: Distribution & Disclosure, (November 2010): www.fsa.gov.uk/pubs/cp/cp10_28.pdf

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92. Many respondents felt the definition of a ‘mortgage professional’ was too broad in scope

and would capture administrative staff. There was also a concern about how the exemption

would apply to joint applicants, where only one was a mortgage professional.

93. Lenders were concerned that the work and oversight required to set up a process to cater

for a small group of customers was disproportionate. They noted it would be unlikely the

exemption would be applied in practice. However, intermediaries were supportive of

applying the proposed opt-out.

94. There was more support from both lenders and intermediaries for applying a different

approach to HNW customers.

Our response

Overall, we believe the denition of a ‘mortgage professional’ is clear and would

only capture applicants who could demonstrate they hold a professional position,

which would exclude administrative staff. We therefore do not intend to amend

the denition.

For joint applications where only one applicant is a mortgage professional, then

advice would be required for the non-professional applicant. In practice this

would mean that the application would be advised.

Q31(iii):

Is there anything we can do to mitigate the risk of

intermediaries using these exceptions to circumvent

the rules?

95. Several respondents, including trade bodies and lenders, noted that the rules make it clear

that a firm should not encourage a customer to opt-out from, or reject advice in favour of,

execution-only. They also felt that a relatively small number of customers will be able to

opt-out, therefore the likelihood of anyone circumventing the rules is low.

96. Several respondents recommended having documentary evidence on file that establishes

that a customer is a mortgage professional or a HNW customer. A small number of

respondents suggested strong supervision and enforcement of these rules.

Our response

We have included requirements for rms to keep a record of evidence that

the customer is HNW or a professional. Overall, we believe that the controls

we outlined in CP11/31 are adequate for the mortgage professional and HNW

opt-outs.

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Q31(iv): Are there any other consumer types you think should

be able to purchase on an execution-only basis in an

interactive sale?

97. A large number of respondents felt the proposed availability of execution-only was too

restrictive and that it should be opened up more widely, with the customer being able to

opt out of advice at the start of the sale.

98. They argued that other MMR proposals will provide sufficient consumer protection and

the additional requirement to provide advice in almost every case is both unnecessary

and very costly.

99. A number of respondents suggested extending the availability of execution-only sales to

customers where the transaction is lower risk. For example, HNW, business customers,

second or subsequent time buyers and straight-forward remortgagers. A few respondents

suggested other consumer groups, such as first time buyers, credit impaired customers and

vulnerable customers should be given advice.

Our response

We have thought very carefully about the availability of execution-only. However,

no one in response to CP11/31, or in our subsequent discussions with rms

and their trade bodies, has been able to suggest adequate controls to avoid the

gaming of execution-only if it were opened up more widely.

We rmly believe that allowing an execution-only channel, intended to

accommodate a minority of customers, presents a serious risk of abuse. As

evident with self-certication mortgages, our concern is that execution-only

will become the norm and will be used beyond the small group for which it

was created.

While monitoring and supervising the levels of execution-only business may

highlight concerns to us, it is a reactive tool and would not prevent consumer

detriment occurring.

As a result, we are not amending our policy approach to execution-only and

intend to allow it on a very limited basis, i.e. limiting it to HNW mortgage

customers, mortgage professionals and, in light of the feedback, business

borrowers. Our approach to HNW mortgage customers and business borrowers is

set out in Chapter 4. Our overall approach will require rms to give advice to all

other customers purchasing a mortgage through an interactive sales channel.

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Q32: Do you have any comments on our proposed approach,

which allows consumers to opt-out of advice when purchasing

products online or by post and allows them to purchase

on an execution-only basis?

100. The majority of respondents generally supported our proposals to allow non-interactive

sales to be undertaken on an execution-only basis.

101. There were concerns, particularly from consumer representatives, that allowing an

execution-only route creates a regulatory gap that could be exploited by firms to the

detriment of consumers.

102. Many noted that, while the online sales channel is currently small, it may grow in future,

particularly where it is a means of circumventing the advised sales process.

103. Lenders and their trade bodies asked if they could promote their execution-only online

products without breaching our requirements not to induce customers to opt-out of advice.

They also felt the rules should acknowledge that the customer can contact the firm to ask

for assistance with the online application process without this triggering the requirement

for advice.

Our response

We recognise the concerns with execution-only rules being gamed and we intend

to implement robust monitoring and supervision.

Our rules do not prohibit rms from making the customer aware of their

execution-only channels, as long the information provided does not steer the

customer in one particular direction, i.e. the customer is made aware of all

available sales channels and is not encouraged to proceed on an execution-only

basis. Our nal rules make this clear (see MCOB4.8A.5R).

Online help facilities such as ‘adviser chat’ functions, where the customer can

interact with an adviser while applying online, will involve ‘regulated advice’, if

the adviser steers the customer to a particular product or range of products. If

the interaction is merely to help the customer navigate through the process or

provide generic advice or information, this would not be considered regulated

advice. Chapter 2 explains the boundary between advice and information.

Firms should also have regard to PERG (particularly PERG 4.6G) regarding

the use of ‘ltering’ to narrow down the customer’s choice of products. These

requirements would also apply to aggregator and price comparison sites.

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Q33 (i): We are proposing that consumers who are vulnerable

(i.e. equity release, Sale and Rent Back or right-to-buy

consumers and those who are consolidating debt) should

always be advised and therefore will not be able to

purchase their mortgage through a non-interactive process.

Do you have any comments on this approach?

104. Most respondents supported the proposal that vulnerable customers should always have

advice. However, a number of respondents considered that those customers consolidating

debt should not automatically be treated as vulnerable. These respondents wanted more

clarity around the proposals for debt consolidation and also questioned the need for

mandatory advice in situations where debt consolidation may only be a small aspect of

the overall borrowing.

105. A number of respondents suggested that, for debt consolidation, there should be a cut-off

point (e.g. a percentage of overall borrowing), below which advice is not mandatory.

106. A number of respondents also raised the potential for debt consolidation to be gamed, with

the purpose of the loan being mis-stated to avoid the mandatory advice requirement.

107. Several respondents raised concerns about right-to-buy (RTB) and noted the key issue of

whether to move from a secure tenure was outside the scope of advice. One respondent was

concerned that restrictions on RTB may reduce the willingness of mainstream lenders to

operate in this market.

108. Those respondents who offer Home Purchase Plans considered that these customers should

be able to opt for a non-advised route.

109. The equity release respondents considered that their customers should be able to opt for a

non-advised sale, particularly for contract variations.

Our response

We are proceeding with our policy approach of requiring vulnerable customers to

have advice (unless they are a HNW customer – see Q33(ii)). This means these

customers will not be able to buy a mortgage via a non-interactive sales channel.

We did not intend to capture Home Purchase Plans – we originally included these

in the question by mistake and they are not included in the vulnerable category

in our nal rules.

We recognise that RTB customers may need help and support when deciding to

buy their home. However, this is separate to mortgage advice and it is outside

of our remit.

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We have considered whether a value or percentage benchmark would be appropriate

for debt consolidation loans, but we believe that more unscrupulous rms would

take advantage of this, so we did not consider this to be an appropriate approach.

We therefore intend to proceed with our proposed approach to require advice

where debt consolidation is the main purpose for additional borrowing.

Firms should also note that the existing requirements under SYSC 6.1.1R still

apply and appropriate systems and controls must be in place to ensure fraudulent

applications are not supported.

Our approach to contract variations is set out in detail in Chapter 2.

Q33 (ii):

What are your views on our proposal to allow high net

worth consumers and mortgage professionals to opt-out of

receiving advice irrespective of whether they are considered

to be vulnerable?

110. The majority of respondents thought that vulnerable customers should receive advice

irrespective of HNW or mortgage professional status.

111. A number of respondents re-iterated their concerns with regards to our overall approach

to advice and the limited availability of execution-only.

Our response

In light of the feedback we have amended our approach to mortgage professionals

and will require these customers to receive advice where they are a vulnerable

customer. Our approach to HNW customers is discussed in detail in Chapter 4.

Q33 (iii):

Are there any other consumer types you think should

always receive advice?

112. The majority of respondents agreed with the proposed vulnerable groups.

113. First-time buyers were suggested by several respondents as another group for whom advice

should be mandatory. A few respondents also suggested mandatory advice for those using

transitional arrangements, older customers (those lending into retirement), shared

ownership and credit-impaired customers.

114. A small number of respondents felt that the proposals should represent the minimum

standard required and individual firms should be allowed to require other consumer groups

to receive advice.

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Our response

In CP11/31 we outlined our views on FTBs and credit impaired customers. We did

not think that advice should be mandatory for these customers and our views

have not changed.

If rms wish to require other customers to always receive advice, in addition to

our requirements, this is a commercial decision for that rm and our rules do not

prohibit this.

Q34:

Do you agree that, except in the case of Sale and Rent Back,

we should allow consumers to reject advice and proceed on an

execution-only basis?

115. The majority of respondents agree that customers should have the choice to proceed

without advice. Some argued that this choice should be made before the sale commences.

116. A few respondents felt that the exception should apply to all of the vulnerable customer

groups (equity release, right-to-buy and debt consolidation), not just to sale and rent back

(SRB). One respondent would like bridging loans included in this group.

117. A number of respondents pointed out that if a customer does not wish to proceed with the

product being recommended, they may be simply rejecting a small part of the

recommendation and not necessarily rejecting the advice. A review of products and further

conversation with the adviser is likely to lead to the recommendation being adjusted, rather

than the advice rejected. It is therefore very unlikely for customers to want to proceed on a

rejected advice basis.

Our response

Overall, we are proceeding with the proposal to allow vulnerable customers to

reject the advice given (unless they are SRB customers).

We recognise that the customer may not reject the advice in its entirety and it

is our intention to allow the rm to amend the product or products presented

to the customer in light of their preferences, where appropriate. This has been

reected in the nal rules. We accept that the number of instances where

the customer may entirely reject the advice may be low, but we believe it is

important to retain this option.

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Q35 (i): We are proposing that intermediaries monitor their

execution-only business. Do you have any comments on

our proposed approach to monitoring?

118. Almost all respondents agreed that levels of execution-only sales should be closely

monitored. However, many respondents felt that it would be difficult to accurately

predict the amount of execution-only business they will do. Respondents suggested

that we should require a risk-based approach, rather than hard limits.

119. It was also suggested that firms should have a policy in place setting out the steps they will

take if they exceed the expected level of execution-only sales, to ensure appropriate action

is taken.

120. Respondents also noted the importance of robust supervision of execution-only.

Our response

We recognise that the amount of execution-only business a rm undertakes will

vary from time to time. It is not our intention that rms set hard limits, but

rather that they take a risk-based approach.

We agree with the suggestion that rms should also have a policy in place

setting out the steps they will take if they exceed their expected levels of

execution-only business. This is reected in the nal rules.

We intend to closely monitor and supervise the levels of execution-only business

undertaken by rms and any unexpected spikes will be investigated further.

Q35 (ii):

Are there any other steps we should take to ensure

that consumers are protected when purchasing on a

non-interactive basis, e.g. should we place any other

limitations on the types of consumers who are able to

purchase online?

121. A number of respondents expressed concern that non-interactive sales channels could be

used by firms to avoid or reduce the cost of giving advice (e.g. by offering better products

online, which are not available in branch or by telephone).

122. Several respondents suggested that we should monitor the levels of non-interactive sales via

our reporting systems and take action if they appear excessive. Others suggested a

requirement that online processes carry a clear warning for customers, pointing out that

they are not receiving advice.

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123. There was recognition that using the internet through a variety of methods is becoming

more popular as a way of both obtaining information and making purchases. Respondents

suggested that we should ensure regulation does not stifle innovation or technological

advances that benefit customers.

Our response

Our rules requiring the customer to be made aware of the consequences of

proceeding on an execution-only basis apply equally to online sales.

We recognise that some rms and customers may try to circumvent our rules,

which is a major concern for us. Our nal rules prohibit execution-only channels

being promoted over advice channels and all rms are required to monitor levels

of execution-only business.

Firms will need to consider how their products are made available to ensure

compliance with our rules.

Disclosure

Q36: Do you agree that we should be specific about the appropriate

method of disclosing service fees that are not simple flat fees?

124. The majority of respondents agreed with our approach. The importance of there being

transparency in what the firm’s fee would be was considered important.

125. Respondents also welcomed CP11/31 clarifying that, when the firm’s remuneration is

disclosed, this need not include the individual remuneration of sales staff.

Our response

We are proceeding with our proposal to specify how non-at fees are disclosed.

Q37:

Do you have any comments about our revised approach to

the requirements for the messages on product range and

remuneration to be given ‘clearly and prominently’?

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126. Most respondents had no objections to our approach to bring out key messages about a

firm’s service in a clear and prominent manner. However, many also felt there was a need

for the information to be given in writing – with firms wanting to have a record that they

had told customers these messages. One respondent considered that standard documents

were helpful when it comes to teaching customers about comparing services.

127. There were mixed views on the guidance we provided in relation to how compliance with

oral disclosure requirements could be evidenced (e.g. by including it in staff training,

inserting prompts into sales systems). Some respondents were reassured by this. However,

others did not feel that compliance could be demonstrated in this way and thought the

solution was to require firms to give the consumers the information in a written form.

128. Some respondents considered that there should also be disclosure about whether a firm

gives advice or not. There were also calls for reassurance that firms could specifically tell

customers that they offer an execution-only service as well as an advised service without

breaching our rules.

Our response

We are proceeding with our proposals to require the key messages about a

rm’s product range and remuneration to be given clearly and prominently.

We understand that many rms will want to continue to give customers

written information about their service so there is a record that the customer

has received the messages. We are not seeking to prevent rms from doing

this and we have updated the combined Initial Disclosure Document (IDD)

in our Handbook to help rms who want to take the option of also giving

information in written form (and those required to do so because the sale is

a distance contract). This can be used by rms offering mortgages and other

products or rms just offering mortgages. We will also retain the tool on our

website that helps rms build their own mortgage IDD.

However, we do not want to require rms to give information in written

form (for sales that are not distance contracts). Our consumer research has

demonstrated that customers tend not to use the IDD

, so we do not see a

customer benet in keeping it or any other similar document as a requirement.

In response to comments that we should require rms to tell the customer

whether they provide advice or not, we did not see the need for such a

disclosure because, under our reforms, most sales will be advised. Where it is

an execution-only sale, the rm must inform the customer of the details and

consequences of taking that particular sales route.

9 Disclosure in the prime mortgage market – Research report, Illuminas, (December 2008): www.fsa.gov.uk/pubs/consumer-research/

crpr81.pdf and Mortgage effectiveness review – Stage 2 report, (March 2008): www.fsa.gov.uk/pubs/other/MER2_report.pdf

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There is nothing in our rules to prevent rms from telling customers that

they offer both an execution-only service and an advised service. However,

rms will need to keep in mind that the execution-only route is only

available in specied circumstances, and that under rule 4.8A.5R, a rm

must not do anything that specically encourages a customer to opt-out of

or reject advice. The simple act of informing the customer that the rm offers

some products on an execution-only basis would not be considered to be

encouraging them down this route.

Q38:

Do you consider that the combined IDD template remains

useful with respect to mortgage service disclosure?

129. The majority of respondents supported keeping the combined IDD template so firms can

use it if they want to.

Our response

We asked this question to gauge the ongoing usefulness to mortgage rms of

having the combined IDD in our Handbook. It will no longer be compulsory

to use the combined IDD given that we are not requiring messages about

a rm’s service to be given in writing (other than for sales that are distance

contracts).

Given the positive response we received from rms regarding

the combined IDD, we have updated it in the Handbook.

Q39:

Do you agree that we should not apply the ‘independent’

and ‘restricted’ labels to the mortgage market, but instead

require intermediaries to explain to the consumer in clear and

straightforward terms any limitations to their service?

130. A majority of respondents considered our revised approach to disclosure about a firm’s

product range to be the correct one. They agreed that a simple explanation that could be

tailored to the situation and the market is more likely to be understood by customers than

a label.

131. Those respondents who disagreed noted that there are risks that firms will use the flexibility

in our approach to misrepresent their service or that customers could be confused by seeing

explanations in multiple formats.

10 We have retained requirements for firms to provide specified information in a durable medium where this is required under the

Distance Marketing Directive.

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132. Some respondents made suggestions to add to our approach. These included: having standards

for what it means to be a ‘whole of market’ firm; requiring firms to explain if they use a panel

for their product range; providing more specific guidance on what lenders should say; and not

allowing the term ‘adviser’ to be used for non-advisory staff.

Our response

We are proceeding with our proposals on describing a rm’s product range, given

the positive response. This includes the proposed guidance on when a rm can

describe its service as being ‘unlimited’, including when a panel is used. Our

approach is intended to be equally applicable to lenders and intermediaries and

where lenders only offer their own products, they can simply state this (using

one of the relevant examples we provide if they wish).

While allowing exibility, our approach does not allow rms to describe

their product ranges in a misleading or unclear way. (See MCOB4.4A.7G).

Q40:

Do you have any views about our updated proposals for

product disclosure?

133. The majority of respondents agreed with our changes to the product disclosure rules. It

was acknowledged that the reduced trigger points for providing Key Facts Illustrations

(KFIs) would help to prevent customers from being overloaded with information.

Respondents also welcomed the additional flexibility to provide customers with specific

product information outside of the KFI.

134. A few respondents took the opportunity in response to this question to note their explicit

support for removing from CP11/31 the proposal consulted on in CP10/28 that would have

required two KFIs to be given where fees may be rolled up into a loan.

Our response

We are proceeding with our changes to the product disclosure rules in light of

the positive feedback on this approach. We have made some small adjustments

to the rules consulted on in CP11/31 (see Annex 2). This is to provide trigger

points, within the contract variation execution-only sales route and the tailored

execution-only sales route for high net worth mortgage customers and business

borrowers, for when a KFI is given and when a customer has to be told they can

request a KFI.

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Q41: Do you have any comments on the draft rules on distribution

and disclosure as set out in the draft Mortgage Market Review

(Conduct of Business) Instrument 2012 at Appendix 1?

135. A significant number of respondents used this question to highlight their concerns with the

definition of advice and how our proposals work within the context of the Perimeter

Guidance (PERG). The boundary between advice and information is explained in Chapter 2.

The advice process and other issues raised by respondents are summarised below.

Consumer choice

136. We received strong feedback from a consumer representative, lenders and their trade

bodies that customers should retain the ability to choose the service they receive. They did

not think that customers should be forced to receive advice when speaking to an adviser.

Some respondents called for the non-advised sale process to remain and others called for

execution-only to be opened more widely.

Our response

In CP10/28, we consulted on proposals to strengthen sales standards by

requiring an assessment of appropriateness for non-advised sales. The vast

majority of respondents to that consultation supported those proposals, with

many conrming that they already included an appropriateness check as part of

their non-advised sale process.

Given that determining appropriateness lies at the heart of giving advice, we

viewed our proposals in CP11/31 to require all interactive sales to be advised,

as not being a substantive change. We expected the major concern for rms to

be the costs of ensuring that staff were suitably qualied to provide advice.

However, the feedback suggests that not only have rms interpreted our

proposals as changing the scope of advice (which is claried in Chapter 2),

they have also interpreted the advice process as being much wider than we

intend it to be.

Lenders suggested the requirement to provide advice could add over an hour

to the sales process, increasing costs to the rm and possibly disengaging

customers from the process. This is not our intention and in our view the

differences between the two sales processes in terms of time and the steps

involved will be minimal.

The advice process

Our new proposals do not change the process that rms can follow. The current

non-advised sale process requires the rm to script any questions it asks about

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the customer’s needs and circumstances. This enables the rm to provide the

customer with one or more products, from which they are left to make their own

choice. Under the current approach, if the rm goes one step further and makes

the choice for the customer (i.e. a personal recommendation), it becomes an

advised sale.

We are proposing that rms ask questions (that can be scripted) in all interactive

sales, about the customer’s needs and circumstances, to ensure they shortlist

suitable products (as they may well have done under the non-advised sales

process currently). The difference is that our advised sales standards will apply.

Staff will need to be appropriately qualied, which may have increased costs for

some rms. However, in CP10/28, we had already proposed that all mortgage

sellers should be appropriately qualied and this was supported by the majority

of respondents. The proposals in CP11/31 did not fundamentally alter this.

We appreciate that some rms will be affected by our proposals more than

others, particularly if they do not have an advised sale process currently and

do not consider appropriateness as part of their non-advised sale. However, we

believe that the overall benet to customers outweighs the costs to rms.

Small lenders with a limited product range

137. A number of small building societies and their trade association did not think it would be

possible to give advice where they only offer one product, as they would only be assessing

whether the customer met their eligibility criteria.

138. Others were concerned that only offering a limited product range (e.g. only variable rate

products) would mean they would have to advise the customer to purchase a mortgage

from another firm.

Our response

PERG 4.6.7G sets out the position where the lender only offers a single product.

In this instance, the lender would inevitably be steering the customer towards a

particular product, therefore this would be advice.

Lenders, who offer a limited product range, should never offer the ‘least worst’

product. This has always been the case under our rules. If a xed rate would be

appropriate for the customer, based on their needs and circumstances, the lender

would be in breach of our existing rules by only offering a variable rate product.

There is no requirement for the rm to advise on products offered by other rms.

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Scope of advice

139. One trade body questioned our overall approach to advice and criticised it for being

too product focused. Instead their preference would be for the advising and selling

process to be focused on holistic financial advice and/or information to ensure the

mortgage is appropriate.

Our response

The Regulated Activities Order

(RAO) denes regulated mortgage advice as

advice on the merits of the customer entering into (or varying the terms of)

a particular mortgage contract. Our proposals are in line with the RAO.

Arrears management

140. CP11/31 set out a number of proposals relating to arrears management. These included

further clarification on how firms should be calculating arrears charges, limiting the

number of times direct debits can be presented each month, widening the arrears charges

rules to cover all payment shortfalls and the removal of the rule allowing firms to remove

borrowers from concessionary interest rates if they go into payment shortfall.

141. Overall there was support for the arrears management proposals, although concerns were

raised about specific aspects of the arrears management rules.

Q42:

Do you have any comments on the proposed policy approach

on the calculation of payment shortfall amounts?

142. Most respondents were in favour of the proposals. The remaining respondents were

broadly supportive of the general policy intention, but had concerns about specific aspects

of the proposals.

143. Concerns included the possibility that executive staff at larger firms, with high arrears

levels, or who are running down a ‘backbook’

, may be involved in the day-to-day

management of arrears or that executive staff may spend time reviewing and agreeing day-

to-day arrears business processes and direction, and that this was a reasonable cost to

recover through payment shortfall charges.

144. Certain respondents wanted more clarification on what arrears calculations are required to

be performed and how often these should be reviewed. It was argued that we should not

create an overly complicated solution.

11 The Financial Services and Markets Act 2000 (Regulated Activities) Order 2001: www.legislation.gov.uk/uksi/2001/544/contents/made

For example, a lender may not be actively lending and may be managing a tranche of existing mortgages until the borrowers

remortgage or the tranche is sold on.

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Our response

We are proceeding with the proposed arrears charges rules in CP11/31.

For executive staff costs, the proposed rules already require these costs to be

included in arrears charges only if they are objectively justiable and relate to

the day-to-day management of customers in payment shortfall. We would expect

this to apply only in relation to very small rms, where executive staff may be

justiably involved in the management of individual cases. Executive staff costs

relating to company strategy, including arrears strategy, are not costs that should

be recovered through arrears charges, as they relate to the general oversight

of the rm and are not sufciently related to the day-to-day management of

arrears cases. This includes executive staff costs relating to developing arrears

management policy. More generally, we consider that, while it may be benecial

to prole and analyse borrower groups who are not in arrears, these costs are not

an additional administration cost of borrowers in arrears.

We do not think it is appropriate to set out compliant and non-compliant arrears

charges calculation methods.

Q43:

Do you have any comments on the proposed policy approach

on direct debit payments?

145. Most respondents were in favour of the proposals, although there were specific concerns

raised about the rules. Consumer representatives continued to recommend that firms should

be allowed to charge for only one missed payment.

146. Certain respondents noted that reviewing and replacing direct debit as a mode of payment

could generate an increase in the use of alternative payment methods (e.g. debit card

payments) and possibly create more circumstances for missed payments. These respondents

considered that this may be detrimental to the borrowers and increase costs to firms.

147. Some respondents queried if the proposed rules would require firms to suspend missed

direct debit fees across two months even if payments are subsequently collected through

direct debits in each of those months. They also questioned if the draft rules will require

firms to refund missed direct debit fees levied in month one once a further payment is

missed in month two.

148. Several respondents sought confirmation from us that missed direct debit charges for

customers in arrears constitute charges covered by MCOB12.4.

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Our response

We are proceeding with the proposals.

We consider that it is reasonable for lenders to request a second direct debit in

a month where the rst request fails. The rules prevent lenders from presenting

direct debit requests more than twice a month for more than two months without

considering whether the payment method remains appropriate.

While there is potential for the rules to result in an increased use of other payment

methods, we do not consider that this is a sufcient reason not to require lenders

to consider the appropriateness of direct debit as a payment method where there

have been failed direct debit requests in each of the last two months.

MCOB13.3.1A R requires that where rms are considering whether the method of

payment remains suitable, the rm may not pass on any costs to the customer

which were incurred as a consequence of presenting direct debit requests

during ‘this period of consideration’. This does not mean that charges for missed

payments in the whole two-month period need to be refunded, it merely means

that while the lender is considering the appropriateness of the payment method,

costs incurred as a result of presenting direct debits should not be charged to

the customer.

Charges for missed direct debit payments to borrowers in payment shortfall are

covered by the arrears rules in MCOB12.4.

Q44:

Do you have any comments on the proposal to extend

the application of MCOB12.4 and 13.3 rules to include

payment shortfalls?

149. Most respondents were in favour of the proposal. However, some respondents raised

important points about the potential impact of the rules on the record keeping requirements.

150. Respondents suggested that, for record keeping requirements, there should be a common

sense and proportionate approach to small payment shortfalls or short-term payment

shortfalls. Respondents were concerned about the requirement to record all telephone

conversations where the borrower was technically in payment shortfall, but was not in

arrears or payment difficulty.

151. Certain respondents noted an inconsistency between the proposed rules in CP11/31 and the

Forbearance and Impairment Provisions guidance, which allows for the automatic

capitalisation of small payment shortfalls subject to certain conditions. The draft rules in

CP11/31 prevent automatic capitalisation of all payment shortfalls.

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Our response

We are proceeding with the proposed approach, subject to the

following modications.

The main purpose of widening MCOB12.4 and 13.3 to cover payment shortfalls

and not just arrears was to prevent rms front loading arrears charges. The

payment shortfall denition in CP11/31 captures shortfalls against what the

lender is expecting to receive within a given month.

In CP11/31 we proposed record keeping requirements under MCOB13.3.9

requiring rms to make and retain an adequate record of its dealings with a

customer whose account has a payment shortfall. This record would include

all telephone conversations between the rm and the customer which discuss

the sums due. Our intention is not to capture all conversations with customers

who technically have a payment shortfall. Our intent is only to capture the

meaningful contacts with customers in nancial difcultly. To achieve this we

have amended MCOB13.3.9 R (1), so that all telephone conversations discussing

any amount that is in arrears or any amount attracting payment shortfall charges

need to be recorded. This will prevent a situation where rms are obliged to

record all telephone calls discussing immaterial payment shortfalls (unless the

shortfall is attracting a charge) or where the payment shortfall occurs where the

customer is not in nancial difculty.

It is also not necessary to capture parts of telephone calls that are not relevant

to accounts in arrears or subject to payment shortfall charges. For example, if a

borrower, with an account in arrears, phones a lender’s branch to discuss another

account or a matter other than the payment shortfall, then this part of the call

would not need to be recorded. However, if the telephone call moved onto a

discussion about the arrears, we would expect the customer to be transferred to

the collections department and the conversation would be recorded.

We have made an amendment to MCOB13.3.4AR and MCOB13.3.4AA to align

the rules with the Forbearance and Impairment Provisions guidance.

The rule

change will allow rms to automatically capitalise small payment shortfall

amounts provided the combined effect of the capitalisation and previous

automatic capitalisations are immaterial (see MCOB13.3.4AA).

We have also made a small amendment to the denition of ‘payment shortfall’ so

that it more clearly reects the policy intention, i.e. to prevent rms from front

loading arrears charges on payment shortfalls that occur during the term.

13 FG11/15: Forbearance and Impairment Provisions – ‘Mortgages’, (October 2011): www.fsa.gov.uk/library/policy/final_guides/2011/

fg11_15.shtml (page 34)

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Q45: Do you have any comments on the proposal to replace

MCOB12.4.1 R (2) with a rule permitting firms to remove

concessionary rates where there is a material breach of

contract unrelated to payment shortfall?

152. A significant majority of respondents were in favour of the proposal. Of the respondents who

were neutral or not in favour, several identified that, while they never removed customers in

arrears from concessionary rates, they could see the benefit of being able to do so. This could

be to act as an incentive to borrowers or where borrowers are in serious arrears and refuse to

engage with the firm.

153. A few respondents wanted more clarification on what qualifies as a concessionary rate and

what constitutes a material breach of a mortgage contract.

Our response

We are proceeding with our proposed approach. We do not accept that the removal

of concessionary rates for borrowers in serious arrears could be appropriate. This

position is supported by the current market practice of the vast majority of lenders

and by most respondents to CP11/31.

Concessionary rates covered by MCOB2.6A-1 R will include all initial mortgage

product rates included in the mortgage contract, including lifetime tracker

products, stepped products, capped products, xed rate products, discounted

variable products and other products with concessionary rates. The rule prevents

lenders articially increasing borrowers’ interest rates because of a payment

shortfall. Examples of material non-payment shortfall-related breaches of

mortgage contracts that could justify the removal of concessionary rates may

include borrowers letting out their property without the authorisation of the

lender, or borrowers providing deliberately misleading information in their

mortgage application.

Q46:

Do you have any comments on the draft rules on arrears

management as set out in the draft Mortgage Market Review

(Conduct of Business) Instrument 2012 at Appendix 1?

154. Many respondents were comfortable with the draft arrears management rules, and

although there were specific concerns raised, most of these were dealt with under the

feedback to Q42 to Q45.

155. It was noted by one lender that it is common for some lenders to outsource the collection

of payment shortfalls to external and specialist collection agencies, and that some agencies

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operate a fee structure based on receiving a percentage of the loan collected. The lender

argued that MCOB12.4.8 R should allow lenders to charge an arrears charge based on a

percentage of the loan.

156. One respondent noted an inconsistency between MCOB12.4.1A E

– where a payment

shortfall charge, for a customer adhering to an arrangement to pay, may be relied on as

tending to show a contravention of MCOB12.4.1 R – and MCOB13.5.2 G (3), where

firms must provide a statement if the payment shortfall is attracting charges where there is

an arrangement to pay.

Our response

We do not propose to amend MCOB12.4.8R. It is a commercial decision for

lenders whether they employ specialist collection agencies, but irrespective

of the contractual arrangements in place between the lender and the agency,

customers must not be charged arrears charges that are calculated as a

percentage of the payment shortfall.

We have deleted MCOB13.5.2 G (3). We do not expect rms to impose a payment

shortfall charge where a customer is adhering to an arrangement to pay under

MCOB12.4.1A E and therefore there is no need for a rm to send the customer a

written statement of those charges.

Prudential reform

Impact of Basel III

Q47: Do you agree that the new prudential requirements are

unsuited to meeting the objectives of the MMR, specifically

deterring high-risk lending?

157. A majority of respondents agreed with us that the Basel III requirements for banks are

unsuited to meeting the objectives of the MMR, specifically in deterring high-risk lending

(and that additional conduct requirements are therefore necessary).

158. However, while respondents generally agreed that the prime vehicle for meeting the

MMR objective of consumer protection should be through conduct measures, it was

also acknowledged that prudential requirements designed to ensure that firms hold

sufficient risk-based capital would impact on and help deter higher-risk lending.

Overall, the responses highlighted that there is a complex interaction between conduct

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considerations and additional prudential tools introduced under Basel III and the

macro-prudential overlay.

Our response

We consider it inappropriate to simply rely on the future prudential reforms

in Basel III to meet the objectives of the MMR. The additional reforms on the

conduct of business side discussed in Part 1 of CP11/31 are required to reduce

the risk of consumer detriment in the mortgage market due to relaxed lending

standards and over-rapid credit expansion in a boom period.

Non-deposit taking mortgage lenders

Q48: Do you have any comments on the proposed risk-based capital

requirement?

159. Respondents’ feedback addressed the following points:

• risk-based framework;

• credit risk;

• securitisation and other credit risk mitigation techniques;

• operational risk; and

• limits denominated in Euros.

Risk-based framework

160. Respondents in principle supported risk-based capital requirements. However, they

emphasised key differences between the simpler business models of non-deposit taking

mortgage lenders (non-banks) and those more complex business models of banks and

building societies.

161. In particular they have no depositors, a plain vanilla balance sheet and they do not

perform a maturity transformation function, so they are not subject to liquidity risk

in the same way.

162. Respondents agreed that achieving a level playing field across all lenders was a key

deliverable. However, as there are some key differences in the prudential risks of each

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business model, it would not be proportionate to simply import all of the BIPRU

prudential requirements into MIPRU.

163. To help navigate the sub-set of BIPRU requirements that will apply to MIPRU firms,

respondents proposed copying these directly into MIPRU rather than rely on cross-referencing

to BIPRU. They also suggested that the requirements should be drafted into ‘plainer English’.

The result would be to reduce the compliance cost for firms who would otherwise have to

navigate large volumes of complex BIPRU requirements, much of which will not apply.

Our response

In principle, we are sympathetic to copying across the requirements into MIPRU

and where possible redrafting the text to improve clarity. In practice this is a

substantial piece of work and one with signicant risks attached.

BIPRU represents part of the UK’s domestic transposition of the EU Capital

Requirements Directive, which is a complex piece of legislation, with many

interactions. Any substantial redrafting and simplication of the text, especially

on a stand-alone basis (in MIPRU), would need to consider carefully, not only the

purpose and intent of each individual requirement, but also their interactions to

avoid unintended consequences, errors or important omissions.

On balance, therefore, we will proceed with implementing the risk-based prudential

requirements for non-bank lenders through cross-referencing the relevant BIPRU

rules within MIPRU, as part of the overall package of MMR reforms.

However, at the same time we will continue to explore whether and how the

same policy requirements could be delivered through a simplied, stand-alone

set of rules in MIPRU (without cross-reference) in a way that makes them more

accessible to non-bank lenders. Detailed consultation would be necessary for any

such revision. The objective of such work would be to help make the rules more

accessible and not to change the impact or application of the risk-based capital

requirements derived from applying the relevant BIPRU rules as consulted on

in CP11/31. So until then, rms should use the navigation tables provided for

securitisation (see MIPRU 4.2B.4) and credit risk mitigation (see MIPRU 4.2C.4)

to help them understand the application of the relevant parts of BIPRU and to

prepare for implementation of the requirements.

14 Prudential sourcebook for Banks, Building Societies and Investment Firms: http://fsahandbook.info/FSA/html/handbook/BIPRU

15 Prudential sourcebook for Mortgage and Home Finance Firms, and Insurance Intermediaries: http://fsahandbook.info/FSA/html/

handbook/MIPRU

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Credit risk

164. One respondent proposed further minor simplifications of the standardised approach, but

most argued for greater complexity by allowing non-banks to use the Internal Ratings

Based approach (IRB models) for calculating credit risk.

Our response

The standards for IRB model recognition are set out in BIPRU Chapter 4 and the

requirements are complex, extremely robust and impose correspondingly high

requirements on rms. It is therefore important that rms are aware of how

resource intensive, both in terms of time and money, the model recognition

process can be for lenders. Added to this are the signicant resources required

to continue meeting the necessary standards after approval. Furthermore, any

material failure in this respect is likely to result in the immediate removal of

model recognition and the application of the standardised approach, which

would likely result in signicantly increased capital requirements.

The cost of allowing IRB models is expected to be greater complexity, due to:

a. more approaches for calculating credit risk requirements;

b. more complex methods for calculating credit risk requirements;

c. likelihood of industry demand for corresponding IRB sections of

BIPRU 9 to be added to MIPRU; and

d. resource intensive model recognition process and ongoing

compliance supported by specialist and highly expert staff

both at the FSA and rms.

Other considerations include the possible benets for the non-banks whose

lending business model is based on the originate-and-distribute model. This

means that, beyond the warehousing period, most of the risk will likely be

mitigated by techniques such as securitisation (subject to holding any element

of risk retention

). The net credit risk position should be such that any potential

reduction in the capital required is immaterial enough that it makes maintaining

an IRB model less cost-effective.

In CP11/31 we decided not to allow the IRB model approach to calculate the

credit risk requirement. Our general experience of model recognition and the

challenges faced by rms in showing that they meet the required standards, led

us to conclude that this would not be a viable solution for non-bank lenders.

This decision should also be seen in the context of deciding not to apply any

additional capital requirements under a ‘Pillar 2’ approach.

16 Under Article 122a of the Capital Requirements Directive (CRD), in order for EU banks to be able to invest in a securitisation

(whether in the primary or secondary markets) the originator or original lender – which would include a non-bank – must retain a

minimum 5% net economic interest.

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Despite this, we are willing to discuss on a case-by-case basis, the necessary

conditions that might allow an individual rm to consider whether or not it could

make a future application to operate the IRB approach to mortgage credit risk

(and if so, how to implement it, for example through the waiver process).

165. One respondent asked for clarification of the loan-to-value (LTV) calculation for shared

ownership lending. In particular where, in the event of default, the lender had a priority

claim over the whole property.

Our response

The LTV calculation will be a question of fact based on the contractual terms

governing the loan. To illustrate the point for shared ownership lending, a

£100,000 property is jointly owned by Party A (80%) and Party B (20%) and

Party B has a £5,000 deposit, so borrows £15,000. If Party B defaults and the

lender to Party B has a rst claim on the whole property (i.e. ahead of Party

A) and has the unfettered right to immediately sell the property, then the LTV

is 15%. If the lender’s claim is limited to the percentage of the property lent

against (i.e. 20%) then the LTV is 75%.

Securitisation and other credit risk mitigation techniques

166. All respondents commented on the complexity of the BIPRU Chapter 9 Securitisation

requirements and the difficulty in navigating them, particularly as only part of BIPRU 9

is relevant to non-banks. To address this, respondents proposed copying across just the

relevant sections into MIPRU and redrafting them so that they are clearer. One respondent

proposed retaining the cross-references to BIPRU and supplementing them by providing

guidance on how to identify and navigate the relevant sections.

167. All respondents argued that MIPRU should allow forms of credit risk mitigation other than

securitisation, as set out in BIPRU Chapter 5.

Our response

In the draft Handbook text (section 4.2C Appendix 1) we said:

a. Section 4.2B deals with securitisation and includes a navigational table

(see MIPRU 4.2B.4) which cross-references back to BIPRU 9.

b. Section 4.2C deals with credit risk mitigation and includes a

navigational table (see MIPRU 4.2C.4) which cross-references back to

BIPRU 5.

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Section 4.2C permits other forms of credit risk mitigation.

We agree that a standalone version of MIPRU would remove the need for

cross-referencing to other parts of the Handbook. We will consider this issue

as a separate exercise. Meanwhile, we will continue with cross-referencing to

the source material and use the Tables 4.2B.4 and 4.2C.4 to navigate between

MIPRU and BIPRU.

Operational risk

168. We proposed that there would not be an operational risk requirement. Respondents supported

this approach.

Our response

We are not imposing an operational risk requirement.

Limits denominated in euros

169. Respondents challenged setting limits in euros when the firm’s business was wholly

UK-based.

Our response

The particular references are in BIPRU 3.2.10R and 3.2.19G in respect of the

retail exposure class. We agree that applying euros limits to a business with

predominately sterling assets and liabilities is not proportionate. We will therefore

restate the limit in sterling. The €/£ exchange rate has varied signicantly since

the time the limits were rst set. The limits have also not been updated to capture

ination. To avoid spurious accuracy we have decided to simply translate the limits

so that the €1m limits become £1m limits.

Q49:

Do you have any comments on the proposed restriction in the

eligible capital calculation?

170. One respondent argued that non-banks had the potential to destabilise market confidence

so 25% or 30% of eligible capital should be share capital and reserves less intangible assets

(rather than the 20% proposed).

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171. Other respondents argued that there should be no minimum share capital and reserves

requirement (or in one respondent’s view, at least where subordinated loans were of a

maturity of at least 12 months longer than the corresponding lending to customers). Their

main argument was that subordinated loans, which provide a form of ‘gone-concern’

capital that is effective where a firm winds down its operations rather than continuing,

should be adequate for this business model and better suited to the typical sources of

capital and funding that are available in this market.

Our response

These lenders are signicant market participants and they can cause signicant

consumer detriment. Our view is that we should increase the quality and

quantity of capital required for these lenders to increase their loss absorbency,

which was a key failing across the market during the crisis. Holding a minimum

amount of share capital and reserves should help a rm absorb losses while

either continuing to trade or to help prepare for a more orderly wind-down and

withdrawal from the market.

So we will retain the requirement that at least 20% of eligible capital should be

share capital and reserves less intangible assets.

We have removed the proposed new rules 4.4.1R(3) and (4) from the Instrument

as they are not necessary given that the requirement is set out in rule 4.4.8R.

Q50:

Do you have any comments on this proposed

liquidity regime?

172. Respondents agreed with the proposed qualitative liquidity regime.

Our response:

We are proceeding with the proposed policy as set out in the consultation.

Q51:

Do you have any comments on the proposed scope and

application of the regime?

173. Respondents agreed in principle that the policy should apply for ‘new lending’.

174. Their main concern, however, was the definition of ‘new lending’ for existing borrowers.

Respondents were unanimous in their view that forbearance should not be deemed new

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lending. There was broad agreement that the new requirements should only apply to the

increase and not the whole loan.

175. Some respondents argued that additional borrowing should not include further advances on

existing mortgages or facilities including lifetime mortgages (or equity release), in particular

where a firm is closed to new business. One respondent suggested that ongoing monitoring

of future drawdowns would be administratively burdensome and another suggested

excluding further advances under 10% of existing borrowing.

Our response

Firms that conduct new lending will be subject to the new MIPRU prudential

requirements. Whereas requirements such as eligible capital and the qualitative

liquidity regime will apply to the rm as a whole, the BIPRU credit risk capital

requirements (with the risk weight determined by factors such as the LTV) will

apply only to new lending.

New lending includes the following:

• Any payment of new funds by the rm to the borrower, directly or indirectly,

including a future drawdown on existing facilities, on the basis that such

facilities should be kept under review; and

• Any change to the contractual terms to mitigate the risk of lenders rolling-over

loans and passing it off as old lending. The only exception being if there has

been forbearance, with expected losses fully provided for.

Portable loans where the borrower can change the collateral (e.g. move house)

is not deemed new lending.

Firms that are closed to new business (i.e. in run-off) should not be undertaking

new lending. The new requirements will not apply to such rms. They will be

excluded from the proposed limit in the eligible capital calculation and the

liquidity regime by being subject to a restriction to their permission preventing

them from undertaking new lending.

We regard the use of a de minimis limit, such as 10% of existing borrowing, as an

unnecessary complication and it would create tiering of new lending (i.e. above

and below the 10% limit). We consider that the routine monitoring of future

drawdowns is required to meet our systems and control requirements.

We have expanded Rule MIPRU 4.2A.5R to clarify that where a loan is increased,

the new capital requirement only applies to the increase and not the whole loan.

We have also introduced additional guidance in MIPRU 4.2A.5AG to conrm that

the new capital requirement does not apply to any loans that are acquired by a

rm after the implementation date if they had been made before that date; and

to arrangements made as a result of forbearance procedures.

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Q52: Do you have any comments on the draft rules set out in the

MIPRU instrument at Appendix 1? Do you think the rules

reflect the stated policy intention?

176. The points raised by respondents have been addressed at Q48 to Q51.

Our response

We have amended the drafting of Rule MIPRU 4.2.23R(2) (2)(b)(ii) to clarify that

the 1% charge is not applied to assets that have already been subject to a risk-

based charge under the requirements of MIPRU 4.2A. To achieve this result, the

reference in the rule is to items ‘subject to’ MIPRU 4.2A.4R rather than ‘excluded’

from it.

Equity release

Q53: Do you have any comments on our views, summarised in the

table at the end of this chapter, about the MMR proposals

which are either not applicable or where a straight read across

to the equity release market is appropriate?

177. The majority of respondents agreed with the proposed read-across or had no specific

comments in reply to this question.

Our response

We will proceed with the read-across in our nal rules. Some minor changes to

rules applying to equity release are shown in the table in Annex 2.

Q54:

What are your views on our proposal to treat the equity

release market as a single market for regulatory purposes?

178. The industry already operates as if the equity release market is a single market, so there

was strong support for this proposal, with no objections.

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Our response

We are proceeding with the proposals to treat equity release as a single

relevant market.

Q55:

Do you have any comments on the tailoring we propose in

relation to execution-only sales following rejected advice and

scope of service?

179. The majority of respondents agree with our proposals. Several respondents did not agree

with allowing customers to reject advice, as simply having the product details and a

property value does not demonstrate that the customer fully understands the implications.

Our response

Equity release customers cannot opt-out of advice. However, we do not want to

prevent equity release customers from having the freedom to make their own

choices. To provide what we believe is the right level of protection for equity

release customers, they will all need to go through an advised sales process rst.

This will ensure that they have considered the implications of equity release with

a qualied adviser before they are able to reject the advice and make their own

choice. Because of the nature of the product and the standards imposed by the

industry trade body, we would not expect many equity release sales to be on an

execution-only basis.

Q56:

Is any other tailoring required for the equity release market?

If yes, please explain.

180. Around half of the respondents saw no need for any other tailoring. The main suggestions

from the remaining responses were:

Roll-up of fees and charges

181. Concern was raised over the read-across of our proposal that firms must offer customers a

choice of whether to roll-up fees into the loan and record the customer’s positive election.

Equity release customers are typically releasing equity because they do not have funds available

elsewhere and are unlikely to be able to pay any upfront fees. Having to offer a choice would

mean unnecessary and costly changes to systems, such as producing illustrations.

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Existing customers

182. Several respondents felt that existing equity release customers should have access to certain

types of transaction without the need for advice. Examples given included pre-agreed

increments or drawdown facilities within lifetime mortgages; further releases to home

reversion plans; and moving home without increasing the borrowing.

183. Respondents pointed out that customers are likely to have already received advice about

access to additional funds or drawdown facilities when they first entered into the contract.

They also noted that the amounts involved are often quite small, which means that the cost

of obtaining advice could be disproportionate to the benefit gained by the customer. Finally,

drawdown facilities give quick and easy access to funds. Having to go through an advice

process could considerably slow this down.

Our response:

Roll-up of fees and charges

We agree with the feedback and have changed the application of the rules on

rolling-up fees or charges into the loan so that, where the lifetime mortgage is

structured on an interest roll-up basis from the outset, they do not apply (MCOB

8.3.1R (1)(c)). Where regular payments are involved, the rules would apply

(MCOB 4.4A).

Existing customers

In light of the feedback, we have amended our approach to contract variations

and will not require advice to be given if the total sum outstanding does not

increase. Our rules do not require advice to be given where the customer is

drawing down from an agreed facility, which was part of the original product

recommendation. However, where the total sum outstanding will increase, for

example where there is a new agreement to advance further funds, advice would

be required. Our general approach to contract variations is discussed in Chapter2.

Q57:

Overall, do you have any other comments on our proposed

read-across of the MMR to the equity release market?

184. No substantial comments were made and most respondents were in favour of our overall

approach to reading across the MMR to equity release.

Our response

We are proceeding with the read-across of the MMR to the equity release market.

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Home Purchase Plans

Q58: Do you have any comments on our views, summarised in the

table at the end of this chapter, about those mainstream MMR

proposals which are either not applicable or where a straight

read-across to the Home Purchase Plan market is appropriate?

185. No substantial comments were made in reply to this question.

Our response

We are proceeding with the read-across of the MMR to the Home Purchase Plan

(HPP) market.

Q59:

Do you have any comments on the tailoring we propose in

relation to execution-only Home Purchase Plan sales following

rejected advice and enhancing sales standards?

186. Most respondents were either supportive of our proposals or did not have any comments.

187. A few respondents believe HPP sales should either be on an execution-only basis, or allow

customers to opt-out of advice, because providers only offer one product, which the

customer is either eligible for or not. They believe advice is unlikely to be needed, or is not

possible, because the customer does not have a choice.

Our response

We have not changed the current position on advice set out in our Perimeter

Guidance Manual (PERG 4.6.7 G

). This explains that if the provider offers the

customer only one product, then the seller is implicitly steering the customer

towards that product, and this constitutes regulated advice.

Q60:

Is any other tailoring required for the Home Purchase Plan

market? If yes, please explain?

Q61: Overall, do you have any other comments on our proposed

read-across of the MMR to the Home Purchase Plan market?

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188. The majority of respondents were supportive of our overall approach to HPPs. A number

had commented in response to earlier questions, so did not add any further comments here.

Our response

We are proceeding with the tailored rules for the HPP market.

Sale and rent back

Q62: Do you have any comments on our views, summarised in the

table at the end of this chapter, about those mainstream MMR

proposals which are either not applicable or where a straight

read-across to the Sale and Rent Back market is appropriate?

189. Most respondents were either supportive of our approach or did not have any comments. A

small number of respondents asked us to clarify our advice proposals, as the table we published

in CP11/31 suggests advice can be rejected, while our proposals confirm that it cannot.

Our response

We are proceeding with our proposals that all sales to SRB customers must

be advised.

The table showed that we were adopting a tailored approach to execution-only

for SRB. We thought this would highlight better the fact that SRB customers

cannot reject advice and there is no execution-only route available.

Q63:

Do you have any comments on the tailoring we propose in

relation to not allowing Sale and Rent Back consumers to

reject advice?

Q64: Is any other tailoring required for the Sale and Rent Back

market? If yes, please explain.

Q65: Overall, do you have any other comments on our proposed

read-across of the MMR to the Sale and Rent Back market?

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190. All respondents who commented were strongly in support of the proposals.

Our response

We are proceeding with our proposals for the SRB market.

Bridging finance

Q66: Do you have any comments on our proposal to define a

bridging loan as a regulated mortgage contract with a term

of 12 months or less?

191. The majority of respondents agreed with the proposed definition.

Our response

We are proceeding as proposed.

Q67:

Do you have any comments on how the affordability

proposals should be applied to consumers taking out

bridging finance?

192. The majority of respondents agreed with our read-across of the affordability proposals to

bridging finance.

Our response

We are proceeding as proposed.

Q68:

Do you have any comments on our proposed read-across

of our interest-only proposals to bridging finance?

193. The majority of respondents agreed with our read-across. A few pointed out that it is not

clear how our periodic checking requirement will apply to short-term lending. Others

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commented that repayment strategies for bridging loans will differ from mainstream

mortgages and this needs to be taken into account.

Our response

Given that the loan is for 12 months or less, we do not see a need to check

on the repayment strategy during the term and we have therefore changed

MCOB11.6.49R to make this clear.

Q69:

Do you have any comments on our proposal that lenders

consider the repayment or exit strategy of the borrower,

and have a clear lending policy that reflects this?

194. Respondents were on the whole in favour of our proposals. A number pointed out that

documenting every customer type and every possible exit strategy in a lending policy is

not possible.

195. Concern was raised about lenders obtaining evidence of a guaranteed offer for bridging

loans used for credit repair (see MCOB11.6.53E in Appendix 1). It was felt that this was

not achievable, as normal mortgage lenders will not be able guarantee an offer so far in

advance. They thought this would effectively ban bridging loans from being used for credit

repair purposes.

Our response

We addressed the concern over keeping lending policies up to date with all valid

repayment strategies in CP11/31.

We explained that we would allow lenders

to consider all types of repayment strategy as long as they operated within a

framework of appropriate controls, set out in their lending policy.

Regarding credit repair, we continue to believe that it is highly speculative for a

customer to take out a bridging loan and expect their credit status to be repaired

sufciently to enable them to renance to a mainstream mortgage. So we have

retained the evidential provision MCOB 11.6.53E. Therefore, accepting credit

repair as a repayment strategy, without evidence of a guaranteed offer for

a longer-term contract, would tend to show a breach of MCOB 11.6.41R(1).

Q70:

Do you have any comments on our proposals about extending

bridging finance loans?

17 See paragraph 4.45 to 4.49 in CP11/31.

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196. Almost all respondents agreed with our proposals. A few were concerned that, as the

majority of bridging loans are taken out on a retained interest basis, extending the term

would involve borrowing more money. They felt that it is not clear from our proposals

whether this additional borrowing would be a sale for which advice was required.

197. Some firms involved in HNW and business lending were concerned that these proposals

would apply to some HNW and business loans (particularly secured overdrafts, which

often have an assumed term of 12 months). They felt this would be overly onerous for

these types of lending.

Our response

We recognise that, where the loan is taken on a retained interest basis, an

additional amount is added to the loan when the term is extended. However, this

extra amount is interest on the loan that the customer has already received and

is not additional borrowing.

We have explained in Chapter 2 that, as long as the customer is not taking

out additional borrowing when varying a mortgage contract, then advice does

not need to be given. When the term of a bridging loan is extended without

any additional borrowing, we regard this as a variation that benets from the

exception in MCOB4.8A.10R.

We have amended MCOB11.6.55R so that it does not apply to secured overdrafts

for HNW mortgage customers or loans made solely for a business purpose.

However, as set out in MCOB 11.6.56G, we will expect rms to act honestly, fairly

and professionally, in accordance with the best interests of their customer, when

they extend such loans.

Q71:

Are there any other factors that firms should consider in order

to determine that a bridging loan is appropriate?

198. Most respondents had nothing to add and several expressed their support for the enhanced

consumer protection that our proposals would bring.

Our response

We are proceeding with our proposals.

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Q72: Do you have any comments on our proposal, which requires

that intermediaries who only offer bridging loans should

describe the restriction on their service to the consumer?

199. Most respondents agreed with our proposal. A few were concerned that describing their

service could become complicated or impossible for intermediaries, especially if they have

to name all of the lenders, as some lenders will not be known to all and there is no

comprehensive list. They suggest a higher level explanation of their service.

Our response

We are proceeding as proposed. The intermediary can say that they offer products

from a comprehensive range of providers as long as they can demonstrate access

to a sufciently representative number. If they use a limited panel of lenders, we

would expect them to know their names.

Q73:

Do you have any comments on the proposed prudential regime

for bridging lenders?

200. Responses were polarised. Those not directly involved with the sector, such as mainstream

mortgage lenders and trade bodies, were generally content with the proposals. However,

those directly involved argued strongly that the proposal to apply BIPRU requirements to

these generally smaller-sized firms is not proportionate and for many firms would mean a

significant increase in the capital required. The preference by providers of capital for

subordinated loans means that firms’ ability to raise share capital would be either very

restricted or very expensive.

201. They argued that there have been few failures and the market remained strong in the

downturn, meaning there is no significant risk to be addressed by more complex and

costly requirements.

202. There is also concern that the rules are far too complicated and smaller firms would not be

able to cope without specialist advice.

Our response

We agree there is a risk of consumer detriment in the bridging loan sector and

that the loan periods, while initially short-term, can be and are routinely rolled-

over and extended. The risk-based requirements set out in BIPRU 3 determine

the risk-weights based on LTV not maturity. And while it could be argued that

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in some circumstances the probability of default of a short-dated loan may be

lower, this does not mitigate against event risk, which can happen over a very

short time. There are also other risks that are particular features of bridging

nance (e.g. the inability to nance long-term and repay bridging loans) that

also need to be adequately captured by the risk-weights used. Given this, and

without any evidence to the contrary, the risk-weights applied under BIPRU

3 are deemed to be adequately risk-based. It should also be noted that these

loans, even if short-term, should be subject to adequate ongoing review.

Our response on the navigability and complexity of the rules is also covered by

Q48. Navigational tables have been included (see Tables in MIPRU 4.2B.4 and

4.2C.4) within the draft Handbook text. These cross-reference back to the source

material and provide the means by which to navigate between MIPRU and BIPRU.

As noted in our response to Q48, we continue to consider whether it may be

possible to make the rules more accessible without changing their substance.

Consistent with our response to Q49 on eligible capital, these lenders are

signicant market participants and can cause signicant consumer detriment.

Our view is that we should therefore increase the quality and quantity of capital

required for them to improve their loss absorbency, which was a key failing

across the market during the nancial crisis. The same arguments apply to

bridging loan rms for holding a minimum amount of share capital and reserves,

which should help a rm absorb losses whilst either continuing to trade or to

prepare for a more orderly wind-down and withdrawal from the market. We will

therefore retain the requirement that at least 20% of eligible capital should be

share capital and reserves less intangible assets.

Given this, we will include bridging lenders within the scope of the new

MIPRU requirements.

Q74:

Do you agree with our views, summarised in the table at the

end of this chapter, about the MMR proposals which are either

not applicable or where a straight read-across to the bridging

finance market is appropriate?

203. Most respondents agreed with our summary. One trade body and several lenders are

concerned that our read-across will have a detrimental impact on the bridging market.

They agreed with our aim of protecting vulnerable customers, however, they asked for

greater flexibility to allow for the wide variety of scenarios where bridging can be used.

Suggestions included making advice mandatory for anyone in arrears or who is otherwise

credit-impaired while allowing lenders to make their own risk assessments.

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Our response

We do not believe our rules prevent bridging lenders from lending in a wide

variety of scenarios. We would expect rms’ lending policy to reect the nature

of the market they are in.

Q75:

In addition to the proposed tailoring set out above, is any

other tailoring required for the bridging finance market?

Q76: Overall, do you have any other comments on our proposed

read-across of the MMR to the bridging finance market?

204. A number of respondents commented that the draft rules did not appear to exempt bridging

lenders from having to get evidence of income. Bridging loans are typically repaid on the

sale of a property and there are no payments due during the term.

Our response

In light of the feedback we have changed MCOB11.6.59G to make this clearer.

High net worth and business lending

205. The following sections summarise the feedback received to the questions asked in CP11/31

about high net worth (HNW) and business lending. We have included only brief responses

to some of the feedback here. Further discussion of the responses and full details of our

approach to HNW and business lending is set out in Chapter 4.

Lending to high net worth customers

Q77: What are your views on our approach to high net worth

consumers? Should we adopt a more free-market approach,

recognising that for some consumers, regulation is not needed

to protect them from the decisions they make?

206. Most respondents recognised that HNW customers need a different regulatory approach to

that proposed for the mainstream mortgage market. However, many respondents did not

agree that the wealth of a customer necessarily correlates with financial capability or the

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ability to make sound financial decisions – particularly where wealth is not generated by

the individual concerned, e.g. if inherited or received through a windfall.

207. So, while respondents favoured a more free-market approach than would apply under

the full MCOBrules, most preferred an approach where key consumer protections

would still apply.

Q78:

Would an elective approach similar to that adopted in the

investment market be appropriate?

208. Some lenders and intermediaries favoured an elective approach, where HNW customers

would be able to opt-out of certain elements of regulation. However, for practical reasons,

banks engaged in this sector did not on the whole favour an optional approach. Some

banks felt that discussing the disapplication of consumer protections would not be a

conversation that would fit well in the wider client care ethos of many HNW relationships.

They generally preferred a tailored approach, which would allow consumer protection to

fit with the bespoke process offered to their HNW customers.

Q79:

Would it be appropriate for all mortgage rules to

be foregone?

Q80: Would it be appropriate for all regulatory protections for high

net worth to be foregone or should some, such as redress, for

example, be retained?

209. Some firms favoured disapplying the mortgage rules, particularly where the customer agrees

to this (i.e. through an elective approach). But the majority of respondents, including both

firms and consumer representatives, felt that some consumer protection should apply in all

cases. Many suggested a minimum acceptable level of protection made up of applying the

Principles (such as Principle 6 – ‘treating customers fairly’) and the rules around redress,

compensation and arrears handling.

210. A few respondents commented that if a HNW customer was able to opt-out of some

aspects of regulation (such as advice or the responsible lending rules), they should not

expect to receive consumer protection when things go wrong.

Our response

We have carefully considered the feedback received. We are adopting a tailored

approach to lending to HNW customers, which recognises the characteristics of

this type of lending. We explain our approach in Chapter 4.

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Q81: What are your views on defining high net worth consumers – what

do you consider the appropriate figures for income and assets?

211. The majority of respondents agreed with the proposed net assets definition (£3m), although

some larger banks favoured a lower amount. However, many respondents felt that the

proposed net income threshold (£1m) was much too high. They thought that this level of

income was extremely uncommon, and did not correlate to the wealth levels of customers

likely to have net assets of £3m.

212. Most suggestions for a more appropriate net income threshold ranged between £300,000

and £500,000. A few respondents, including some trade bodies, suggested aligning our

definition with the Consumer Credit Act (CCA) definition that applies to second charge

lending (income of £150,000 or net assets of £500,000), for the sake of consistency

between the two regimes. Some saw gaming opportunities if we did not do this (i.e.

customers fitting the CCA definition might take small first charge mortgages and top

them up with large second charge mortgages, to avoid our rules).

213. Many respondents questioned how the income and assets figures should be met. For example:

whether net assets can include the main residence; how the requirements apply to joint

applicants; and how joint assets are treated.

Our response

In response to feedback, we have reconsidered the proposed denition of a

HNW mortgage customer, and are amending it to a net income of £300,000 or

net assets of £3m. At least one applicant must meet this denition in their own

right. We explain more about the denition in Chapter 4.

Q82:

Do you agree that it is appropriate to extend the definition to

include high net worth consumers acting as guarantors?

214. Respondents had mixed views about this proposal. They felt HNW guarantors merited a

different approach to guarantors in the mainstream market. But some saw heightened risks

for HNW guarantors if mortgage regulation was disapplied – given that the lending was

not advanced for their benefit, but that they would still be responsible for the loan.

Our response

We are extending our denition to include customers whose obligations are

guaranteed by a person who meets the HNW criteria.

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We are not disapplying our mortgage rules, but adopting a tailored approach to

HNW lending. Guarantors meeting the HNW denition will be subject to the same

affordability assessments as HNW mortgage customers.

Q83:

Do you have any comments on how the affordability proposals

should be applied to high net worth consumers?

215. Many respondents (both lenders and intermediaries) saw the need for flexibility in affordability

assessments for HNW customers, given that such assessments often consider the wider financial

position of the customer, beyond just their income (e.g. assets and wealth available to them

through structures such as trusts).

216. Respondents also had concerns about the expenditure approach proposed for the

mainstream market. They thought that when dealing with very wealthy customers, it is

irrelevant and unnecessary to consider expenditure down to the level of utility bills.

217. Therefore, most respondents thought a different approach to affordability assessments

would be necessary for HNW customers, either through disapplying the affordability

assessment rules, or applying some kind of tailored approach.

Our response

We are applying a tailored approach to affordability assessments for HNW

mortgage customers. We discuss this in more detail in Chapter 4.

Q84:

Do you have any comments on our proposal to extend the

tailored disclosure rules to high net worth consumers?

Q85: Do you think that to achieve this, an elective approach similar

to that adopted in the investment market would

be appropriate?

218. The majority of respondents were in favour of extending the tailored disclosure rules to

HNW customers. However, several lenders active in the HNW market considered that,

while the tailored disclosure rules will help them to some extent, some HNW mortgage

products will still not fit with our disclosure requirements, and therefore the tailored

approach may not greatly diminish their need for waivers to some disclosure rules. A small

number of respondents felt that all rules, including disclosure rules, should be forgone for

HNW lending.

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219. Respondents did not express strong views about whether the tailored disclosure should be

achieved through an elective approach.

Our response

We are proceeding with the tailored approach to disclosure for HNW mortgage

customers. As with the existing business lending provisions, rms can opt to

apply all of the tailored disclosure provisions, or to ignore them and apply the full

disclosure rules. But they cannot chose to apply some tailored disclosure provisions

and not others. It is up to the lender to decide which approach to adopt.

We are making some small adjustments to the HNW disclosure rules about

the trigger points for providing a KFI (see MCOB5.4.18BR(2)) in light of the

amended approach to the HNW execution-only sales process.

Q86:

Do you agree with our views summarised in the table at the

end of this chapter about the MMR proposals which are either

not applicable or where a straight read-across to high net

worth lending is appropriate?

220. The majority of respondents agreed with the view summarised in this table, subject to their

views about the wider regulation of HNW lending, as discussed in responses to Q77 to Q85.

221. Some comments were made on the relevance of particular rules to HNW lending.

These included:

• the difficulty of reading across the execution-only rules to HNW lending, due to the

non-commoditised nature of HNW mortgages, which would prevent customers from

being able to specify the product characteristics required by MCOB4.8A.14R before

arranging a sale on an execution-only basis; and

• the short-term nature of some HNW mortgages, which might result in the need to

apply some of the bridging loan requirements.

Our response

We have taken this feedback into account when developing the tailored approach

to HNW lending. For example, we have adapted the HNW execution-only rules

to recognise the nature of HNW mortgages, therefore we are not requiring HNW

mortgage customers to specify the product details that would normally be required.

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As we discuss in Chapter 4, we are also making an exception from the rules

around extending the term of a bridging loan (MCOB11.6.55R) for secured

overdrafts made to HNW mortgage customers.

Q87:

In addition to the proposed tailoring set out above, is any

other tailoring required for high net worth lending? If yes,

please explain.

Q88: Overall, do you have any other comments on our proposed

read-across of the MMR to high net worth lending?

222. No further issues of substance were raised in response to these questions.

Business lending

Q89: What are your views on our approach to business lending?

Should we adopt a similar approach to that proposed for high

net worth consumers, recognising that for some consumers,

regulation is not needed to protect them from the decisions

they make?

223. Respondents’ views were polarised. Lenders and trade bodies strongly supported some

form of carve-out, but consumer representatives were very concerned about the risks this

would pose.

224. Those in favour of a carve-out thought that business borrowers were better able to make

financial decisions. They felt the MMR proposals would not be easily transferable to

business lending, as they do not recognise the way business banking works, or reflect the

differences between regular mortgages and secured business lending. For example, the

requirement to assess income does not recognise that, for business lending, payments can be

made through the resources of the business, rather than the income of the borrower. When

assessing the affordability of a loan made to a business, many factors are taken into

account, such as historic trading performance and future expectations, cash flows, business

commitments and the drawing requirements of the borrower – rather than the personal

income and expenditure of the borrower.

225. Some lenders thought that mortgage regulation can cause unnecessary delays (e.g. while

disclosure documents are produced), which they think can be confusing for the customer,

while adding no significant benefits – particularly as the speed of execution can also be

vital to some business lending.

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226. Respondents also felt that the application of the proposed MMR requirements would be

disproportionately onerous given the very small proportion of business lending that is

regulated. Several lenders felt that the difficulty and costs of developing compliant processes

may lead some lenders to withdraw from regulated business lending.

227. In contrast, consumer representatives thought that the MMR requirements would be vital

to ensure that small business owners and sole traders are protected. They disagreed that

these customers are able to better protect themselves, because it can be difficult for them to

separate out their personal and business affairs, therefore affecting their ability to make

objective financial decisions.

228. Consumer representatives were also particularly concerned that a carve-out would create a

loophole for gaming, by providing an opportunity to bypass affordability checks, and

undermine the ban on self-certification mortgages.

229. Various options for carving out business lending were suggested, but there was no clear

consensus view. Some supported a complete carve-out of regulation for all business

lending. Some supported a partial carve-out (e.g. with some aspects of consumer

protection, such as arrears handling, continuing to apply). Others felt a tailored approach

could work if, for example, the affordability and advice proposals were more relevant to

the needs of business lending.

230. An elective approach was not generally favoured, as respondents felt that our affordability

proposals in their current form were completely inappropriate for business lending.

Q90:

How would we draw a line between those business borrowers

able to take the risk and those who are not?

231. Most respondents thought that it would be very difficult to draw a line between business

borrowers who are able to take the risk and those who are not – with no clear correlation

between, for example, the size of a business and its capacity to understand risks.

232. However, several suggestions were made about where to draw the line. These included:

• Turnover. Protection might be required where annual turnover was low, for example,

below £250,000.

• Type of business. Sole traders might need more protection than other business types.

• Loan size. Smaller loans might need more protection.

• Loans made within a business banking relationship. Loans made through a business

banking relationship to a business might need less protection, on the grounds that the

business is likely to have a degree of financial sophistication, and the bank will apply

an appropriate underwriting process.

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• Purpose of loan. Loans made solely for a business purpose could be treated in a

different way to loans for a mixed use (e.g. a business and personal purpose).

Q91:

How would we prevent this proposal from being exploited as a

means of circumventing our affordability proposals?

233. Common suggestions included that the lender should have clear evidence that the loan is

for a business purpose, or that business loan advances should only be paid into a business

bank account.

234. Banks who offer business lending believed they already have sufficient safeguards in place

to prevent any gaming, as lending is typically done through managed relationships where

the lender already knows and understands the businesses they are lending to. They thought

this would be difficult to exploit.

235. Consumer representatives reiterated their concern that the risk of gaming is too great. They

thought that the only way to protect against exploitation is to insist that affordability

checks apply equally to all types of mortgage borrowing, including for business purposes.

Therefore, they thought that business loans should not be exempt, or be allowed to opt-out

of our affordability requirements

Q92:

Would it be appropriate for all mortgage rules to be foregone

or should some, for example the arrears rules, be retained?

236. Responses to this question were mixed. Around half supported a carve-out for business

lending from our mortgage rules, although the majority of these respondents agreed that

the MCOB13 arrears rules should be retained.

237. The remaining respondents felt strongly that MCOBprotections should apply to business

lending as it is secured on the borrower’s main residence and therefore the borrower is

equally (if not more) at risk.

Our response

We have given careful consideration to the feedback received. We recognise that

some of the MMR proposals, particularly in relation to responsible lending and

advice, are not workable for business lending and that business borrowers are

generally more nancially capable. However, we have not been convinced that

business lending should be entirely carved out of mortgage regulation.

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We have therefore developed a tailored approach to business lending, which

recognises the particular characteristics of business lending where this differs

from mainstream residential mortgages.

We set out details of this approach in Chapter 4.

Q93:

Do you have any comments on how the affordability proposals

should be applied to business borrowers?

238. Many respondents thought the affordability proposals should not be applied to business

borrowers. Business loans are underwritten based on an assessment of the business, rather

than an individual customer, and therefore our affordability proposals do not work.

Our response

We have taken this feedback into account when developing the tailored approach to

business lending, which recognises that the loan may be repaid through the resources

of a business rather than, or as well as, the personal resources of an individual.

Q94:

Do you have any comments on the proposed approach to

professional standards in business lending?

239. The majority of respondents agreed that business lending staff should be excluded from the

requirement to obtain a professional mortgage qualification. They were supportive of including

them in the training and competency regime, which would require firms to ensure individuals

selling business loans are competent to do so.

Our response

We are proceeding with our proposed approach to professional standards in

business lending.

Q95:

Do you agree with our views summarised in the table at the

end of this chapter about the MMR proposals which are either

not applicable or where a straight read-across to business

lending is appropriate?

240. Responses to this question generally disagreed with the read-across of proposals to business

lending, for the reasons outlined above.

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Our response

We have taken respondents comments into account when developing our tailored

approach to business lending.

Q96:

In addition to the proposed tailoring set out above, is

any other tailoring required for business lending? If yes, please

explain.

241. No other substantive issues were raised.

Q97:

Overall, do you have any other comments on our proposed

read-across of the MMR to business lending?

242. Some comments were made on the relevance of particular rules to business lending.

These included:

• the difficulty of reading across the execution-only rules to business lending, due to the

non-commoditised nature of business mortgages, which would prevent customers from

being able to specify the product characteristics required by MCOB4.8A.14R before

arranging a sale on an execution-only basis; and

• the rules around extending the term of a bridging loan may apply to some secured

business overdrafts caught within the definition of a bridging loan.

Our response

We have taken this feedback into account when developing the tailored approach

to business lending. As with HNW lending, we have adapted the execution-only

rules to recognise that it may not be possible for mortgage applicants to specify

the product details that would normally be required. We are also making an

exception for secured business overdrafts from the rules around extending the

term of a bridging loan (see MCOB11.6.55R).

Q98:

Do you have any comments on the draft rules specific to

niche mortgage markets in the draft Mortgage Market

Review (Conduct of Business) Instrument 2012 at

Appendix 1? Do you think the rules reflect the stated policy

intention?

243. No other substantive comments were made that have not been picked up in previous questions.

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Cost Benefit Analysis (CBA)

Q99: Do you have any comments on our estimates for the impacts

of the affordability assessment? Do you have any data and/or

analyses that could be informative about these impacts?

Q100: Do you have any comments on our estimates for the impacts

of the interest rate stress test? Do you have any data and/or

analyses that could be informative about these impacts?

Q101: Do you have any comments on our estimates for the impacts

of the interest-only proposals? Do you have any data and/or

analyses that could be informative about these impacts?

Q102: Do you have any comments on our estimates of the combined

impacts of the responsible lending requirements? Do you have

any data and/or analyses that could be informative about

these impacts?

Q103: Do you have any comments on our estimates for the lending

impacts of the responsible lending requirements? Do you have

any data and/or analyses that could be informative towards

estimating these impacts?

Q104: Do you have any views on whether this balance between

winners and losers is acceptable, given the importance of

the protection obtained by the winners?

244. Responses to these questions were largely overlapping and we have therefore summarised

the responses together.

245. Respondents recognised the difficulty of modelling the mortgage market and the inherent

uncertainty in the available data and analysis. Most respondents were complimentary about

the level and detail of analysis which has gone into the CBA.

246. Overall impacts – Respondents mainly criticised the use of a number of key assumptions in

modelling the responsible lending and the well-being impacts. Respondents raised concerns

about whether the results are reliable given these assumptions. However, despite these

concerns, most respondents said that the estimated size of the impacts of the responsible

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lending proposals appeared to be reasonable. None of the respondents provided data or

additional analysis on the impact of the proposals.

247. Some specific issues were raised regarding measuring the impacts of the

affordability assessment, the interest rate stress test, the interest-only proposals

and the well-being analysis.

248. Affordability assessment – Some respondents commented that the ‘Quality of

Underwriting’ methodology was based on the assumption that the proposals correctly

target unaffordable lending. They argued that this may not be the case in practice,

especially in the short and medium term, when there will be great uncertainty on how

the rules will be supervised. A couple of respondents argued that uncertainty about

implementation and supervision of the proposals will lead to higher impacts as lenders

may be overly cautious in their lending decisions.

249. Interest rate stress test and interest-only proposals – A number of respondents questioned

our decision to revert back to the Debt-Service-Ratio methodology for the modelling of the

interest rate stress test and interest-only proposals. They argued that this adds a further

level of approximation to the estimates. One respondent considered that short-term loans

will be more impacted by the interest-only proposals.

250. Well-being analysis – A number of respondents advocated the need for further explanation

of the methodology behind the well-being analysis. One consumer representative questioned

our choice of methodology and commissioned two reviews of the methodology. Those

reviews provided useful insights and suggestions, but we felt that neither provided a viable

alternative that we could have adopted in the circumstances. Apart from this respondent,

the majority of consumer representatives were supportive of the results.

251. In CP11/31 we also explained that the Executive and Board of the FSA had accepted the

balance of winners and losers from the MMR on the basis of our CBA. Some respondents

also asked for further detail behind this judgement.

Our response

We have been fully transparent in CP11/31 about the need to make a number

of key assumptions in estimating the impacts of MMR, including the well-

being study. The CBA was very complex and any such estimates are inherently

uncertain. The CBA we presented sets out our best estimate of these effects, and

of the expected change in consumer welfare which might result. The basis for

estimating benets was that the proposals would successfully target unaffordable

lending in about 30% of cases.

We explained the reasons why we used the Debt-Service-Ratio (DSR) methodology

for modelling the interest rate stress test and interest-only proposals. Using

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the ‘Quality of Underwriting’ methodology to model the impact of the interest

rate stress test and interest-only proposals would have been very complex. We

also stressed that DSR is used as a proxy rather than as a precise measure of

affordability. We also explained the reasons why a traditional welfare analysis was

not carried out and the limitations of the well-being analysis.

Overall, there is no evidence from the responses that the impacts recorded in the

CBA for the responsible lending proposals are likely to be materially different to

what was estimated.

Other CBA responses

252. In relation to the advice proposals, a number of respondents argued that we have

underestimated the compliance costs of removing the non-advised sales process. Respondents

argued that the requirement to give advice in the vast majority of interactive sales will

extend the timing of the sales process and will lead to recruitment costs as well as higher

salary levels. Some respondents argued that these proposals could result in the competitive

environment being changed. One respondent also stated that removing the fast-track process

will be very costly.

Our response

Since the consultation closed we have had further discussions with a number

of respondents. We believe that some of the criticism regarding the costs of

the advice proposals is based on an incorrect understanding of the proposals.

However, we have updated our compliance cost estimate. The updated estimate

is reected in the CBA summary in Annex 3 of this Policy Statement.

Equality impact assessment

253. In CP11/31 we presented our initial assessment of the impact our proposals will have on

the various groups with protected characteristics (gender, disability, age, pregnancy and

maternity, race, religion and belief, transgender and sexual orientation). This took into

account feedback we had received from previous consultations. We asked several further

questions (Q105 to Q118 in CP11/31) on the issues identified.

254. Overall, respondents agreed that our proposals do not result in direct discrimination for

any of the groups. No new concerns were identified, but there were several issues over

indirect discrimination that respondents felt required further consideration.

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255. We have now completed our final equality impact assessment, which takes into account

all of the comments in response to all of our MMR consultations. This can be found in

Annex 5.

Age

Q105: Do you have any comments on the age-related issues discussed

above?

Q106: Are there any other age-related impacts from our proposals not

highlighted above? If yes, please provide details.

256. Consumer groups believe the MMR reforms will benefit older customers by preventing

them from taking unaffordable mortgages into retirement, thereby avoiding financial

problems following a drop in income in the future.

Our response

We agree with this assessment. We want to prevent older customers carrying

unaffordable debt into retirement.

Responsible lending proposals

257. Concerns were raised over the requirement for lenders to consider future changes in income

and expenditure, as this may result in them applying tighter criteria to older customers.

Equally, a requirement for lenders to assess the repayment strategy for interest-only

mortgages may mean some older customers cannot get a new mortgage or remortgage. This

is because lenders may not accept the eventual sale of the property as a repayment strategy.

This could push older customers towards more expensive sources of borrowing.

258. In addition, a requirement to verify income could prevent younger customers who do not

have an income history from obtaining a mortgage. This is because lenders may set

minimum periods on the length of time a customer must have been in their existing

employment (e.g. six months for employed applicants, two years for self-employed, etc.).

Our response

Lenders must consider whether the customer can continue to afford the

mortgage following a known change in their income, such as at retirement. Our

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aim is to prevent unaffordable lending in retirement, not to prevent all lending

into retirement.

Our analysis has established that our proposals affect rst-time buyers (FTBs)

less than other groups of customers. This is because lenders have always taken

a more stringent view when underwriting loans to FTBs as they do not have a

repayment history. We do not require any xed minimum periods of employment

under the MMR.

Advice

259. Some consumer representatives were worried that requiring advice in all equity release sales

may force financially capable consumers to go through a lengthy process that they do not

want. Equity release customers should not be described as ‘vulnerable’ as it suggests they

are less financially capable.

Our response

We do not regard equity release customers as less capable. In fact our research

suggests the opposite. They are vulnerable, however, to the wider and longer

term implications of equity release on which they need appropriate advice.

The industry already recognises the importance of advice and almost all equity

release sales are advised due to the code of conduct imposed by the Equity

Release Council.

Professional standards

260. There was some concern that a requirement for all intermediaries to obtain a qualification

could be difficult for older advisers and for younger people entering the industry.

Our response

We continue to believe that customers are entitled to expect anyone selling

mortgages to be appropriately qualied, regardless of their age.

Disability

Q107: Do you have any comments on the disability-related issues

discussed above?

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Q108: Are there any other disability-related impacts from

our proposals not highlighted above? If yes, please

provide details.

Evidence of income

261. Concern was raised that disabled customers receiving benefits, or in part-time or irregular

work, may find it more difficult to provide evidence of sources of income that are

acceptable to lenders.

Our response

In making their affordability assessments, we allow rms to take account of

income derived from sources other than employment, which could include

benets, for example. We are not prescriptive about the type of evidence that

lenders may accept.

Interest-only repayment strategies

262. Many disabled home-owners have interest-only mortgages where the loan will be repaid

following the eventual sale of the property. Concerns were raised in previous consultations

that disabled customers may not be able to demonstrate a repayment strategy for their

interest-only mortgage that is acceptable to lenders as a result. This is particularly relevant

to the HOLD scheme, where lending is typically on an interest-only basis.

Our response

We have already acknowledged that customers may have a wide variety of

repayment strategies. We do not prevent lenders from accepting the eventual sale

of the property as the repayment strategy, providing the customer is not relying

on a speculative strategy, such as property price increases.

Access to non-interactive channels

263. Visually impaired customers, or those with hearing problems, may find it difficult to

access non-interactive channels such as the internet. There was concern that by making

execution-only available through non-interactive channels, we may be forcing customers

with certain disabilities into taking advice.

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Our response

Firms have a duty to make reasonable adjustments so that all customers can

access their services. These adjustments should make it possible for disabled

customers to use the non-interactive channels, such as the internet. We

understand that it may be more difcult, but not impossible, for disabled people

to use these channels.

Transitional arrangements

264. Concern was raised that disabled customers requiring alterations to their home may not be

able to borrow additional funds because of our transitional arrangements.

Our response

We considered making an exception for disabled people borrowing funds for

essential alterations. However, we are concerned about the practical difculties

in identifying when such an exception would apply. We are also concerned about

the potential abuse of such an exception and the detriment to customers if they

are unable to afford the additional lending. Our rules do not prevent lenders

from lending additional funds to disabled customers, provided the appropriate

affordability checks are completed.

Professional standards

265. There was some concern that a requirement for all intermediaries to obtain a qualification

could prove difficult for disabled advisers.

Our response

As we have said previously, qualication and training providers have a duty under

legislation to provide alternative means of obtaining qualications.

Gender

Q109: Do you have any comments on the gender-related issue

discussed above?

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Q110: Are there any other gender-related impacts from our proposals

not highlighted above? If yes, please provide details.

266. Concern has been raised that our proposals may have a negative impact on women, as

they make up more of the temporary workforce. This may cause problems for them in

establishing regular income to support a mortgage. Lenders may not accept income from

part-time or temporary contracts, or women may find it more difficult to provide evidence

of sources of income that are acceptable to lenders.

Our response

We are not prescriptive about the type of income or evidence that lenders can

accept. Our rules do not prevent lenders accepting income from part-time work or

temporary contracts.

Pregnancy and maternity

Q111: Do you have any comments on the pregnancy and maternity-

related issue discussed above?

Q112: Are there any other pregnancy and maternity-related impacts

from our proposals not highlighted above? If yes, please

provide details.

Evidence of income

267. There was concern that pregnant customers or those on maternity leave or taking career

breaks may find it more difficult to provide evidence of income that is acceptable to lenders.

Our response

Lenders are subject to equalities and discrimination legislation and should not

have processes that discriminate against customers in this way.

Future changes to income

268. A number of lenders and their trade bodies were concerned that the requirement to take into

account future changes to income and expenditure may conflict with lenders’ obligations

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under equalities legislation, as they would have to ask women about the potential impact of

pregnancy and maternity leave on their income.

Our response

Our requirements do not conict with lenders’ duties under equalities and

discrimination legislation. There is no reason why lenders can’t ask applicants a

high-level question about future changes to their circumstances. If the customer

replies they are pregnant, or planning to start a family, or are taking maternity

leave, then the lender is not prevented from asking specic questions about how

the customer expects their income and expenditure to change, as long as their

approach is in line with their approach to other types of customer in situations

where future income and expenditure might be changing.

Faith or belief

Q114: Do you have any comments on the religion-related issues

discussed above?

Q115: Are there any other religion-related impacts from

our proposals not highlighted above? If yes, please

provide details.

269. There was a concern that, for Islamic Home Purchase Plans, removing the requirement

for an Initial Disclosure Document (IDD) could have a negative impact. It might mean

that Islamic customers would not receive information on the product’s compliance with

Sharia Law.

Our response

Firms can continue to use the IDD or any other method of disclosure to inform

customers of important information such as compliance with Sharia Law.

Other protected characteristics

Q113: Are there any race-related impacts from our proposals

that we should consider? If yes, please provide details.

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Q116: Are there any sexual orientation-related impacts from

our proposals not highlighted above? If yes, please

provide details.

Q117: Are there any transgender-related impacts from our proposals

that we should consider? If yes, please provide details.

270. Respondents agreed with our assessment that there is no impact on Race, Sexual

Orientation, Gender Reassignment or Marital Status. No new concerns were identified for

these groups.

Data

Q118: Do you have access to, or know of, any statistics regarding

the mortgage needs and habits of groups with protected

characteristics that could help us with our analysis? If yes,

please provide details.

271. Respondents did not come forward with any additional statistics regarding the mortgage

needs and habits of the groups with protected characteristics. However, a number offered

to help us monitor the ongoing impacts by gathering data.

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Table of changes from the

draft rules to the final rules

General

This table shows the changes we have made from the draft rules (published in CP11/31) to the final

rules to clarify points raised in responses to the consultation.

This table only shows significant changes to the text and not changes to the numbering, as these are

only a consequence of provisions being added or removed.

Glossary

Handbook reference Comment

Execution-only sale The definition has been expanded to include a variation of an existing home

finance transaction.

High net worth

mortgage customer

The definition has been expanded from ‘high net worth customer’ in order to

distinguish mortgage customers from customers of other services and products.

Interest roll-up

mortgage

The words ‘or anticipated’ have been added so that lifetime mortgages that

allow the customer to avoid rolling up the interest by making voluntary

payments are not captured.

Payment shortfall The words ‘during the term of’ have replaced ‘under’ to make it clear when the

payments would be due.

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Business lending and high net worth

Draft MCOBrule Final MCOBRule Comment

Throughout the

MMR instrument

Throughout the MMR

instrument

Some references to loans for business purposes in the new rules

have been changed to refer to loans solely for business purposes.

This change makes it clear that if any part of a mortgage is not

for business purposes, the new rules that apply to the sales

process and responsible lending for business lending do not apply.

References to high net worth customers throughout MCOBhave

been changed to ‘high net worth mortgage customers’ in line

with the new glossary term.

The section headings ‘Business loans and loans to high net worth

customers’ have been changed to ‘Business loans and loans to

high net worth mortgage customers: tailored provisions’ to make

it clearer which sections contain the tailored provisions (mainly

relating to disclosure).

1.2.3R Same The new text ‘or an elective business customer’ has been deleted

to reflect our revised approach to business lending set out in

Chapter 4.

1.2.3A R 1.2.3B R This rule sets out how MCOBapplies to joint borrowers or

potential borrowers where at least one of them is a high net

worth mortgage customer.

1.2.4G Same This explains where the tailored provisions for business loans

and high net worth mortgage customers can be found in each

chapter of MCOB.

N/A 1.2.4A G

and

1.2.4B G

These explain the application of tailored and other provisions

for high net worth mortgage customers and transactions for

business purposes.

N/A 1.2.5G This explains that the firm has responsibility in determining

whether the mortgage is for business purposes.

N/A 1.2.9B G We have added this guidance to explain that firms have greater

flexibility when dealing with professional customers.

1.2.9-A R 1.2.9C R This has been expanded to allow firms to use evidence already in

their possession as evidence that a customer is a high net worth

mortgage customer.

N/A 1.2.9D R We have added this rule to make it clear that firms must obtain

a credible business plan from the customer before treating the

loan as being solely for a business purpose.

N/A 1.2.9E R We have added this rule to make it clear that firms must

obtain credible evidence from the customer that they meet the

definition before treating them as a professional customer.

1.2.9 –B R 1.2.9F R This sets out the record keeping requirement for the three

preceding rules.

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Advised sales

Draft MCOBrule Final MCOBRule Comment

4.2.1G (2)(c) Same This has been expanded to include loans solely for

business purposes.

N/A Before

4.4A.2R

The heading ‘Range of products’ has been added.

N/A Before

4.4A.8R

The heading ‘Basis of remuneration’ has been added.

4.7A.1G (2) Same This has been redrafted and expanded to include variations of

existing regulated mortgage contracts.

4.7A.1G (3) Same This has been expanded to refer firms to the guidance in PERG

4.6, which sets out what is meant by regulated advice.

N/A 4.7A.1G (4) We have added this new provision in relation to contract

variations, to clarify that execution-only is permitted for

certain variations which do not involve additional borrowing.

4.7A.4G 4.7A.4G (1) The reference to Principle 9 has been removed as the guidance

elaborates on the specific rule to which it refers.

N/A 4.7A.4G (2) We had added this new provision to make it clear that firms

are not precluded from advising a customer to enter into a

different mortgage if their initial advice is rejected.

4.7A.5R (3) Same This has been redrafted to make the rule clearer.

4.7A.6R (8) Same We have replaced ‘credit profile’ with ‘credit history’ to reflect

that customers may not be aware of their profile held by credit

reference agencies and that intermediaries do not generally

have access to this information.

4.7A.24R Same This has been expanded to clarify that where advice is rejected

the customer may enter into a different mortgage on an

execution-only basis.

Execution-only sales

Draft MCOBrule Final MCOBRule Comment

4.8A.1G Same This has been expanded to include varying an existing

regulated mortgage contract and to refer firms to the guidance

in PERG 4.6, which sets out what is meant by regulated advice.

4.8A.2G Same This has been expanded to include variations of existing

regulated mortgage contracts and where the loan is solely for

business purposes.

4.8A.3G Same This has been expanded to provide guidance on internet sales.

4.8A.6G Same This has been expanded and redrafted to make the guidance

clearer.

N/A 4.8A.9R This new provision makes it clear that 4.8A.7R does not

apply to high net worth mortgage customers, and 4.8A.7R(3)

does not apply to professional customers and loans solely for

business purposes.

N/A 4.8A.10R This new provision sets out when execution-only is permitted

for contract variations.

N/A 4.8A.11G This is new guidance to give examples of contract variations

and rate changes and to remind firms when our rules on advice

will apply.

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N/A 4.8A.12R This makes it clear that 4.8A.7R does not apply when advice

has been rejected.

4.8A.9G 4.8A.13G This makes it clear when and how the exceptions in 4.8A.7R

apply.

4.8A.10R 4.8A.14R This has been changed to cater for the new provisions at

4.8A.10R and 4.8A.7R.

N/A 4.8A.15R This specifies which of the execution-only requirements apply

for business lending and high net worth mortgage customers.

4.8A.11R 4.8A.16G Part (1) has been integrated into 4.8A.14R. Part (2) has been

changed to guidance.

4.8A.14R 4.8A.17R This has been expanded to make it clear firms must have a

policy that includes the steps they would take if they exceed

the expected levels of execution-only sales.

4.8A.15R 4.8A.18R This has been expanded to confirm that the record keeping

period applies also from the date of a variation.

N/A 4.8A.19R This new provision makes it clear that the restrictions in

MCOB4.8A do not apply in forbearance cases.

Disclosure

Draft MCOBrule Final MCOBRule Comment

5.4.1R,

5.4.2R

and

5.4.3R

N/A The proposed changes are not required and have been removed

from the final rules.

5.4.18B R

and

5.5.1R (2)

Same These rules have been expanded to provide for the contract

variation execution-only sales route and the tailored execution-

only sales route for high net worth mortgage customers and

loans that are solely for a business purpose.

Home Purchase Plans

Draft MCOBrule Final MCOBRule Comment

4.10.5C G Same The reference to Principle 9 has been removed as the guidance

elaborates on the specific rule to which it refers.

4.10.9D R (2) N/A Removed to bring the execution-only requirements for home

purchase plans in line with 4.8A.14.

5.8.1R (2) (e) and

5.8.13R

Same We have changed the references from 4.8A.10R to

MCOB4.10.9DR in these provisions to make the execution-only

requirements clearer for Home Purchase Plans.

Equity Release

Draft MCOBrule Final MCOBRule Comment

8.2.2G (2) (d) Same This has been expanded to allow for the exceptions set out

in 8.6A.5R.

8.3.1R Same We have added (c) to make it clear the affordability rules in

MCOB4.6 only apply to a lifetime mortgage if payments are

being made by the borrower.

8.3.4R Same This makes clear the execution-only rules in MCOB4.8A are

modified by MCOB8.6A for equity release sales.

Annex 2

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Financial Services Authority A2:5October 2012

Equity Release

8.6A.4R

Same This has been expanded to clarify the conditions for execution-

only sales, including the exceptions for rate switches and

variations. This is a read across of changes to 4.8A.

N/A 8.6A.5R This makes it clear that 8.6A.4R does not apply to rate

switches and contract variations.

N/A 8.6A.6G This new guidance gives examples of rate switches and

variations that benefit from the exception in 8.6A.5R. The

guidance also reminds firms that steering the customer towards

a product such as to constitute advice would not benefit from

the exception.

8.6A.5R 8.6A.7R (1) This has been expanded to allow for the exception in 8.6A.5R.

8.6A.7R 8.6A.9R The record keeping requirements have been expanded to include

information about rejected advice that precedes an execution-

only sale.

N/A 8.6A.10R This new provision makes it clear that the restrictions in

MCOB8.6A do not apply in forbearance cases.

N/A 9.3.1R (2) This has been changed to make it clear how the modification

table in 9.3.2R applies to equity release transactions.

9.3.2R Same The table has been expanded to make it clearer how the

changes to the disclosure rules in MCOB4 and 5 should be read

for equity release transactions.

Responsible lending, and responsible financing of home purchase plans

Draft MCOBrule Final MCOBRule Comment

N/A Throughout

MCOB11

References to further advances have been removed and replaced

with ‘variation’ or ‘variations’. Further advances are a type of

variation so it is clearer and simpler to refer to all variations.

Our approach to variations is set out in Chapter 3.

11.4.4R N/A This has been deleted in line with the above.

11.6.1G Same This has been expanded to explain certain rules are modified for

high net worth mortgage customers and loans that are solely

for a business purpose.

11.6.2R Same This has been expanded so that the assessment of affordability

rule applies to variations as well as new mortgages and

guarantors as well as borrowers.

N/A 11.6.3R This new rule reflects that the affordability assessment rule

does not apply if no additional borrowing is being taken

on beyond the current amount outstanding, and there is no

change to the terms of the mortgage that would impact on

affordability.

The rule also makes it clear that the affordability requirements

in 11.6.2R do not apply in forbearance cases.

N/A 11.6.4E Linked to the above, this provides that not treating certain

changes to the mortgage as not impacting on affordability may

be relied on as tending to show a breach of 11.6.2R.

11.6.6R 11.6.8R This has been expanded to reflect that firms must obtain

evidence of income with all variations, not just further

advances. We have also added a requirement that evidence of

income must be subject to appropriate anti-fraud controls.

Annex 2

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Annex X

A2:6 Financial Services Authority October 2012

Responsible lending, and responsible financing of home purchase plans

11.6.7G 11.6.9G Text has been added to make it clear that income can be

derived from sources other than employment, such as pensions

or investments.

11.6.8R 11.6.10R (3) has been reworded to clarify what the basic quality-of-living

costs are.

11.6.9G 11.6.11G This has been expanded to make clear the cost of a repayment

strategy does not need to be included as committed expenditure

if affordability has been assessed on a capital and interest

basis.

11.6.12R 11.6.14R This has been amended to require firms to take into account

future changes that there will be or are likely to be (rather than

that there may be).

11.6.13G 11.6.15G (2) has been expanded to reflect that post-retirement changes

to income should be taken into account either where the term

extends beyond the customer’s expected retirement date, or

beyond state pension age if their expected retirement date is

not known.

11.6.14R 11.6.16R This has been changed to allow firms to use either approach

(set out in CP11/31) to debt consolidation mortgages for

credit-impaired customers.

11.6.16R 11.6.18R The words ‘beginning of’ have been replaced with ‘expected

start of’ to make it reflect that the lender will not know the

exact start date of the mortgage.

11.6.18R 11.6.20R We have made an amendment to allow a firm’s responsible

lending policy to be contained in more than one document.

We have also replaced ‘board’ with ‘governing body’ so that an

appropriate body can approve the firm’s lending policy instead

of the main board of the firm.

11.6.20R

and

11.6.21G

11.6.22R

and

11.6.23G

These provisions have been expanded to make it clearer how

firms should monitor their lending against their policy.

11.6.22R 11.6.24R This has been expanded to reflect that the review of a firm’s

lending policy must be by their internal audit function if they

have one, or their compliance function if they don’t (or in

either case an outsourced equivalent).

N/A 11.6.25R

11.6.32R

These set out the alternative responsible lending requirements

for loans that are solely for a business purpose.

Our approach to business lending is set out in Chapter 4.

N/A 11.6.33R to

11.6.39R

These set out the alternative responsible lending requirements

for loans to high net worth mortgage customers.

Our approach to high net worth mortgage customers is set out

in Chapter 4.

11.6.28G 11.6.45G This has been expanded to include regular deposits into a

savings product as an example of a repayment strategy that may

be acceptable.

Annex 2

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Mortgage Market Review: Feedback on CP11/31 and final rules

Financial Services Authority A2:7October 2012

Responsible lending, and responsible financing of home purchase plans

11.6.29E (3) 11.6.46E (3) This has been expanded to clarify when the sale of the

customer’s main residence may be acceptable as a repayment

strategy.

11.6.30G 11.6.47G ‘at the time of consideration’ has been added to make the

guidance clearer.

11.6.31R 11.6.48R This has been expanded to reflect that alternative provisions

for high net worth mortgage customers and loans solely for a

business purpose may apply when assessing the affordability of

an interest-only mortgage.

11.6.32R 11.6.49R A review of the repayment strategy during the term is not

required for bridging loans.

11.6.38R 11.6.55R This has been expanded to reflect that this rule does not apply

when extending the term of a bridging loan if it is a secured

overdraft for a high net worth mortgage customer or is used

solely for a business purpose.

N/A 11.6.56G Linked to the above, this guidance has been added to remind

firms of their responsibilities towards the customer.

11.6.39R 11.6.57R This has been expanded to clarify none of the affordability

provisions applicable to MCOB11.6.2R apply to interest

roll-up mortgages.

11.6.41G 11.6.59G The words ‘or anticipated’ have been added to reflect the change

in the glossary definition of an interest roll-up mortgage.

11.6.42R (2) 11.6.60R (2) This has been expanded to allow for the alternative provisions

for high net worth mortgage customers and loans solely for a

business purpose.

11.6.42R (2) 11.6.60R (3) This has been expanded to reflect that firms must keep details

of their attempts made to contact the customer.

11.6.42R (5) 11.6.60R (5) Part (b) has been deleted to reflect the revised record keeping

requirements.

11.6.42R (6) 11.6.60R (6) This has been changed to reflect in the record keeping

requirements the changed transitional arrangements rules.

11.6.42R (7) 11.6.60R (7) This has been changed to reflect that firms should keep

a record of their lending policy for as long as mortgages

underwritten under that policy remain outstanding.

N/A 11.8.1E This is a new provision to ensure firms treat their existing

customers fairly if they cannot remortgage.

Transitional arrangements

Draft MCOBrule Final MCOBRule Comment

11.7.1R to 11.7.7R 11.7.1R to 11.7.5G We have updated the section on transitional arrangements to

reflect other changes shown above and to confirm our final

position.

Our approach to transitional arrangements is set out in

Chapter 3.

Annex 2

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Mortgage Market Review: Feedback on CP11/31 and final rules

Annex X

A2:8 Financial Services Authority October 2012

Arrears, payment shortfalls and repossessions

Draft MCOBrule Final MCOBRule Comment

13.3.4A R Same This has been expanded to clarify that firms must not

automatically add a payment shortfall to the loan if the impact

would be material.

N/A 13.3.4AA R Linked to the above, this new rule explains the circumstances

where the impact would be material.

13.3.9R Same This has been expanded to clarify that any discussions about

arrears or payment shortfalls should be recorded.

Other parts of the handbook

Draft MCOBrule Final Rule Comment

MCOBSchedule 1

Sch 1.3G

Same This has been expanded to make it clear what the firm’s records

should contain, when the records should be made and for how

long they should be kept, including the extended record keeping

requirements that apply to MCOB 11.

This has also been changed to reflect other changes in

MCOBshown in this table.

N/A SUP 16 Annex 18BG This has been modified to reflect the fact that firms are no

longer required to describe their service using ‘labels’. When

mortgage firms are asked whether they offer advice for different

categories of product ranges, they should simply answer ‘No’ for

each category.

Non-bank mortgage lenders capital requirement

Draft MIPRU rule Final MIPRU Rule Comment

4.2.23R(2)(b)(ii) 4.2.23R(2)(b)(ii) Amended to clarify that the 1% charge is not applied to assets

subject to a risk-based charge under the requirements of

4.2A.4R

4.2A.1R 4.2A.1R Deleted reference in the rule to credit risk capital requirement

as it is not necessary.

4.2A5R 4.2A5R and

4.2A.5’A G

4.2A.5R expanded to clarify the new requirement only applies

to the increase and not the whole loan. Additional guidance

introduced in 4.2A.5AG to confirm that the new requirement

does not apply to loans acquired by the firm after the

implementation date if they had been made before that date;

and to arrangements made as a result of forbearance.

4.2A.8R 4.2A.8R The references to €1 million in BIPRU 3.2.10R and 3.2.19G are

replaced by £1 million as applying Euro limits to a business

with predominately sterling assets and liabilities is not

proportionate.

4.2D.9(3) 4.2D.9(3) Requirement introduced for the written record to be made as

soon as practicable after the test has been performed.

4.4.1R(3) and (4) N/A Proposed 4.4.1R (3) and (4) removed as not necessary given the

requirement is set out in 4.4.8R.

N/A Schedule 1 Record keeping requirements in respect of the stress tests

required under 4.2D.9R(3) are set out in this Schedule.

Annex 2

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Mortgage Market Review: Feedback on CP11/31 and final rules

Financial Services Authority A3:1October 2012

Annex 3

Cost benefit analysis

1. The respondents to the Cost Benefit Analysis (CBA) in CP11/31 felt that the estimated size

of the impacts of the responsible lending proposals appeared reasonable. The changes made

to the transitional arrangements described in Chapter 3 do not materially change the results.

2. Regarding the advice proposals, a number of respondents felt that we had underestimated

the compliance costs of removing the non-advised sales process. The policy approach has

been amended in light of the feedback, as described in Chapter 2. We have updated our

compliance costs estimate as set out below to reflect our changed approach and the

feedback received.

3. The approach to high net worth (HNW) lending also does not materially affect the CBA.

We noted in the CBA of CP11/31 that the impacts of the MMR on mortgage finance for

business development may be negative, but that we lacked the data to quantify these

impacts. The proposed approach to business lending is likely to mitigate potential negative

impacts. There is, however, still no data available to quantify the impacts on mortgage

finance for business development.

4. We therefore believe that our CBA as set out in CP11/31 remains valid, subject to the revised

compliance cost estimate for the advice proposals. The high-level CBA conclusions are

restated below together with a regional breakdown of the impacts, as requested in feedback.

The overall impact on borrowers

5. The affordability assessment, the interest rate stress test and the interest-only proposals

together are estimated to affect 2.5% of borrowers in subdued market conditions and

11.3% in boom market conditions. Figure 1 shows the combined impact of the affordability

assessment, interest-rate stress and the interest-only proposals, as well as of two other

combinations and of the affordability assessment by itself.

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Annex X

A3:2 Financial Services Authority October 2012

Annex 3

Figure 1 – Responsible lending proposals – estimated total proportion of

borrowers affected

6. Our analysis of the affordability assessment alone shows that its impact is minimal in the

subdued period. In both the subdued and the boom period, the impact is less on first-time

buyers (FTBs) than on remortgagors. Throughout the sample period, the greatest impact is

on self-certified borrowers and the credit-impaired, with credit-impaired by far the most

affected. Because many self-employed borrowers were self-certified, there is also a

significant impact on this group from the affordability assessment in the boom period.

Regional impacts on borrowers

7. Figure 2 shows the combined impact of the responsible lending proposals by region. For all

borrower categories, except self-certified borrowers and credit-impaired borrowers, Greater

and Central London, the South-East and the South-West are the regions that are most

affected by the responsible lending proposals both in the boom and subdued period.

8. For self-certified borrowers, the North-East is most affected by the responsible lending

package over the boom period and the South-East over the subdued period. For credit-

1 The incremental impact of the interest-rate stress and interest-only proposals together (2.5% in subdued, 7.7 % in boom) is greater

than the sum of the incremental impacts of the interest-rate stress and the interest-only proposals (1.8% in subdued, 6.6% in boom).

This is due to the interest-only and interest-rate stress tests proposals acting together to affect borrowers who would not be affected

by either of the two proposals alone. For example, an interest-only borrower may pass an affordability assessment with the interest-

rate stress, and may also pass an affordability assessment with the interest-only proposals, but not pass an affordability assessment

where both the interest-rate stress and the interest-only proposals are applied. Modelling the combined impact of the three proposals

together captures further borrowers.

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Financial Services Authority A3:3October 2012

Annex 3

impaired borrowers, Wales is most affected by the responsible lending package over the

boom period and Northern Ireland over the subdued period.

Figure 2 – Responsible lending proposals – proportion of borrowers affected

in different regions

10%

12%

14%

16%

18%

UnknownScotland North

West

North

East

Yorkshire

and The

Humber

EasternEast

Midlands

West

Midlands

WalesNorthern

Ireland

South

East

Central &

Greater

London

South

West

Boom Subdued

Compliance costs from the MMR

9. In CP11/31 we explained that we expect the total ongoing compliance costs of the MMR

proposals to range between £47m and £170m a year and total one-off costs to be between

£40m and £65m.

10. In light of the consultation feedback, we have updated the compliance cost estimate for the

advice proposals. On the basis of research that Oxera conducted for us and the Council of

Mortgage Lenders, in CP11/31, we expected one-off compliance costs of this proposal to be

around £0.8m and ongoing compliance costs to be around £1m. However, we have revised

our estimate to take into account the fact that some lenders have a much larger percentage of

non-advised sales at the moment and may need to recruit additional staff. We now expect one-

off compliance costs to be around £2.8m and ongoing compliance costs to be around £3m.

11. Therefore we now expect the total ongoing compliance costs of the MMR proposals to range

between £49m and £172m a year and total one-off costs to be between £42m and £67m.

2 The regional impact of the individual requirements is slightly different to the overall impact. We set out the differences below:

• The affordability assessment alone impacts Northern Ireland, Wales and the North-East more than the other regions over both

periods in the sample.

• When the interest only rule is added to the affordability assessment Wales and Northern Ireland remain the most impacted regions

while Central and Greater London replaces the North-East over the boom period. In the subdued period the most impacted

regions are Central and Greater London and the South.

• When the interest rate stress test rule is added to the affordability assessment the impact shifts to Central and Greater London,

Wales and West Midlands over the boom period. In the subdued period, Central and Greater London remains highly impacted

followed by the South-East and the South-West.

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Financial Services Authority A4:1October 2012

Annex 4

List of non-confidential

respondents to CP11/31

Arbuthnot Latham & Co. Limited

Association of Accounting Technicians

Association of Bridging Professionals

Association of Finance Brokers

Association of Mortgage Intermediaries

Association of Short Term Lenders

Aviva

Baigrie Davies

Bank of Ireland

Bath Investment & Building Society

Brian Bollen

Bridgewater Equity Release Limited

British Bankers Association

Building Societies Association

C Hoare & Co

Chartered Institute of Housing

Chartered Institute of Taxation

Citizens Advice

Clive Jones

Co-operative Banking Group

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A4:2 Financial Services Authority October 2012

Council of Mortgage Lenders

Coventry Building Society

Cumberland Building Society

Daniel Burn

Darlington Building Society

David Turner

Defaqto Limited

Duncan Lawrie Limited

EA Consulting Group

EFG Private Bank Limited

Ecology Building Society

Enness Private Clients

Evan Owen

Experian

Finance & Leasing Association

Financial Services Consumer Panel

Frank Eve Consulting Limited

Furness Building Society

GE Money Home Lending

Gentoo Genie Limited

Genworth Financial

Graham Radband

Home Saver Mortgage Lifeline

IFS School of Finance

Ian Watters

Institute of Certified Practising Accountants

Institute of Chartered Accountants in England and Wales

Intermediary Mortgage Lenders Association

Annex 4

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Financial Services Authority A4:3October 2012

Ipswich Building Society

Jackson Cohen Associates Limited

Jeremy Foster

Karel Herman

Key Retirement Solutions Limited

Knight Frank Finance LLP

Leeds Building Society

Lloyds Banking Group

London & Country Mortgages

Lonsdale Mortgages Limited

Loughborough Building Society

Mansfield Building Society

Marsden Building Society

Metcalf Moat IFA Limited

Money Advice Trust

National Association of Commercial Finance Brokers

National Counties Building Society

National Housing Federation

Newbury Building Society

Nottingham Building Society

Openwork Limited

Paragon Group of Companies

Penrith Building Society

Permjit Singh

Prudential

Quantum Alpha Limited

rightmortgageadvice.co.uk

Royal Bank of Scotland Group

Annex 4

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Annex X

A4:4 Financial Services Authority October 2012

RS Mortgage Consultancy

SA Compliance

Santander UK plc

Scottish Building Society

Sesame Bankhall

Shelter

SHIP

Skipton Building Society (including Homeloan Management Limited)

SPF Private Clients

St James’s Place Wealth Management

Stephen Holroyd

Stonehaven

Teachers Building Society

Tenet Group Limited

The Association of Professional Compliance Consultants

The Association of Taxation Technicians

The Chartered Insurance Institute

The Consumer Council for Northern Ireland

The Mortgage & Insurance Shop

Thornhill Solutions Limited

Towergate Financial/John Charcol

Trisha Justin

Virgin Money

West Bromwich Building Society

Which?

Yes Financial Services Limited

Yorkshire Building Society

Annex 4

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Financial Services Authority A5:1October 2012

Annex 5

Equality Impact

Assessment (EIA)

1. What are the main and secondary aims, purposes and outcomes of

this policy/function?

The mortgage market has worked well for most consumers. However, the lead up to the

financial crisis (2005 to 2007) saw poor lending practices, which led to a significant tail of

consumers facing the distress of arrears and repossessions. The Mortgage Market Review

(MMR) has two broad aims:

• to have a mortgage market that is sustainable for all participants; and

• to have a flexible market that works better for consumers.

The MMR can be broken down into the following sets of proposals, which are designed to

meet these aims, mainly through changes to our conduct of business requirements:

• responsible lending;

• distribution and disclosure;

• arrears management; and

• niche markets.

The outcome, in broad terms, will be to ensure the continued provision of mortgage credit

for the great majority of consumers who can afford it, while preventing the re-emergence of

the tail of poor lending practices, which led to consumer detriment.

2. Is this policy/function related to other policies or areas of work?

Non-deposit taking lenders

The MMR proposes the introduction of a new prudential regime for non-deposit taking

mortgage lenders, which is based on the relevant parts of BIPRU. Respondents to CP11/31

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Annex X

A5:2 Financial Services Authority October 2012

did not raise any equality or diversity concerns about these prudential requirements. An

initial assessment was completed prior to consultation and as no new issues were raised we

have concluded there are no equality or diversity implications.

3. What are the main activities, stages or steps of this policy/

function?

Below is a high-level summary of all the MMR policy proposals.

Arrears management practices

• Firms must not apply a monthly arrears charge where an agreement is already in place

to repay the arrears.

• Payments by customers in financial difficulties must first be allocated to clearing the

missed monthly payments, rather than to arrears charges, which can be repaid later.

• Firms must consider all options for borrowers. Repossessions should always be the

last resort.

• All telephone calls regarding arrears handling must be recorded and kept for three years.

Rules bringing the above into effect came into force on 25 June 2010. Rules for the

remaining proposals below are not yet in force.

Approved Persons

All mortgage advisers and those who arrange mortgage sales will be individually held

accountable and required to demonstrate they are ‘fit and proper’.

Responsible lending

• Affordability assessment. Lenders must verify income and demonstrate the mortgage is

affordable for the borrower, taking into account income and expenditure. This includes

any known future changes to income and expenditure.

• Interest rate stress test. Lenders must take into account market expectations of possible

future interest rate increases.

• Interest-only mortgages.

• Lenders must assess affordability on a capital and interest repayment basis unless

there is a clear repayment strategy in place to repay an interest-only mortgage. If

affordability is assessed on an interest-only basis, the lender must take into account

the cost of the repayment strategy.

Annex 5

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Financial Services Authority A5:3October 2012

• Lenders must obtain evidence of the repayment strategy.

• Lenders must contact borrowers at least once during the mortgage term to check

on the status of the repayment strategy.

• Transitional arrangements. Lenders will be allowed to waive certain affordability rules

for existing mortgage holders where it is responsible and appropriate to do this.

• Lenders must have in place a responsible lending policy, which has been approved by

their governing body, which sets out their approach to all of the above.

Distribution and disclosure

Advice. All vulnerable consumer groups (those purchasing equity release, right-to-buy,

sale and rent back and those consolidating debt) must get advice. All other borrowers

must get advice if the sale involves interaction between the lender and consumer, except

for high net worth (HNW), professional and business borrowers who can elect for an

execution-only service.

Execution-only. Consumers can reject advice (except in sale and rent back sales) and

purchase on an execution-only basis. Non-interactive sales (for example via the internet)

may be execution-only. Consumers must know precise details of the product and the loan

they require in order to proceed. Execution-only can also be used for post-sale contract

variations (for example if porting to a new property) providing no new money is advanced.

Sales standards. Firms have additional responsibilities to borrowers regarding further

advances and the rolling-up of fees.

Professional standards. All mortgage intermediaries must hold a relevant mortgage qualification.

Service disclosure. The Initial Disclosure Document (IDD) is no longer required. Instead

firms must explain whether there are any limitations in the product range they provide and

how they will be remunerated.

Product disclosure. The Key Facts Illustration (KFI) does not need to be produced until the

product has been recommended/chosen, or the consumer requests it.

Arrears management

Arrears charges. Lenders must not attempt to collect more than two direct debits in a month.

Concessionary rates. Lenders must not remove borrowers from concessionary interest rates

if they have difficulties meeting their mortgage payments.

Annex 5

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Annex X

A5:4 Financial Services Authority October 2012

Niche markets

The proposals summarised above will be read across to the niche markets where

appropriate, with some limited tailoring to reflect the particular nature of those markets.

4. Who is primarily impacted by your policy/function?

Are there any secondary people impacted by it?

Any other relevant stakeholders?

• All home finance providers and administrators.

• All home finance intermediaries.

• All consumers buying home finance products.

5. What evidence (e.g. data, research or consultation) is available to

analyse the impact of this policy/function?

MMR consultations

• DP09/3

• FS10/1

• CP10/2

• PS10/9

• CP10/16

• CP10/28

• CP11/31 (which includes feedback on responses to the previous two consultations as

well as new questions)

• This Policy Statement, which includes feedback on responses to the EIA questions

in CP11/31

Data

• MMR Data Pack published with DP09/03

• Updated MMR Data Pack published with CP11/31

• Updated MMR Data Pack published with this Policy Statement

Annex 5

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Financial Services Authority A5:5October 2012

6. How will this policy/function impact each group?

Protected

characteristics

Positive

impact

Negative

impact

Reason

(list findings from data listed in question 8)

Y = We anticipate our

proposals have an impact

N = We anticipate our

proposals have no impact

Gender N N Concern has been raised that our proposals may have

a negative impact on women, as they make up more

of the temporary workforce. This may cause problems

for them in establishing regular income to support a

mortgage. Lenders may not accept income from part-

time or temporary contracts, or women may find it more

difficult to provide evidence of sources of income that

are acceptable to lenders.

Our response

We are not prescriptive about the type of income or

evidence that lenders can accept. Our rules do not prevent

lenders accepting income from part-time work

or temporary contracts.

Race N N No concerns were identified.

Disability N N The following concerns have been raised.

1. Evidence of income

Disabled consumers receiving benefits, or in part-time

or irregular work, may find it more difficult to provide

evidence of sources of income that are acceptable

to lenders.

Our response

In making their affordability assessments, we allow firms

to take account of income derived from sources other than

employment, which could include benefits, for example.

We are not prescriptive about the type of evidence that

lenders may accept.

2. Interest-only repayment strategies

Disabled borrowers may not be able to demonstrate a

repayment strategy for their interest-only mortgage

that is acceptable to lenders, if they are relying on the

eventual sale of the property (e.g. on death). This is

particularly relevant to the home ownership for people

with Long-term Disabilities (HOLD) scheme, where

lending is typically on this basis.

Annex 5

PS12/16

Mortgage Market Review: Feedback on CP11/31 and final rules

Annex X

A5:6 Financial Services Authority October 2012

Our response

We do not prevent lenders accepting the eventual sale of

a property as a repayment strategy, provided the consumer

is not relying on a speculative strategy for their plan to

work, such as property price increases.

3. Access to non-interactive channels

Some disabled consumers such as the visually impaired

may find it difficult to access non-interactive channels

such as the internet. There was a concern that by

making execution-only sales only available through non-

interactive channels, we may be forcing consumers with

certain disabilities into taking advice.

Our response

Lenders have a duty to make reasonable adjustments so

that all consumers can access their services. This applies

to all products not just mortgages and includes non-

interactive channels such as the internet. We understand

that it may be more difficult, but not impossible, for

disabled people to use these channels.

4. Transitional arrangements

Disabled consumers requiring alterations to their home

may not be able to borrow additional funds because of

our transitional arrangements.

Our response

We considered making an exception for disabled people

borrowing funds for essential alterations. However,

we are concerned about the practical difficulties in

identifying when such an exception would apply. We are

also concerned about the potential abuse of such an

exception and the detriment to consumers if they are

unable to afford the additional lending. Our rules do not

prevent lenders from lending additional funds to disabled

borrowers, provided the appropriate affordability checks

are completed.

5. Professional standards

A requirement for all intermediaries to obtain a

qualification could prove difficult for disabled advisers.

Our response

Qualification and training providers have a duty under

legislation to provide alternative means of obtaining

qualifications.

Annex 5

PS12/16

Mortgage Market Review: Feedback on CP11/31 and final rules

Financial Services Authority A5:7October 2012

Age Y N Positive impacts

Consumer groups believe the MMR reforms will benefit older

borrowers by preventing them from taking unaffordable

mortgages into retirement, thereby avoiding financial

problems following a drop in income in the future.

Our response

We agree with this assessment. We want to prevent older

consumers carrying unaffordable debt into retirement.

Negative impacts

The following concerns have been raised:

1. Responsible lending proposals

The requirement for lenders to consider future changes

in income and expenditure may result in them applying

tighter criteria to older borrowers. Equally, a requirement

for lenders to assess the repayment strategy for interest-

only mortgages may mean some older borrowers cannot

obtain a new mortgage or remortgage. This is because

lenders may not accept the eventual sale of the property

as a repayment strategy. This could push older consumers

towards more expensive sources of borrowing.

In addition, a requirement to verify income could prevent

younger borrowers who do not have an income history

from obtaining a mortgage. This is because lenders may

set minimum periods on the length of time a consumer

must have been in their existing employment, (e.g.

six months for employed applicants, two years for self-

employed, etc.)

Our response

Lenders must consider whether the borrower can continue

to afford the mortgage following a known change in their

income, such as at retirement. Our aim is to prevent

unaffordable lending in retirement, not to prevent all

lending into retirement.

Our analysis has established that our proposals impact

less on first-time buyers (FTBs) than on other groups of

consumers. This is because lenders have always taken a

more stringent view when underwriting loans to FTBs as

they do not have a repayment history. We do not require

any fixed minimum periods of employment under the MMR.

Lending policy is a commercial matter for firms.

Annex 5

PS12/16

Mortgage Market Review: Feedback on CP11/31 and final rules

Annex X

A5:8 Financial Services Authority October 2012

2. Advice

Requiring advice in all equity release sales may force

financially capable consumers to go through a lengthy

process that they do not want. Equity release consumers

should not be described as ‘vulnerable’ as it suggests

they are less financially capable.

Our response

We do not regard equity release consumers as less

capable. In fact our research suggests the opposite.

They are vulnerable, however, to the wider and longer

term implications of equity release on which they need

appropriate advice.

The industry already recognises the importance of advice

and almost all equity release sales are advised due to the

code of conduct imposed by the Equity Release Council

(formerly SHIP), the trade body of equity release firms.

3. Professional standards

A requirement for all intermediaries to obtain a

qualification could prove difficult for older advisers

and for younger people entering the industry.

Our response

Consumers are entitled to expect anyone selling mortgages

to be appropriately qualified, regardless of their age.

Sexual orientation N N No concerns were identified.

Faith or belief N N There was a concern that for Islamic Home Purchase

Plans removing the requirement for an IDD could have a

negative impact. It would mean that Islamic consumers

would not receive information on the product’s

compliance with Sharia Law.

Our response

Our rules do not prevent firms from using the IDD or

any other method of disclosure to inform customers of

important information such as compliance with Sharia Law.

Gender

reassignment

N N No concerns were identified.

Marital status N N No concerns were identified.

Annex 5

PS12/16

Mortgage Market Review: Feedback on CP11/31 and final rules

Financial Services Authority A5:9October 2012

Pregnancy,

maternity and

carers

N N There were two concerns raised.

1. Evidence of income

Pregnant customers or those on maternity leave or

taking career breaks may find it more difficult to provide

evidence of income that is acceptable to lenders.

Our response

Lenders are subject to equalities and discrimination

legislation and should not have processes that discriminate

against customers in this way.

2. Future changes to income

The requirement to take into account future changes

to income and expenditure may conflict with lenders’

obligations under equalities legislation, as they would

have to ask women about the potential impact of

pregnancy and maternity leave on their income.

Our response

Our requirements do not conflict with lenders’ duties

under equalities and discrimination legislation. We have

explained in the EIA Annex of the Policy Statement how

firms should approach questioning mortgage borrowers

about future changes to income in a way that is not

discriminatory.

7. Action plan

The following actions apply to all impacts identified in the table above.

1. The MMR implementation team will review rms lending policies as the new rules

come into force. Their review will include how lenders implement our rules regarding:

• evidence of income;

• known future changes to income; and

• interest-only repayment strategies.

2. The impacts will be reviewed as part of a post-implementation review, which we will

carry out 24 to 60 months after implementation.

3. As we reported in CP11/31, reporting by mortgage rms is being reviewed. Collecting

data to help us monitor equalities impacts will be considered in the review, so that such

data does not need to be collected manually.

Annex 5

PS12/16

Mortgage Market Review: Feedback on CP11/31 and final rules

Annex X

A5:10 Financial Services Authority October 2012

8. What steps were considered to regularly monitor the effects of this

policy/function on people or the changes proposed and which

action will be taken if any negative impacts arise with its

implementation?

We will monitor the ongoing impact of our proposals on the protected groups through:

• our Product Sales Data (PSD), which can provide some limited data (for example

on age);

• complaints data from the Financial Ombudsman Service (FOS);

• reviews of firms’ lending policies by Supervision;

• continued contact with external stakeholders such as the Government Equalities

Office (GEO);

• continued contact with industry stakeholders such as the Council of Mortgage Lenders

(CML) and Building Societies Association (BSA); and

• a post-implementation review.

Actions in the event of any negative impacts:

• Supervision will assess the impact;

• we will communicate with stakeholders such as FOS, GEO, CML and BSA; and

• we will communicate with firms and consumers to clarify our rules where required.

9. Summary agreed with policy/function owner to be given to

decision makers

Responses confirm that the changes to our rules do not result in direct discrimination

against any of the protected groups. There is clearly some concern that mortgage firms

could interpret our rules in such a way that certain protected groups find it more difficult

to obtain mortgages.

To protect consumers as much as possible against this we will be checking, through our

supervision of the mortgage market, that firms do not introduce lending policies that

are discriminatory.

We have established working relationships with a number of stakeholders and will stay in

contact with them to monitor the impact of our rule changes as they are implemented. This

will also allow us to respond quickly if any negative impacts come to light.

Annex 5

PS12/16

Mortgage Market Review: Feedback on CP11/31 and final rules

Financial Services Authority A5:11October 2012

Pregnancy,

maternity and

carers

N N There were two concerns raised.

1. Evidence of income

Pregnant customers or those on maternity leave or

taking career breaks may find it more difficult to provide

evidence of income that is acceptable to lenders.

Our response

Lenders are subject to equalities and discrimination

legislation and should not have processes that discriminate

against customers in this way.

2. Future changes to income

The requirement to take into account future changes

to income and expenditure may conflict with lenders’

obligations under equalities legislation, as they would

have to ask women about the potential impact of

pregnancy and maternity leave on their income.

Our response

Our requirements do not conflict with lenders’ duties

under equalities and discrimination legislation. We have

explained in the EIA Annex of the Policy Statement how

firms should approach questioning mortgage borrowers

about future changes to income in a way that is not

discriminatory.

7. Action plan

The following actions apply to all impacts identified in the table above.

1. The MMR implementation team will review rms lending policies as the new rules

come into force. Their review will include how lenders implement our rules regarding:

• evidence of income;

• known future changes to income; and

• interest-only repayment strategies.

2. The impacts will be reviewed as part of a post-implementation review, which we will

carry out 24 to 60 months after implementation.

3. As we reported in CP11/31, reporting by mortgage rms is being reviewed. Collecting

data to help us monitor equalities impacts will be considered in the review, so that such

data does not need to be collected manually.

Annex 5

8. What steps were considered to regularly monitor the effects of this

policy/function on people or the changes proposed and which

action will be taken if any negative impacts arise with its

implementation?

We will monitor the ongoing impact of our proposals on the protected groups through:

• our Product Sales Data (PSD), which can provide some limited data (for example

on age);

• complaints data from the Financial Ombudsman Service (FOS);

• reviews of firms’ lending policies by Supervision;

• continued contact with external stakeholders such as the Government Equalities

Office (GEO);

• continued contact with industry stakeholders such as the Council of Mortgage Lenders

(CML) and Building Societies Association (BSA); and

• a post-implementation review.

Actions in the event of any negative impacts:

• Supervision will assess the impact;

• we will communicate with stakeholders such as FOS, GEO, CML and BSA; and

• we will communicate with firms and consumers to clarify our rules where required.

9. Summary agreed with policy/function owner to be given to

decision makers

Responses confirm that the changes to our rules do not result in direct discrimination

against any of the protected groups. There is clearly some concern that mortgage firms

could interpret our rules in such a way that certain protected groups find it more difficult

to obtain mortgages.

To protect consumers as much as possible against this we will be checking, through our

supervision of the mortgage market, that firms do not introduce lending policies that

are discriminatory.

We have established working relationships with a number of stakeholders and will stay in

contact with them to monitor the impact of our rule changes as they are implemented. This

will also allow us to respond quickly if any negative impacts come to light.

PS12/16

Mortgage Market Review: Feedback on CP11/31 and final rules

We have previously explained that, as part of our future mortgage market work, we will be

reviewing the data collected from firms. As part of this review we will be considering data

to help us monitor mortgage activity by the protected groups.

10. Policy/function owner

Lynda Blackwell

11. Critical assessor

Thomas Francis

12. Date EIA completed

10 September 2012

PS12/16

Mortgage Market Review: Feedback on CP11/31 and final rules

Appendix 1

Made rules

(legal instrument)

PS12/16

Mortgage Market Review: Feedback on CP11/31 and final rules

Made rules– Mortgage Market

Review (Conduct of Business)

Instrument 2012

FSA 2012/46

MORTGAGE MARKET REVIEW (CONDUCT OF BUSINESS) INSTRUMENT 2012

Powers exercised

A. The Financial Services Authority makes this instrument in the exercise of the

following powers and related provisions in the Financial Services and Markets Act

2000 (“the Act”):

(1) section 138 (General rule-making power);

(2) section 149 (Evidential provisions);

(3) section 156 (General supplementary powers); and

(4) section 157(1) (Guidance).

B. The rule-making powers listed above are specified for the purposes of section 153(2)

(Rule-making instruments) of the Act.

Commencement

C. (1) Part 2 of Annex D to this instrument comes into force on 26 October 2012.

(2) The remainder of this instrument comes into force on 26 April 2014.

Amendments to the Handbook

D. The modules of the FSA’s Handbook of rules and guidance listed in column (1) below

are amended in accordance with the Annexes to this instrument listed in column (2)

below.

(1) (2)

Glossary of definitions Annex A

Training and Competence sourcebook (TC) Annex B

Conduct of Business sourcebook (COBS) Annex C

Mortgages and Home Finance: Conduct of Business

sourcebook (MCOB)

Annex D

Supervision manual (SUP) Annex E

Professional Firms sourcebook (PROF) Annex F

Amendments to material outside the Handbook

E. The Perimeter Guidance manual (PERG) is amended in accordance with Annex G to

this instrument. The general guidance in PERG does not form part of the Handbook.

Citation

F. This instrument may be cited as the Mortgage Market Review (Conduct of Business)

Instrument 2012.

By order of the Board

27 September 2012

FSA 2012/46

Page 2 of 138

Annex A

Amendments to the Glossary of definitions

In this Annex, underlining indicates new text and striking through indicates deleted text,

unless otherwise stated.

Insert the following new definitions in the appropriate alphabetical position. The new text is

not underlined.

bridging loan

a regulated mortgage contract which has a term of twelve

months or less.

credit-impaired customer

a customer who:

(a) within the last two years has owed overdue payments, in

an amount equivalent to three months’ payments, on a

mortgage or other loan (whether secured or unsecured),

except where the amount overdue reached that level

because of late payment caused by errors by a bank or

other third party; or

(b) has been the subject of one or more county court

judgments, with a total value greater than £500, within

the last three years; or

or bankruptcy order which was in force at any time

within the last three years.

direct deal

a home finance transaction that can only be obtained direct from

a home finance provider, and where that home finance provider

is not the selling firm.

execution-only sale

(a) a home finance transaction entered into by a firm with,

or arranged by a firm for, a customer; or

(b) a variation of an existing home finance transaction

entered into by a firm with, or arranged by a firm for, a

customer;

where the firm does not give advice on home finance

transactions to that particular customer, or where the customer

has rejected such advice given by the firm.

high net worth mortgage

customer

a customer with an annual net income of no less than £300,000

or net assets of no less than £3,000,000, or whose obligations are

guaranteed by a person with an income or assets of such amount.

high net worth illustration

an illustration for a regulated mortgage contract to a high net

FSA 2012/46

Page 3 of 138

worth mortgage customer.

high net worth offer

document

an offer document for a regulated mortgage contract to a high

net worth mortgage customer.

initial contact

the first occasion when a firm is in contact with the customer and

may perform any of the following in relation to a home finance

transaction:

(a) advising on the transaction;

(b) arranging (bringing about) the transaction; or

arranging (bringing about) the transaction.

interest roll-up mortgage

an interest-only mortgage under which neither capital

repayments, nor payment of any of the interest accruing under its

terms, are required or anticipated until it comes to an end,

whether on expiry of the term (if any), discharge of the mortgage

or the happening of some other event.

payment shortfall

the outstanding amount to be paid measured against the amount

of payments which have become due during the term of a

regulated mortgage contract or home purchase plan, including

any arrears amount due.

professional customer

a customer who works or has recently worked in the home

finance sector for at least one year in a professional position,

which requires knowledge of the home finance transactions or

home finance services envisaged, and who the firm reasonably

believes to be capable of understanding the risks involved in the

transaction or transactions contemplated.

Amend the following definitions as shown.

combined initial

disclosure document

information about the breadth of advice, scope of advice or

scope of basic advice and the nature and costs of the services

offered by a firm in relation to either:

(a)

two or more of the following:

i) packaged products or, for basic advice,

stakeholder products that are not a group

personal pension scheme or a group stakeholder

pension scheme (but only if a consultancy charge

will be made);

(b ii) non-investment insurance contracts;

(c iii) regulated mortgage contracts home finance

FSA 2012/46

Page 4 of 138

transactions (other than lifetime mortgages

regulated sale and rent back agreements)

; or

(d) home purchase plans;

(e) equity release transactions;

(b) home finance transactions (other than regulated sale and

rent back agreements) only;

which contains the keyfacts logo, headings and text in the order

shown in, and in accordance with the notes in, COBS 6 Annex 2.

early repayment charge

(in MCOB and BSOCS) a charge levied by the mortgage lender

on the customer in the event that the amount of the loan is repaid

in full or in part before a date or event specified in the contract.

initial disclosure

document

information about the scope of advice and the nature of the

services offered by a firm in relation to:

(a) a regulated mortgage contract other than a lifetime

mortgage as required by MCOB 4.4.1R(1) and set out in

MCOB 4 Annex 1R;

(b) an equity release transaction as required by MCOB

4.4.1R(1) and set out in MCOB 8 Annex 1R;

and set out in MCOB 4 Annex 1R; or

(d) a non-investment insurance contract in accordance with

ICOBS 4.5.1G and set out in ICOBS 4 Annex 1G.

repayment mortgage

a regulated mortgage contract under which the customer is

obliged to make payments of interest and capital which are

designed to repay the mortgage in full over the stated term.

repayment vehicle

strategy

the means by which the customer will

intends to repay the

outstanding capital due and, where applicable, pay the interest

accrued under the regulated mortgage contract, where all or part

of that contract is an interest-only mortgage.

FSA 2012/46

Page 5 of 138

Annex B

Amendments to the Training and Competence sourcebook (TC)

In this Annex, underlining indicates new text.

Appendix 1

App

1.1

Activities and Products/Sectors to which TC applies subject to TC Appendices 2

and 3

App

1.1.1

Activity Products/Sectors Is there an

appropriate

examination

requirement?

…

Regulated mortgage activity and reversion activity carried on for a customer

Regulated mortgage contracts for a

non-business purpose

Yes

Regulated mortgage contracts for a

business purpose

Advising;

arranging

(bringing about)

or (for a

mortgage lender

or home

reversion

provider) an

activity which

would be

arranging

(bringing about)

but for the

exclusion in

article 28A

Regulated

Activities Order

(Arranging

contracts to

which the

arranger is a

party)

Equity release transactions

Yes

FSA 2012/46

Page 6 of 138

Regulated mortgage contracts for a

non-business purpose

Yes

Regulated mortgage contracts for a

business purpose

Designing

scripted

questions for

non

-advised

execution-only

sales

Equity release transactions

Yes

Overseeing non-

advised

execution-only

sales on a day-

to-day basis

Equity release transactions

Yes

…

FSA 2012/46

Page 7 of 138

Appendix 4E – Appropriate Qualification tables

…

Qualification table for: Advising a customer on or arranging (bringing about) a regulated mortgage contract (for a non-business

purpose) - Activity number 20 in TC Appendix 1.1.1R; and Designing scripted questions for use in execution-only sales to customers

of regulated mortgage contracts for a non-business purpose - Activity number 21A in TC Appendix 1.1.1R

...

Qualification table for: Advising a customer on or arranging (bringing about) Equity release transactions - Activity number 21 in TC

Appendix 1.1.1R

...

…

Qualification table for : Overseeing non-advised execution-only sales on a day-to-day basis on Equity release transactions – Activity

number 23 in TC Appendix 1.1.1R

…

FSA 2012/46

Page 8 of 138

TP 8 Transitional provisions relating to time limits for attaining qualifications

…

8.2 R An employee who is carrying on the activities specified in TC

Appendix 1 of:

(1) arranging (bringing about) regulated mortgage contracts or

home reversion plans or (for a mortgage lender or home

reversion provider) an activity which would be arranging

(bringing about) but for the exclusion in article 28A Regulated

Activities Order (Arranging contracts to which the arranger is a

party) for a non-business purpose; or

(2) designing scripted questions for execution-only sales of

regulated mortgage contracts for a non-business purpose;

as at 26 April 2014 will, for the purposes of TC 2.2A.1R, be regarded as

carrying on such activities only with effect from that date; and, in

relation to such an employee, a firm need not (in relation to such

activities only) comply with TC 2.1.6R until 26 October 2016. TP 8.1

does not apply in respect of such an employee.

FSA 2012/46

Page 9 of 138

Annex C

Amendments to the Conduct of Business sourcebook (COBS)

In this Annex, underlining indicates new text and striking through indicates deleted text.

6.2A Describing advice services

…

6.2A.4 G (1) A firm that provides both independent advice and restricted advice

should not hold itself out as acting independently for its business as a

whole. However, a firm may hold itself out as acting independently in

respect of its services for which it provides independent advice or

advice which meets other independence requirements for particular

investments. For example, a firm that provides independent advice on

regulated mortgage contracts in accordance with MCOB but restricted

advice on retail investment products will not be able to hold itself out

as an independent financial adviser. However, it would be able to hold

itself out as an adviser providing independent advice for regulated

mortgage contracts provided it was made clear in accordance with the

fair, clear and not misleading rule that it provided restricted advice

for retail investment products.

(1A) A firm that offers an unlimited range of regulated mortgage

contracts, or gives advice in relation to contracts of insurance on the

basis of a fair analysis, but offers restricted advice on retail investment

products should not hold itself out as acting independently for its

business as a whole, for example by holding itself out as an

independent financial adviser. However, it may disclose that it offers

an unlimited range for regulated mortgage contracts or gives advice in

relation to contracts of insurance on the basis of a fair analysis

provided it makes clear in accordance with the fair, clear and not

misleading rule that it provides restricted advice for retail investment

products.

…

6 Annex 2 Combined initial disclosure document described in COBS 6.3, ICOBS

4.5, MCOB

4.4.1R(1) and MCOB 4.10.2R(1) 4.4A.20G

….

FSA 2012/46

Page 10 of 138

2 Whose products do we offer? [Note 4] [Note 4A] [Note 6]

Home Finance Products [Note 13]

[Compliance with Islamic law [Note 18]

Our services are regularly checked by [name(s) of scholar(s)] to ensure compliance

with Islamic law. Ask us if you want further information about the role of our

scholar(s).]

[1] [Lifetime] [Mortgages] [Equity Release Products] [and Islamic] [home

reversion schemes purchase plans] [Note 13]

We offer [lifetime] [mortgages] [home reversion plans] [equity release products] from

the whole market.

We [can] [Note 7] only offer [lifetime] [mortgages] [home reversion plans] [equity

release products] from a limited number of [lenders / companies].

Ask us for a list of the [lenders / companies] we offer [lifetime] [mortgages] [home

reversion plans] [equity release products] from. [Note 14]

We [can] [Note 7] only offer [a limited range of the] [a] [lifetime] [mortgage] [s]

[home reversion plan] [s] [equity release products] from [a single lender / company]

[name of single lender / company]. [Note 11(1) and (3)][Note 16]

[or]

We only offer our own [lifetime] [mortgages] [home reversions plan] [equity release

products]. [Note 11(2)]

We do not offer [lifetime mortgages] [home reversion plans].

[Note 12]

[2] [Islamic Home Purchase Plans] [Note 19] [Note 13]

We offer Islamic home purchase plans from the whole market.

We [can] [Note 7] only offer Islamic home purchase plans from a limited number of

providers.

Ask us for a list of the providers we offer Islamic home purchase plans from. [Note

14]

FSA 2012/46

Page 11 of 138

We [can] [Note 7] only offer [a limited range of the] [a] Islamic home purchase

plan [s] from [a single provider] [name of single provider]. [Note 11(1) and

(3)][Note 16]

[or]

We only offer our own Islamic home purchase plans. [Note 11(2)]

Equity release products are either lifetime mortgages or home

reversion plans. [Note 5]

We are not limited in the range of [mortgages] [equity release

products] [Islamic] [home purchase plans] we will consider for you

[Note 7A]

[Compliance with Islamic law [Note 18]

Our services are regularly checked by [name(s) of scholar(s)] to ensure compliance

with Islamic law. Ask us if you want further information about the role of our

scholar(s).]

3 Which service will we provide you with? [Note 4] [Note 4A] [Note 6]

[Note 6A]

…

[Home Finance Products] [Note 13]

[1] [Mortgages] [Equity Release Products] [Note 13]

We will advise and make a recommendation for you on [lifetime mortgages]

[home reversions] [equity release products] after we have assessed your needs.

You will not receive advice or a recommendation from us. We may ask some

questions to narrow down the selection of [lifetime mortgages] [home

reversions] [equity release products] that we will provide details on. You will

then need to make your own choice about how to proceed.

[2] [Islamic Home Purchase Plans] [Note 13]

We will advise and make a recommendation for you after we have assessed

your needs.

You will not receive advice or a recommendation from us. We may ask some

questions to narrow down the selection of products that we will provide details

on. You will then need to make your own choice about how to proceed.

FSA 2012/46

Page 12 of 138

4 What will you have to pay us for our services? [Note 4A]

[Note 20A]

...

[Home Finance Products] [Note 13]

[1] [Mortgages] [Equity Release Products] [Islamic] [Home Purchase

Plans] [Note 13]

No fee. [We will be paid by commission from the [lender/company that buys

your homeprovider].] [Note 33]

A fee of £[ ] payable at the outset and £[ ] payable when you apply for a [lifetime]

[mortgage] [home reversion plan] [equity release product] [Islamic] [home

purchase plan]. [We will also be paid commission from the [lender/company that

buys your home provider.]]. [Note 33] [Note 34]

You will receive a key facts illustration keyfacts illustration when considering a particular

[lifetime] [mortgage] [home reversion plan] [equity release product], which will tell you

about any fees relating to it. [Note 13] [Note 13A]

Refund of fees [Note 32] [Note 13]

If we charge you a fee, and your [lifetime] [mortgage] [home reversion plan] [Islamic]

[home purchase plan] does not go ahead, you will receive: [Note 35]

A full refund [if the [lender/company

provider] rejects your application]. [Note 36]

A refund of £ [ ] [if your application falls through]. [Note 36] [Note 37] [Note

38]

No refund [if you decide not to proceed]. [Note 36]

[2] [Islamic Home Purchase Plans] [Note 13]

No fee. [We will be paid by commission from the provider.] [Note 33]

A fee of £[ ] payable at the outset and £[ ] payable when you apply for an Islamic

home purchase plan. [We will also be paid commission from the provider]. [Note

18]

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Refund of fees [Note 35]

If we charge you a fee, and your Islamic home purchase plan does not go ahead, you will

receive: [Note 32]

A full refund [if the provider] rejects your application]. [Note 36]

A refund of £ [ ] [if your application falls through]. [Note 36] [Note 37] [Note

38]

No refund [if you decide not to proceed]. [Note 36]

…

8 Are we covered by the Financial Services Compensation Scheme (FSCS)?

[Note 4A]

[Note 39] [Note 55] [Note 56]

…

[Note 59] Message from the Financial Services Authority

Think carefully about this information before deciding whether you want to go ahead.

If you are at all unsure about which equity release product is right for you, you should ask

your adviser to make a recommendation.

...

Note 4 – a firm should describe the services that it expects to provide to the particular

client. For services in relation to:

…

• equity release transactions – the firm should select a maximum of two boxes within

this section. Firms should not omit the boxes not selected.

• home finance transactions (other than regulated sale and rent back agreements) –

where the firm will be providing services to a consumer by way of a distance contract,

it should include in Section 3 a statement that explains whether or not the consumer

will receive advice as part of the services. It should insert the appropriate heading

above the statement in accordance with Note 13 (1).

Note 4A - If a firm is not offering all product types it should omit the headings and text

relating to the product types it is not offering. For example, if it is completing the relevant

sections of this template in relation to insurance and home finance products but not

investment products, it should omit the heading “Investment” and the corresponding text.

FSA 2012/46

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Note 5 – a firm should include this sentence if, and only if, it offers equity release

transactions.

…

Note 6A – If the combined initial disclosure document is used only in relation to home

finance transactions (except where Section 3 is required to be used for home finance

transactions as the firm is providing services by way of a distance contract: see Note 4),

the firm should delete this heading and re-number the later sections accordingly.

Note 7 – insert “can” if the firm’s range of products is determined by any contractual

obligation. This does not apply where a product provider, or insurer, lender, home

purchase provider or home reversion provider is selling its own products.

Note 7A - This sentence must only be used where there are no limitations in the product

range that a firm will be providing to the customer. Otherwise, the firm must insert

alternative text that describes in simple, clear terms the limits on its product range for the

relevant market. If the firm is not considering products from a comprehensive range across

the market and has not listed here the name of every lender/provider it offers products from,

the text used must offer a list of these lenders/providers. Where the firm offers equity release

products, it must state if it offers home reversion plans but not lifetime mortgages, or vice

versa. The firm must also state that it will not consider direct deals, where that is the case.

Depending on the firm’s precise circumstances, the following examples may be appropriate:

• “We offer a comprehensive range of [mortgages] [equity release products] [Islamic]

[home purchase plans] from across the market, but not deals that you can only obtain

by going direct to a [lender/provider].”

• “We only offer products from [number] [lenders/providers]. We can provide you

with a list of these.”

• “We only offer some, but not all, of the [mortgages] [equity release products]

[Islamic] [home purchase plans] from [number] [lenders/providers]. We can provide

you with a list of these.”

• “We only offer the [mortgages] [equity release products] [Islamic] [home purchase

plans] from [name of lender(s)/provider(s)].”

• “We only offer some, but not all, of the [mortgages] [equity release products]

[Islamic] [home purchase plans] from [name of lender(s)/provider(s)].”

• “We only offer lifetime mortgages from [name of lender(s)] and home reversion

plans from [name of provider(s)].”

• “We only offer [lifetime mortgages/home reversion plans] but not [lifetime

mortgages/home reversion plans]. We only offer [lifetime mortgages/home

reversion plans] from [name of provider] and we only offer some, but not all, of

their products.”

• “We only sell bridging finance products from [name of lender(s)]. We do not offer

products from across the mortgage market.”

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…

Note 11 – if the firm selects this box, it will be offering the products of one provider for a

particular product type. It should therefore follow the format specified in (1) below except

when offering its own products, in which case it should follow (2) instead. In the case of

non-investment insurance contracts, where the firm is providing a service in relation to

different types of insurance, this box covers the situation where it is offering a particular

type of insurance from a single insurance undertaking.

(1) Insert the name of the provider, namely the product provider for packaged

products,

and the insurance undertaking(s) for non-investment insurance

contracts, the

lender for regulated mortgage contracts and regulated lifetime

mortgage contracts and the home reversion provider for home reversion plans.

For example: “We can only offer products from [name of product provider]”. For

non-investment insurance contracts the type of insurance offered should also be

included. For example: “We only offer ABC’s household insurance and ABC’s

motor insurance.” If the provider has only one product, the firm should amend the

text to the singular – for example: “We can only offer a mortgage policy from

[name of lender insurance undertaking]”. If the firm does not offer all of the home

finance transactions generally available from that provider, it should insert the

words “a limited range of” as shown in the specimen.

(2) If the firm is a product provider offering only its own products, or is part of a

product provider offering only the products sold under that part’s trading name, it

should use this alternative text.

(3) If the firm offers home reversion plans from only one reversion provider, and

lifetime mortgages from only one lender, which is different from the reversion

provider, then the firm should identify the lender and the reversion provider and

specify the type of equity release transaction to which they relate. For example,

“We can only offer lifetime mortgages from ABC Mortgages Ltd and home

reversion plans from ABC Reversions Ltd.”

Note 12 – if the firm does not give personal recommendations advise or give personalised

information on, both types of equity release transactions, then it should indicate to the client

the sector that the

firm does not cover. However, if the firm’s scope of service does not

include equity release transactions, the last box (‘We do not offer [lifetime mortgages] [home

reversion plans]’), should be omitted.

Note 13 – in describing the services and products provided, firms should omit the text in

brackets that do not apply and ensure that they describe accurately their activities with

respect of the services and products that they offer, as follows:

(1) Headings and sub-headings:

a. If the firm offers both a combination of regulated mortgage contracts and,

home purchase plans and equity release products, it should include the heading

“Home Finance Products” in the combined initial disclosure document and

describe the regulated mortgage contracts, and home purchase plans and

equity release transactions (as applicable) that it offers under two separate sub-

headings. The sub-headings (“Mortgages”, and “Home Purchase Plans” and

FSA 2012/46

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“Equity Release Products”) should be numbered accordingly. If the firm only

offers one of these two

three products, then the heading “Home Finance

Products” should be omitted and the heading will read “Mortgages”, or “Home

Purchase Plans” or “Equity Release Products”, as appropriate.

b. If the firm offers equity release transactions, then the appropriate heading

“Home Finance Products” should be omitted and the or sub-heading will read

is “Equity Release Products” (even if the firm offers equity release

transactions from only one sector) only lifetime mortgages or only home

reversion plans.

…

(2) Describing the products:

a. If a firm gives personal recommendations

or gives personalised information

advice

on, or arranges execution-only sales in, lifetime mortgages, it should

change “mortgage” to “lifetime mortgage”

b. If a firm gives personal recommendations or gives personalised information

advice on, or arranges execution-only sales in, home reversion plans, it should

use the text in brackets relating to home reversion plans.

c. If the firm gives personal recommendations or gives personalised information

advice on, or arranges execution-only sales in, products from both equity

release market sectors, then it should use the term ‘equity release products’

when referring to them collectively.

(3) Describing the provider: If a firm gives personal recommendations or gives

personalised information advice on, or arranges execution-only sales in, home purchase

plans or home reversion plans, it should change “mortgage” to “product” and “lender” to

“company” or “provider”, as appropriate.

(4) Home purchase plans: A firm that carries on home purchase activities may add the

word “Islamic” to “home purchase plan(s)” if it holds out one or more home purchase

plans within its product range as compliant with Islamic law. If “Islamic” is included, it

should be included consistently throughout the document. However, a firm may omit the

word “Islamic” in sections 5 and 8 even if it uses it elsewhere throughout the document. A

firm that wishes to hold itself, its products or services out as compliant with religious or

philosophical belief other than Islamic law may include an appropriate description in place

of the references to “Islamic” and “Islamic law”.

(5) A firm offering services in relation to loans for business purposes must use a

description of its services which make that clear.

Note 13A – A firm must not include this paragraph if the only services to which the

combined initial disclosure document relates are activities relating to home purchase

plans. A firm may include a similar explanation regarding the financial information

statement if the services they offer include activities relating to home purchase plans.

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Note 14 – for services provided in relation to home finance transactions, this

sentence is required only where a firm selects this service option. It may also be

omitted if a firm chooses to list all of the lenders, home purchase providers and home

reversion providers it offers home finance transactions from in the previous line, so

long as the firm offers all of the products generally available from each.

…

Note 16 – if the firm does not select this box, it should alter the wording to say “a single

group of companies” for packaged products, and “a single insurer” for non-investment

insurance contracts, “a single lender” for regulated mortgage contracts or lifetime

mortgages and “a single company” (or “a single provider”) for home purchase plans and

home reversion plans

. For example: “We only offer the products from a single group of

companies” should replace the text in the specimen combined initial disclosure document.

…

Note 18

– This subsection is optional unless may (at the firm’s option) be used if, and

only if, the firm holds itself, its regulated mortgage contract or home purchase plan

products or services out as compliant with Islamic law in the

combined initial disclosure

document. If a firm includes this section it should describe it as Section 2 and renumber

subsequent sections accordingly.

A firm that wishes to hold itself, its regulated mortgage contract or home purchase plan

products or services out as compliant with religious or philosophical beliefs other than

Islamic law in the combined initial disclosure document may also use the subsection in

accordance with this note and modify the wording in the section to the extent appropriate.

Note 19 – A firm that carries on home purchase activities may omit the word “Islamic”

from “Islamic home purchase plan(s)” if one or more home purchase plans within its

scope of service is not held out as compliant with Islamic law. If “Islamic” is omitted, it

should be omitted consistently throughout the document. However, a firm may omit the

word “Islamic” in sections 5 and 8 without having to omit it throughout the document. A

firm that wishes to hold itself, its products or services out as compliant with religious or

philosophical belief other than Islamic law in the combined disclosure document may

make appropriate amendments to references to “Islamic” and “Islamic law”.

…

Note 34 – insert a plain language description of when any fees are payable for

services relating to home finance transactions, and the amount This description

could include, for example, a cash amount, a percentage of the loan or reversion

amount or the amount per hour, as appropriate. However, where a cash amount is not

disclosed, one or more examples of the cash amount should be included. If a firm

offers more than one pricing option in relation to equity release transactions, it

should specify the pricing policy for each of them. For example, “A fee of £[XX]

payable at the outset and £[YY] when you apply for a lifetime mortgage and £[ZZ]

when you apply for a home reversion plan”. If a firm does not charge a fee, the text

for the second box should be abbreviated to ‘A fee’. The fee must be described,

where possible, as a cash sum, but where this is not possible:

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• If the fee is a percentage of another sum which is not yet known (such as the

amount to be borrowed), give the percentage and a representative illustrative

example which gives an amount as a cash sum.

• If the fee will be one of a range of possible cash fees, provide a description of

the fee in terms which include the maximum and minimum possible fees as

cash sums, and what factors will determine where in the range the fee will be.

• If the fee will be one of a range of fees that are a percentage of another sum

which is not yet known (such as the amount to be borrowed), give the

minimum and maximum percentages and a representative illustrative example

which gives an amount as a cash sum, and set out what factors will determine

where in the range the fee will be.

• If the fee will be based on an hourly rate, but the number of hours to be spent

on the customer’s transaction is unknown, state the hourly rate in cash terms

and set out what factors will determine how many hours it takes to provide

the firm’s services.

…

Note 39 – the firm may omit this section for services relating to packaged products if the

firm has, on first contact with the client, provided the client with its client agreement

which contains that information. This section may be omitted for services relating to non-

investment insurance contracts if the information covered by this section is not required

by ICOBS or is required by ICOBS but is provided to the customer by some other means.

This section may be omitted for services relating to home finance transactions in

accordance with MCOB 4.4.1R(3). If this section is omitted, the other sections of the

combined initial disclosure document should be renumbered accordingly.

…

Note 59

– this warning box should be added when the firm sells lifetime mortgages or

home reversion plans or both.

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Annex D

Amendments to the Mortgages and Home Finance: Conduct of Business sourcebook

(MCOB)

In this Annex, underlining indicates new text and striking through indicates deleted text,

unless otherwise stated.

Part 1: Comes into force on 26 April 2014

1.2 General application: who? what?

1.2.1 R (1) This sourcebook applies to every firm that:

(a) carries on a home finance activity (subject to the business

loan and loans to high net worth mortgage customers

application provisions); or

…

Firm types and the home finance activities

1.2.2 G (1) This sourcebook applies to activities carried out in respect of four

types of product: regulated mortgage contracts (which includes

lifetime mortgages), equity release transactions, home purchase

plans, home reversion plans and regulated sale and rent back

agreements…

…

Business loans and loans to high net worth mortgage customers: application

of MCOB

1.2.3 R 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 all those

tailored provisions, including MCOB 1.2.7R.

1.2.3A

R In relation to a regulated mortgage contract with a high net worth

mortgage customer, a firm must either:

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(a) 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

(b) subject to MCOB 1.2.9CR, comply with MCOB in full, but

taking account of all those tailored provisions, including

MCOB 1.2.7R.

1.2.3B R Where 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.

1.2.4 G For detail of

the The tailored provisions applying, see are those in the

sections

section on ‘business Business loans’ and loans to high net

worth mortgage customers: tailored provisions’ set out in each relevant

chapter.

1.2.4A G Certain 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 1.2.4BG.

1.2.4B G

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?

Various of the

provisions in MCOB

4.7A and MCOB 4.8A

Applicable in all

cases

Applicable only where

loan is solely for a

business purpose

MCOB 4.9 Tailored Applicable to all business

loans

MCOB 5.7 Tailored Applicable to all business

loans

MCOB 6.7 Tailored Applicable to all business

loans

MCOB 7.7 Tailored Applicable to all business

loans

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Various of the

provisions in MCOB

11.6

Applicable in all

cases

Applicable only where

loan is solely for a

business purpose

MCOB 12.6 Tailored Applicable to all business

loans

MCOB 13.7 Tailored Applicable to all business

loans

1.2.5 G (1) …

(2) Whether a regulated mortgage contract is, or is solely, for a

business purpose will be a matter of fact to be determined by a

firm (in accordance with MCOB 1.2.9DR where applicable)

depending on the individual circumstances of each case…

…

Business loans and loans to high net worth mortgage customers: additional

requirements if tailored route is used

1.2.7 R In relation to a regulated mortgage contract for a business purpose or

with a high net worth mortgage customer, if a firm has opted for the

tailored route, it must adopt the following modifications to the

sourcebook:

(1) (except in relation to sections 6 and 8 of any initial disclosure

document or sections 5 and 8 of any combined initial disclosure

document) substitute an alternative description of the facility

provided under the regulated mortgage contract for 'mortgage'

where that term is used in any disclosure;

(2) substitute the term 'illustration' for 'key fact

s ‘keyfacts illustration’

when opting to use the tailored business loans or loans to high net

worth mortgage customers rules in MCOB 4.9, MCOB 5.7, MCOB

6.7 or MCOB 7.7; and

…

1.2.8 G (1) Firms are reminded of the requirement in MCOB 2.2.6R that any

communication should be clear, fair and not misleading when

substituting an alternative for the term 'mortgage' in accordance

with MCOB 1.2.7R(1).

(2) Possible alternatives to the term 'mortgage' include, for example,

'secured business

overdraft', 'secured loan' or 'secured business

credit'.

1.2.9 G The disclosure rules in MCOB place particular emphasis on the

description of borrowing. Where the regulated mortgage contract is for

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a business purpose or with a high net worth mortgage customer, 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.

…

Provisions for professional customers

1.2.9B

G Certain provisions of MCOB 4.7A and MCOB 4.8A apply in respect of

professional customers. Where they apply, they provide greater

flexibility for firms.

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

1.2.9C R A 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.

1.2.9D

R A firm must not treat a loan as being solely for a business purpose for

the purposes of MCOB unless it has reviewed a business plan provided

by the customer which provides credible evidence that that is the case.

1.2.9E R A firm must not treat a customer as being a professional customer for

the purposes of MCOB unless it has credible evidence that the customer

satisfies the definition.

1.2.9F

R A 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.

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Authorised professional firms

1.2.10 R MCOB does not apply to an authorised professional firm with respect to

its non-mainstream regulated activities except for:

…

(2) … ; and

(3) initial disclosure requirements but only as regards providing the

information contained in section 7 (What to do if you have a

complaint) and section 8 (Are we covered by the Financial

Services Compensation Scheme?) of an initial disclosure

document or combined initial disclosure document (see MCOB 4.4

and MCOB 4.10). [deleted]

…

1.3 General application: where?

…

Distance contracts entered into from an establishment in another EEA State

1.3.4 R …

(2) The rules which do not apply are:

(a) initial disclosure requirements in MCOB 4.4

4.4A (in

respect of regulated mortgage contracts)…

…

(g) MCOB 8.3 (Application of rules in MCOB 4) to the extent

that it applies MCOB 4.4

4.4A to MCOB 4.6;

…

2.1 Application

Who?

…

2.1.2 R This table belongs to MCOB 2.1.1 R

(1) Category of firm (2) Applicable section

mortgage lender

whole chapter except MCOB 2.2.6AR, MCOB

2.2.8AR, MCOB 2.2.8BG, MCOB 2.6A.1R to

FSA 2012/46

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mortgage

administrator

mortgage adviser

mortgage arranger

2.6A.18G and MCOB 2.8.6G

mortgage

administrator

mortgage adviser

mortgage arranger

As for a mortgage lender, except that MCOB

2.6A.-1R does not apply.

home purchase

provider

MCOB 2.1, MCOB 2.2.1G, MCOB 2.2.6R to

MCOB 2.2.9G, MCOB 2.5, to MCOB 2.6,

MCOB 2.6A.1R to MCOB 2.6A.4G, MCOB

2.6A.7G to MCOB 2.6A.10G, MCOB 2.7.4R to

MCOB 2.7.6R, MCOB 2.7A and MCOB 2.8.6G

…

SRB administrator

MCOB 2.1, MCOB 2.2.1G, MCOB 2.2.2G,

MCOB 2.2.3R, MCOB 2.2.6R, MCOB 2.2.7G,

MCOB 2.2.8G, MCOB 2.5, to MCOB 2.6,

MCOB 2.6A.5BR(5), MCOB 2.6A.8R to MCOB

2.6A.11G, MCOB 2.6A.17AR, MCOB

2.6A.18G, MCOB 2.7.1G to MCOB 2.7.5R,

MCOB 2.7A, MCOB 2.8.1G to MCOB 2.8.5G.

…

2.2 Communications

…

Related investment advice

2.2.5 G Firms are reminded that they should follow the relevant rules in COBS 6

and COBS 13 relating to advice and disclosure on investments if they are

advising the customer on an investment such as an annuity associated with

an equity release transaction or an ISA used as a repayment vehicle

strategy.

…

2.5A The customer’s best interests

2.5A.1 R

A firm must act honestly, fairly and professionally in accordance with the

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best interests of its customer.

…

2.6A Protecting customer’s interests: regulated mortgage contracts,

home

purchase plans, home reversion plans and regulated sale and rent back

agreements

Protecting customer’s interests: regulated mortgage contracts

2.6A-1

R A mortgage lender may only include, or rely on, a term in a regulated

mortgage contract which permits it to change the rate of interest from a

fixed, discounted or other concessionary rate to the firm’s standard variable

rate in the event of a breach of contract if each of the following conditions

is met:

(1)

the breach of contract is material;

(2) the breach of contract is unrelated to a payment shortfall; and

(3) that standard variable rate is not an interest rate created especially for

customers who are (either at all, or in particular ways) in breach of

contract.

...

Protecting customers’ interests under regulated sale and rent back agreements:

security of tenure

2.6A.5B R (1) When entering into a entering into a regulated sale and rent back

agreement, a firm must ensure that, under the terms of the regulated

sale and rent back agreement:

...

(2) When entering into

a entering into a regulated sale and rent back

agreement, a firm must ensure that, under the terms of the regulated

sale and rent back agreement, if the property is in England and

Wales, the terms of the tenancy do not:

…

(3) When entering into

a entering into a regulated sale and rent back

agreement, a firm must ensure that, under the terms of the regulated

sale and rent back agreement, if the property is in Scotland, the

terms of the tenancy do not include:

…

(4) When entering into a entering into a regulated sale and rent back

agreement, a firm must ensure that, under the terms of the regulated

sale and rent back agreement, if the property is in Northern Ireland,

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the terms of the tenancy do not include:

…

3.8 Form and content of real time qualifying credit promotions

…

3.8.6 G Firms should note the additional disclosure requirements in MCOB 4.4.7R

(Disclosure 4.4A.17R (Additional disclosure where initial contact is by

telephone), MCOB 4.4A.18R (Additional disclosure requirements where

the services are to be provided to a consumer under a distance contract)

and MCOB 4.5 (Additional disclosure for distance mortgage mediation

contracts and distance home purchase mediation contracts with retail

customers) in relation to telephone calls that may fall within the definition

of a financial promotion.

…

4.1 Application

Who?

…

4.1.2 R Table This table belongs to MCOB 4.1.1R

(1) Category of firm (2) Applicable section

mortgage lender

except in relation to lifetime

mortgages: MCOB 4.1 to MCOB 4.4

4.4A, 4.6A, and MCOB 4.8 4.8A in

accordance with MCOB 4.1.2A R, to

and

MCOB 4.9

mortgage adviser

except in relation to lifetime

mortgages: whole chapter except

MCOB 4.10

mortgage arranger

except in relation to lifetime

mortgages: whole chapter except

MCOB 4.7 4.7A and MCOB 4.10

home purchase provider

MCOB 4.1, MCOB 4.2 and MCOB

4.10 (except MCOB 4.10.5G to

MCOB 4.10.7G).

MCOB 4.3, MCOB 4.4 4.4A and

MCOB 4.8 4.8A in accordance with

MCOB 4.1.2BR and MCOB 4.10

FSA 2012/46

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home purchase adviser

MCOB 4.1, MCOB 4.2, MCOB 4.5,

MCOB 4.6 and MCOB 4.10.

MCOB 4.3, MCOB 4.4 4.4A, MCOB

4.7 4.7A and MCOB 4.8 4.8A in

accordance with MCOB 4.10

home purchase arranger

As for a home purchase adviser

except MCOB 4.10.5G to MCOB

4.10.7G MCOB 4.10.5AR to MCOB

4.10.9AR, 4.10.13R and MCOB 4.7

4.7A do not apply

reversion

equity release provider

reversion

equity release adviser

reversion equity release arranger

See MCOB 8 8.3 for the application of

this chapter

…

4.1.2A R MCOB 4.8A only applies to a mortgage lender in relation to entering into

a regulated mortgage contract where there is no firm which is arranging

(bringing about) the regulated mortgage contract to which MCOB 4.8A

applies.

4.1.2B R MCOB 4.8A only applies to a home purchase provider (as provided in

MCOB 4.10.9BR) in relation to entering into a home purchase plan where

there is no firm which is arranging (bringing about) the home purchase

plan to which MCOB 4.8A applies (as provided in MCOB 4.10.9BR).

4.1.2C

G MCOB 4.1.2AR and MCOB 4.1.2BR mean that the provisions in MCOB

4.8A on execution-only sales, including the prohibition on entering into

them in the circumstances specified in that section, only apply to sales by

mortgage lenders or home purchase providers where there is no

intermediary firm to which that section applies.

4.1.2D

G MCOB 4.1.2AR and MCOB 4.1.2BR mean that the situations where

MCOB 4.8A applies to a mortgage lender or home purchase provider

include where a mortgage intermediary or home purchase intermediary

has been involved in arranging a regulated mortgage contract or home

purchaser plan but is no longer involved in the transaction.

What?

4.1.3 R This chapter applies if a firm in the course of carrying on a home finance

activity: enters into, advises on or arranges a home finance transaction or

a variation of the terms of a home finance transaction.

(1) makes, or anticipates making, a personal recommendation about;

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(2) gives, or anticipates giving, personalised information relating to;

the

customer

(3) entering into a home finance transaction; or

(4) varying the terms of a home finance transaction entered into by the

customer.

…

4.1.6 G MCOB 4.1.5 R means that this chapter, MCOB 4, deals with standard

regulated mortgage contracts, home purchase plans and regulated sale

and rent back agreements only and therefore firms should note that the

scope of service rules in this chapter do not apply in respect of equity

release transactions

. [deleted]

…

4.2 Purpose

4.2.1 G (1)

This chapter amplifies Principle 6 (Customers' interests), Principle

7 (Communications with clients) and Principle 9 (Customers:

relationships of trust).

(2) The purpose of this chapter is to ensure that:

(a) customers are adequately informed about the nature of the

service they may receive from a firm in relation to home

finance transactions. In particular firms need to make clear to

customers the scope range of home finance transactions

available from them firms and the basis of their remuneration;

and

(b)

where advice is given, it is suitable for the customer. The

steps firms need to take to ensure that the customer receives

suitable advice will vary depending on the demands and

needs of the customer and the type of home finance

transaction.;

which there is spoken or other interactive dialogue between

the firm and the customer (with exceptions for high net worth

mortgage customers and professional customers, and for

loans which are solely for a business purpose);

(d)

when there is no spoken or other interactive dialogue between

the firm and the customer during the sale, the firm is able to

provide an execution-only service except for certain

vulnerable customers (customers for regulated sale and rent

back and equity release transactions; customers whose main

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purpose is debt consolidation; and customers who are using

the transaction in order to exercise a statutory “right to buy”)

who are given advice in every case;

(e) execution-only sales are only provided where the customer

has been warned about the implications of proceeding

without advice, or where the customer has rejected advice

which has been given, and has specifically instructed the firm

that he wishes to do so; and

(f) except in the case of regulated sale and rent back

transactions, customers have the right to reject advice and

proceed on an execution-only basis.

(3)

This chapter also implements certain requirements of the Distance

Marketing Directive in relation to distance mortgage mediation

contracts and distance home purchase mediation contracts.

…

The existing section 4.3 is deleted in its entirety. The existing text is not struck through.

4.3 Scope of service provided [deleted]

MCOB 4.4 is deleted in its entirety and replaced with a new section MCOB 4.4A. The

deleted text is not shown and the new text is not underlined.

4.4

Initial disclosure requirements [deleted]

4.4A Initial disclosure requirements

Description of a firm’s services in all cases

4.4A.1 R Using the methods and at the times specified in this section, a firm must

provide the customer with the following information:

(1) whether there are any limitations in the range of products that it will

offer to the customer, and if so what those are; and

(2) the basis on which the firm will be remunerated.

Range of products

4.4A.2 R (1) The limitations in MCOB 4.4A.1R include any limitations on the

regulated mortgage contracts the firm will consider from within the

relevant market. A firm which is offering services to a customer in

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respect of more than one type of relevant market must describe its

services in relation to each such relevant market.

(2) For these purposes, there are two relevant markets for regulated

mortgage contracts (apart from lifetime mortgages): one for regulated

mortgage contracts that are not for a business purpose; and one for

regulated mortgage contracts that are. A firm offering services in

relation to loans for a business purpose must make that clear in its

disclosure under MCOB 4.4A.1R(1).

(3) If a firm will not, as part of its services, consider direct deals, it need

not treat that as a limitation in its product range, but the firm must tell

the customer as part of the disclosure under MCOB 4.4A.1R(1) that it

will not consider direct deals.

4.4A.3 G (1) A firm that only offers products from one part of a relevant market (for

example, just bridging loans) should not disclose its service as

unlimited.

(2) When considering whether there are any limitations in its product range

across the relevant market, a firm need not take account of the existence

of exclusive deals which a mortgage lender offers to be sold by one or a

limited number of mortgage intermediaries only (and not generally by

mortgage intermediaries across the relevant market).

4.4A.4 R (1) If a firm is not offering to the customer products from an unlimited

range from across the relevant market, its disclosure on product range in

MCOB 4.4A.1R must either:

(a) list the names of all the mortgage lenders whose products it is

offering; or

(b) inform the customer of the number of mortgage lenders whose

products it is offering and that he has the right to request a list of

those mortgage lenders.

(2) If a customer requests the list in (1), the firm must provide it in a

durable medium as soon as possible following the request and in any

event within five business days. The list must also indicate whether the

firm offers all of the products generally available from each mortgage

lender on the list.

4.4A.5 G A firm may be able to describe its product range as unlimited even if it offers

its customers only a selection of the regulated mortgage contracts available

from the relevant market, or uses ‘panels’. The firm would need to ensure that

any panel, or selection of products, is sufficiently broad in its composition that

it is representative of products from across the market, that it is reviewed

regularly, and that its use does not materially disadvantage any customer. In

such a case, a firm should ensure that its analysis of the market and of the

available regulated mortgage contracts is kept adequately up to date. For

example, a firm would need to update its selection of regulated mortgage

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contracts if it became aware that a regulated mortgage contract had become

generally available offering an improved product feature, or a better interest

rate, when compared with the regulated mortgage contracts currently in the

firm’s selection.

4.4A.6 G The disclosure required by MCOB 4.4A.1R(1), MCOB 4.4A.2R and MCOB

4.4A.4R(1) about limitations in product range and direct deals should be

expressed in simple, clear terms. A firm may wish to consider using a

sentence appropriate to the circumstances, along the following lines:

• “We are not limited in the range of mortgages we will consider for

you.”

• “We offer a comprehensive range of mortgages from across the

market, but not deals that you can only obtain by going direct to a

lender.”

• “We only offer mortgages from [number] lender(s). We can provide

you with a list of these.”

• “We only offer mortgages from [name of lender(s)].”

• “We only offer some, but not all, of the mortgages from [number]

lender(s). We can provide you with a list of these.”

• “We only offer some, but not all, of the mortgages from [name of

lender(s)].”

• “We only sell bridging finance products from [name of lender(s)]. We

do not offer products from across the mortgage market.”

4.4A.7 G (1) Firms are reminded that, in the light of the rules and guidance in SYSC,

they should have adequate systems and controls in place to ensure that

the disclosure they make to a customer about their service reflects the

service the customer is actually offered.

(2) Firms are also reminded that Principle 7 (Communications with clients)

and MCOB 2.2.6R (Clear, fair and not misleading communications) are

also relevant to how they describe their services, including in any

business name they adopt. For example, a firm should not call itself an

“independent mortgage adviser” unless its product range across the

relevant market is unlimited.

(3) A firm that offers a different service for different product types should

not disclose that it offers one type of service for its business as a whole.

For example, a firm that provides independent advice on retail

investment products but only offers a limited range of regulated

mortgage contracts should ensure it discloses to the customer that the

service is different for the different products.

(4) There are additional rules about complying with MCOB 4.4A.1R(1) in

relation to home purchase plans and equity release transactions at

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MCOB 4.10.3BR and MCOB 8.3.2BR.

Basis of remuneration

4.4A.8 R (1) The information about the basis of remuneration required by MCOB

4.4A.1R(2) must include all relevant information, including the

following details:

(a) any fees which the firm will charge to the customer;

(b) when any such fees will be payable and, if applicable,

reimbursable; and

if applicable, any arrangements for offsetting this against any

fees charged.

(2) The details in (1)(a) must be expressed, where possible, as a specific

cash sum, but the following rules apply where this is not possible:

(a) If the firm will charge a fee that is a percentage of another sum

which is not yet known (such as, but not limited to, the amount

to be borrowed), the firm must provide details of the percentage

and a representative illustrative example which gives an amount

as a cash sum.

(b) If the firm will charge one of a range of possible cash fees, the

firm must provide a description of the fee in terms which

include the maximum and minimum possible fees as cash sums,

and what factors will determine where in the range the fee will

be.

percentage of another sum which is not yet known (such as, but

not limited to, the amount to be borrowed), the firm must

provide details of the minimum and maximum percentages and

a representative illustrative example which gives an amount as a

cash sum, and set out what factors will determine where in the

range the fee will be.

(d) If the firm will charge an amount based on an hourly rate, but

the number of hours to be spent on the customer’s transaction is

unknown, the firm must state the hourly rate in cash terms and

set out what factors will determine how many hours it takes to

provide the firm’s services.

Method of providing initial disclosure in all cases

4.4A.9 R

The information required by MCOB 4.4A.1R, MCOB 4.4A.2R, MCOB

4.4A.4R(1) and MCOB 4.4A.8R must be communicated clearly and

prominently, and in doing so:

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(1)

if the initial contact includes spoken interaction, the information must

be communicated orally; and

(2) if the initial contact does not include spoken interaction, the messages

must appear separately from other messages in the communication.

If the initial contact is made by electronic means, the firm must ensure that

the customer cannot progress to the next stage of the sale unless the

information has been communicated to the customer.

4.4A.10 G (1) In order to comply with MCOB 4.4A.9R for an internet sale, a firm

should display the required information on a screen which the customer

must access as part of the sales process. It would not be sufficient for

the information to be accessible only by giving the customer the option

to click on a link or download a document. The messages could be

displayed clearly on one of the initial pages which the customer

accesses.

(2) In a postal sale, a firm may comply by setting out the messages in a

clear covering letter.

(3) Where the initial contact is by email, SMS or instant messaging, the

messages could be displayed clearly and prominently early on in the

body of the email, SMS or instant messaging.

(4) For face-to-face and telephone contact, a firm should comply by

building the messages into the initial oral discussion with the customer.

4.4A.11 G A firm may demonstrate compliance with MCOB 4.4A.9R(1) by, for

example, undertaking one or more of the following: building a requirement

for oral communication of the relevant information into its training of staff as

evidenced by its training and compliance manuals; inserting appropriate

prompts into paper-based or automated sales systems; and having procedures

in place to monitor compliance by staff with that rule. What is required in

each case will depend on all the circumstances.

Timing of initial disclosure in all cases

4.4A.12 R The information required by MCOB 4.4A.1R, MCOB 4.4A.2R, MCOB

4.4A.4R(1) and MCOB 4.4A.8R must be provided during the course of the

initial contact.

4.4A.13 G (1) In many cases, MCOB 4.4A.12R means that information will be given

at the time of the first contact between the firm and the customer.

However, there may be circumstances, for example in relation to a loan

for a business purpose, where the possibility of the customer entering

into, or varying the terms of, a regulated mortgage contract is only

identified after preliminary discussions. The relevant disclosure is only

required once this possibility is identified.

(2) MCOB 4.4A.12R does not require a firm to provide the information

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specified in that rule when a customer contacts a firm simply to arrange

to receive services in relation to a regulated mortgage contract at a later

time, such as when a customer books an appointment. In those cases,

the initial disclosure should be made when the firm first makes contact

with the customer with a view to actually carrying out the services.

However, firms should note the additional disclosure requirements in

MCOB 4.5 (Additional disclosure for distance mortgage mediation

contracts with retail customers), and the need to ensure that the required

information is provided in good time (see MCOB 4.5.3G(1)).

4.4A.14 G Principle 7 and MCOB 2.2.6R also mean that, if initial disclosure has been

given but any of the information in it (for example the basis on which the firm

will be remunerated) subsequently changes, the firm should bring this clearly

to the customer’s attention.

Instances where initial disclosure need not be given

4.4A.15 R The information requirements in MCOB 4.4A.1R, MCOB 4.4A.2R, MCOB

4.4A.4R(1) and MCOB 4.4A.8R do not apply where:

(1)

the information has already been provided by the firm and the firm has

good reason to believe that it is still accurate and appropriate for the

customer; or

(2) the information has already been provided by the firm which first made

contact with the customer in respect of the particular regulated

mortgage contract, and the firm subsequently making contact with the

customer does not expect to alter or replace the product range or basis

of remuneration described in that information.

4.4A.16 G A mortgage lender should provide the information in the provisions referred

to in MCOB 4.4A.15R in a direct sale but need not do so where the sale is

through a mortgage intermediary. If a number of different firms are involved

in relation to the transaction, having regard to MCOB 2.5.4R(2), those firms

should take reasonable steps to establish that the customer has been provided

with the information as required by this section.

Additional disclosure where initial contact is by telephone

4.4A.17 R If the initial contact is by telephone, then the firm must also, before

proceeding further, give the name of the firm and (if the call is initiated by or

on behalf of the firm) the commercial purpose of the call.

Additional disclosure where the services are to be provided to a consumer under a

distance contract

4.4A.18 R Where a firm provides services to a consumer by way of a distance contract,

the firm must provide the consumer with the following information in a

durable medium in good time before the distance contract has been agreed:

(1)

the information which is required by MCOB 4.4A.1R to MCOB

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4.4A.8R;

(2) whether or not the firm will be providing the consumer with advice;

(3) the name and the main business of the firm, the geographical address at

which it is established and any other geographical address relevant for

the consumer’s relations with the firm;

(4) an appropriate statutory status disclosure statement (see GEN 4), a

statement that the firm is on the FSA Register and its FSA registration

number;

(5) the total price to be paid by the consumer to the firm for the financial

service, including all related fees, charges and expenses, and all taxes

paid through the firm or, when an exact price cannot be indicated, the

basis for the calculation of the price enabling the consumer to verify it;

(6) the arrangements for payment and for performance;

(7) how to complain to the firm, whether complaints may subsequently be

referred to the Financial Ombudsman Service and, if so, the methods

for having access to it, together with equivalent information about any

other applicable named complaints scheme;

(8) whether compensation may be available from the compensation scheme,

or any other named compensation scheme, if the firm is unable to meet

its liabilities, and information about any other applicable named

compensation scheme; and

(9) any other contractual terms and conditions of the distance contract.

4.4A.19 G (1) MCOB 4.4A.18R contains the additional disclosure requirements for

firms providing mortgage mediation activities to a consumer by way of

a distance contract. MCOB 4.5 and MCOB 4.6 contain further rules

and guidance applicable where firms enter into a distance contract in

respect of their home finance mediation activities independent of any

contractual arrangement with a consumer relating to a particular home

finance transaction or transactions.

(2) There

is guidance on distance contracts and consumers at MCOB

1.3.5G and MCOB 1.3.6G.

4.4A.20 G If used in accordance with its notes and provided to the customer at the

correct time, using a combined initial disclosure document in a durable

medium may satisfy the requirements of MCOB 4.4A.18R, though firms

should consider whether it contains all the contractual terms and conditions of

the distance contract.

Uncertainty whether a mortgage is regulated

4.4A.21 R (1) If at the point that initial disclosure must be made in accordance with

MCOB 4.4A.1R, MCOB 4.4A.2R, MCOB 4.4A.4R and MCOB 4.4A.8R

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a firm is uncertain whether the contract will be a regulated mortgage

contract, the firm must:

(a) make the initial disclosure; or

(b) seek to obtain from the customer information that will enable the

firm to ascertain whether the contract will be a regulated

mortgage contract.

(2)

Where (1)(b) applies, the initial disclosure must be made unless, on the

basis of the information provided by the customer, the firm has

reasonable evidence that the contract is not a regulated mortgage

contract.

Appointed representatives

4.4A.22 R A firm may restrict the home finance transactions it authorises a particular

appointed representative to sell. If it does so, the firm must ensure the

appointed representative reflects this limited range in any disclosure given to

the customer under MCOB 4.4A.

Record keeping

4.4A.23 G Firms are reminded of the general record-keeping requirements in SYSC 9. A

firm should keep appropriate records of the disclosures required by this

section.

Amend the following as shown.

4.5 Additional disclosure for distance mortgage mediation contracts, distance

home purchase mediation contracts and distance regulated sale and rent

back mediation contracts with retail customers

…

4.5.2 R If the initial contact of a kind in

MCOB 4.4.1R(1) initial contact is with a

consumer with a view to concluding a distance mortgage mediation

contract…

After MCOB 4.6 insert the following new section. The text is not underlined.

4.6A

Rolling-up of fees or charges into loan

4.6A.1 R A mortgage lender may not offer a regulated mortgage contract to a

customer on the basis that fees or charges of any kind (receivable either by

the mortgage lender or another party) are automatically added to the sum

advanced.

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4.6A.2 R A firm must not undertake any action that commits a customer to an

application for a regulated mortgage contract where a fee or charge of any

kind (receivable either by the firm or another party) is to be added to the sum

advanced under the regulated mortgage contract, unless the customer has

made a positive choice to add the fee or charge to the sum advanced.

MCOB 4.7 is deleted in its entirety and replaced with a new section MCOB 4.7A. The

deleted text is not shown and the new text is not underlined.

4.7A Advised sales

4.7A.1 G (1) MCOB 4.7A sets out standards to be observed by firms when advising

a particular customer on regulated mortgage contracts.

(2) The rules at MCOB 4.8A require firms which are selling regulated

mortgage contracts to, or entering into variations of existing regulated

mortgage contracts with, certain types of vulnerable customer, to

provide advice to them.

(3) The rules at MCOB 4.8A also provide that advice must be given

wherever the sales process involves spoken or other interactive

dialogue (except for high net worth mortgage customers, professional

customers and loans solely for a business purpose). They do not

prohibit the giving of pre-contract or preliminary information which

does not amount to advice to the particular customer, but means that

advice must be given before a firm enters into or arranges a regulated

mortgage contract, or variation of such contract, unless the

requirements there are satisfied. Firms may wish to refer to PERG

(particularly PERG 4.6) for guidance on the regulatory perimeter in

relation to advising on home finance transactions.

(4) The rules at MCOB 4.8A provide for an exception which permits

certain execution-only sales which do not involve additional

borrowing.

Suitability

4.7A.2 R If a firm gives advice to a particular customer to enter into a regulated

mortgage contract, or to vary an existing regulated mortgage contract, it

must take reasonable steps to ensure that the regulated mortgage contract

is, or after the variation will be, suitable for that customer.

4.7A.3 R In MCOB 4.7A, a reference to advice to enter into a regulated mortgage

contract is to be read as including advice to vary an existing regulated

mortgage contract.

4.7A.4 G (1) A firm should take reasonable steps to obtain from a customer all

information likely to be relevant for the purposes of MCOB 4.7A.

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(2) For the purposes of MCOB 4.7A.2R, if for any reason a customer

rejects (in whole or in part) advice given by a firm, the firm is not

precluded from advising him to enter into a different regulated

mortgage contract (in accordance with the requirements of MCOB

4.7A) provided the firm has taken reasonable steps to ensure that

that different contract is suitable for the customer.

4.7A.5 R For the purposes of MCOB 4.7A.2R:

(1) a regulated mortgage contract will not be suitable for a customer

unless the regulated mortgage contract is appropriate to the needs

and circumstances of the customer;

(2)

a firm must base its determination of whether a regulated mortgage

contract is appropriate to a customer’s needs and circumstances on

the facts disclosed by the customer and other relevant facts about

the customer of which the firm is or should reasonably be aware;

(3) no advice must be given to a customer to enter into a regulated

mortgage contract if there is no regulated mortgage contract which

is suitable from the product range offered by the firm; and

(4) if a mortgage lender is dealing with an existing customer with a

payment shortfall and has concluded that there is no suitable

replacement regulated mortgage contract, the firm must

nonetheless have regard to MCOB 13.3.

4.7A.6 R When a firm assesses whether the regulated mortgage contract is

appropriate to the needs and circumstances of the customer for the purposes

of MCOB 4.7A.5R(1), the factors it must consider include the following,

insofar as relevant:

(1) whether the customer’s requirements appear to be within the

mortgage lender’s known eligibility criteria for the regulated

mortgage contract;

(2) whether it is appropriate for the customer to have an interest-only

mortgage, a repayment mortgage, or a combination of the two;

(3) whether it is appropriate for the customer to take out a regulated

mortgage contract for a particular term;

(4) whether it is appropriate for the customer to have stability in the

amount of required payments, especially having regard to the

impact on the customer of significant interest rate changes in the

future;

(5) whether it is appropriate for the customer to have their payments

minimised at the outset;

(6) whether it is appropriate for the customer to make early

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repayments;

(7)

whether it is appropriate for the customer to have any other features

of a regulated mortgage contract;

(8) whether the regulated mortgage contract is appropriate, based on

the information provided by the customer as to his credit history;

and

(9)

whether it is appropriate for the customer to pay any fees or charges

in relation to the regulated mortgage contract up front, rather than

adding them to the sum advanced (see also MCOB 4.6A.2R).

4.7A.7 G Firms are reminded that the list in MCOB 4.7A.6R is not exhaustive. For

certain customers there may be additional considerations to explore beyond

those described in that rule; for example, in the case of a business loan or a

regulated mortgage contract for a high net worth mortgage customer.

4.7A.8 G Examples of criteria in MCOB 4.7A.6R(1) are: the expected affordability

criteria of the mortgage lender; and whether the mortgage lender will lend

in respect of properties of a non-standard construction.

Interest-only

4.7A.9 R In relation to MCOB 4.7A.6R(2), where a firm has identified an interest-

only mortgage as appropriate for a customer, the firm must ensure that the

customer is aware that he will have to demonstrate to the mortgage lender

that he will have in place a clearly understood and credible repayment

strategy, in order for the mortgage lender to be able to satisfy MCOB

11.6.41R(1).

4.7A.10 G MCOB 4.7A.9R does not require a firm to advise the customer on a credible

repayment strategy or assess the adequacy of a customer’s existing

repayment strategy.

Bridging loans

4.7A.11 R

When a firm assesses whether a bridging loan is appropriate to the needs

and circumstances of the customer for the purposes of MCOB 4.7A.5R(1),

the factors it must consider include, in addition to the factors listed at

MCOB 4.7A.6R:

(1) whether it is appropriate for the customer to make regular payments;

and

(2) whether it is appropriate for the customer to access finance quickly.

4.7A.12 R Where a firm has identified a bridging loan as appropriate for a customer,

the firm must ensure that the customer is aware that he will have to

demonstrate to the mortgage lender that he has a clearly understood and

credible repayment strategy in place.

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4.7A.13 R Where a firm is considering giving advice to a customer to enter into a

bridging loan, the reasonable steps in MCOB 4.7A.2R include considering

why it is not appropriate for the customer to take out a regulated mortgage

contract which is not a bridging loan.

4.7A.14 E If a firm advises a customer to enter into a regulated mortgage contract

with a term of a particular length so that MCOB 4.7A.11R to MCOB

4.7A.13R do not apply because the regulated mortgage contract does not

fall within the definition of a bridging loan, that advice may be relied on as

tending to show contravention of MCOB 2.5A.1R (The customer’s best

interests).

Debt consolidation

4.7A.15 R When a firm advises a customer in relation to entering into a regulated

mortgage contract where the main purpose for doing so is the consolidation

of existing debts by the customer, in addition to the factors at MCOB

4.7A.6R, it must also take account of the following, where relevant, in

assessing whether the regulated mortgage contract is suitable for the

customer:

(1) the costs associated with increasing the period over which a debt is

to be repaid;

(2) whether it is appropriate for the customer to secure a previously

unsecured loan; and

(3) where the customer is known to have payment difficulties, whether it

would be appropriate for the customer to negotiate an arrangement

with his creditors rather than to take out a regulated mortgage

contract.

4.7A.16 E An attempt by the firm to misdescribe the customer’s purpose or to

encourage the customer to tailor the amount he wishes to borrow so that

MCOB 4.7A.15R does not apply may be relied on as tending to show

contravention of MCOB 2.5A.1R (The customer’s best interests).

Further advances

4.7A.17 R Where the customer is looking to increase the borrowing secured on the

property which is the subject of an existing regulated mortgage contract,

unless the firm knows that the existing lender will not make a further

advance to the customer, the firm must inform the customer, either orally or

in writing, that it may be possible, and more appropriate, to do so rather

than to enter into a regulated mortgage contract with another lender.

4.7A.18 G Firms are not under any obligation to explore whether a further advance

with the existing lender is, in fact, more appropriate for the customer.

Other considerations when advising

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4.7A.19 R When advising a customer on the suitability of a regulated mortgage

contract, a firm must explain to the customer that the assessment of whether

the regulated mortgage contract is appropriate to his needs and

circumstances is based only on the customer’s current circumstances and

any reasonably foreseeable changes to those.

4.7A.20 G Different considerations apply when giving advice to a customer with a

payment shortfall. For example, the circumstances of the customer may

mean that, viewed as a new transaction, a customer should not be advised to

enter into a regulated mortgage contract. In those cases, a firm may still be

able to give advice to that customer where the regulated mortgage contract

concerned is, in the circumstances, a more suitable one than the customer’s

existing regulated mortgage contract.

4.7A.21 G In complying with MCOB 4.7A.5R(1) a firm is not required to consider

whether it would be preferable for the customer to:

(1) purchase a property by using his own resources, rather than by

borrowing under a regulated mortgage contract; or

(2) rent a property, rather than purchase one; or

(3) delay entering into a regulated mortgage contract until a later date

(on the grounds that property prices would have fallen in the

intervening period, or that the interest rate in relation to the

regulated mortgage contract may be lower, or both).

4.7A.22 G MCOB 4.7A.5R(3) means that where the advice is not provided on an

unlimited range of products from across the relevant market, the assessment

of suitability should not be limited to the types of regulated mortgage

contracts which the firm offers. A firm cannot recommend the 'least worst'

regulated mortgage contract where the firm does not have access to

products appropriate to the customer’s needs and circumstances. This

means, for example, that a firm dealing solely in the credit-impaired market

should not recommend one of these regulated mortgage contracts if

approached for advice by a customer who is not a credit-impaired

customer.

4.7A.23 G A firm may generally rely on any information provided by the customer for

the purposes of MCOB 4.7A.5R(1) unless, taking a common sense view of

this information, it has reason to doubt it.

Rejected advice

4.7A.24 R If a customer has rejected the advice given by a firm and instead wishes to

enter into a different regulated mortgage contract as an execution-only

sale, the firm may enter into or arrange that contract as an execution-only

sale provided the requirements in MCOB 4.8A.14R are satisfied.

Record keeping

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4.7A.25 R (1) A firm must make and retain a record:

(a)

of the customer information, including that relating to the

customer's needs and circumstances, that it has obtained for the

purposes of MCOB 4.7A;

(b) that explains why the firm has concluded that any advice given

to a customer complies with MCOB 4.7A.2R and satisfies the

suitability requirement in MCOB 4.7A.5(1)R; and

up of fees or charges into loan) where applicable.

(2) The records in (1) must be retained for a minimum of three years

from the date on which the advice was given or, in the case of (1)

(d), the making of the choice.

MCOB 4.8 is deleted in its entirety and replaced with a new section MCOB 4.8A. The

deleted text is not shown and the new text is not underlined.

4.8A Execution-only sales

Scope and application of this section

4.8A.1 G This section sets out the conditions which must be satisfied for a firm to

enter into or vary a regulated mortgage contract with a customer, or

arrange such a transaction for a customer, without giving advice, or where

the advice given by the firm has been rejected. As explained in MCOB

4.7A.1G, it does not prohibit the giving of pre-contract or preliminary

information which does not amount to advice to the particular customer. If

a firm intends (where permitted under this section) to operate a business

model under which it will not give advice to particular customers, it may

wish to refer to PERG (particularly PERG 4.6) for guidance on the

regulatory perimeter in relation to the regulated activities which constitute

advising on home finance transactions.

4.8A.2 G Subject to certain limited exceptions, where the rules in MCOB 4.8A apply

to a firm they restrict execution-only sales (which term is defined to include

variations of existing contracts) to cases where:

(1) there is no spoken or other interactive dialogue between the firm and

the customer during the sale; or

(2) if there is spoken or other interactive dialogue between the firm and

the customer during the sale:

(a) the customer is a high net worth mortgage customer; or

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(b) the customer is a professional customer; or

and in each case the customer has positively elected to proceed with

an execution-only sale and (in the case of a professional customer)

identified the product he wishes to purchase; or

(3) the customer has rejected advice, identified the product he wishes to

purchase and positively elected to proceed with an execution-only

sale.

In each case certain requirements must be satisfied.

4.8A.3 G Interactive dialogue includes SMS, mobile instant messaging, email and

communication via social media sites; this list is not exhaustive. Where a

sale is carried out entirely on the internet, a firm merely permitting the

customer to input details about the matters specified in MCOB

4.8A.14R(1), (2) or (3) in order to select from the firm’s product range the

regulated mortgage contract he wishes to purchase, or the variation he

wishes to enter into, would not be engaging in interactive dialogue. Firms

are reminded that, if this process steers the customer towards any one or

more of the products offered by it, so as to constitute advice, the

requirements of MCOB 4.7A will apply.

The customer’s best interests

4.8A.4 G Firms are reminded that MCOB 2.5A.1R (The customer’s best interests)

applies in all cases, including in relation to execution-only sales.

4.8A.5 R A firm must not encourage a customer to opt out of receiving advice on

regulated mortgage contracts from, or reject advice given by, it or any

associate.

4.8A.6 G Firms are not prohibited from entering into or arranging execution-only

sales for regulated mortgage contracts for customers to whom they have

provided product information (where otherwise permitted under this

section), but MCOB 2.5A.1R and MCOB 4.8A.5R (The customer’s best

interests) mean the information they provide should not steer the customer

to elect to enter into an execution-only sale.

Cases where execution-only sales are not permitted

4.8A.7 R A firm must not enter into or arrange an execution-only sale for a regulated

mortgage contract if:

(1) the customer is intending to use it to exercise a statutory “right to

buy” the customer’s home; or

(2) the main purpose of the customer’s entering into it is to raise funds

for debt consolidation; or

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(3) there is spoken or other interactive dialogue between the firm and the

customer at any point during the sale.

4.8A.8 E

An attempt by the firm either to:

(1) misdescribe the customer’s purpose or characteristics; or

(2) encourage the customer to tailor the amount he wishes to borrow;

so that MCOB 4.8A.7R does not apply may be relied on as tending to show

contravention of MCOB 2.5A.1R (The customer’s best interests).

Exceptions: high net worth mortgage customers, professional customers and

loans solely for a business purpose.

4.8A.9 R (1) MCOB 4.8A.7R does not apply where the customer is a high net

worth mortgage customer.

(2) MCOB 4.8A.7R(3) does not apply where the customer is a

professional customer or the loan is solely for a business purpose.

Exception: rate switches and other variations

4.8A.10 R (1) MCOB 4.8A.7R does not apply in the case of a variation of a

regulated mortgage contract, provided that:

(a) the variation would not involve the customer taking on

additional borrowing beyond the amount currently outstanding

under the existing regulated mortgage contract, other than to

finance any product fee or arrangement fee for the proposed

new or varied contract; and

(b) where the variation will (in whole or part) change from one

interest rate to another, the firm has presented to the customer,

using only a non-interactive channel, all products offered by it

for which the customer is eligible, whether or not the customer

then selects from those products using an interactive channel.

(2) The reference to a variation in (1) (and in all other provisions which

cross-refer to this rule) must be read as including any new regulated

mortgage contract which would replace an existing regulated

mortgage contract between the customer (or, where there are joint

borrowers, at least one of them) and the firm (either as the original

mortgage lender or as the transferee of the existing contract).

4.8A.11 G (1) The variation in MCOB 4.8A.10R might involve: a transfer to a

different property (“porting”); the addition or removal of a borrower

for joint mortgages; an extension of the term; a change in payment

method; or consent to let the property. This list is not exhaustive.

(2) Examples of rate changes in MCOB 4.8A.10R(1)(b) are: a transfer

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from a variable rate to a fixed rate; and a transfer from one fixed rate

to another fixed rate.

(3) Firms are reminded that, if their presentation in MCOB

4.8A.10R(1)(b) has (either explicitly or implicitly) steered the

customer towards any one or more if the products offered by them

such as to constitute advice, the requirements of MCOB 4.7A will

apply.

Exception: rejected advice

4.8A.12 R MCOB 4.8A.7R does not apply where the customer has rejected advice

given by a firm and instead wishes to enter into a different regulated

mortgage contract as an execution-only sale (see MCOB 4.8A.14R).

Execution-only sales: guidance

4.8A.13 G (1) If a firm wishes to be able to apply the exception in MCOB 4.8A.9R

for a high net worth mortgage customer, it should first consider the

provision in MCOB 1.2.9CR (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).

(2) Where a firm’s business model is such that it does not offer advice

on regulated mortgage contracts to particular customers, it should

ensure that it does not enter into or arrange regulated mortgage

contracts for customers in breach of MCOB 4.8A.7R. Such a firm

may wish to use filtering questions which the customer is required

to answer before he is able to proceed, in order to establish whether

any of the exceptions to MCOB 4.8A.7R apply.

Requirements for execution-only sales

4.8A.14 R A firm must not enter into or arrange an execution-only sale for a

regulated mortgage contract unless, except as provided in MCOB

4.8A.15R:

(1) for a new regulated mortgage contract not falling within MCOB

4.8A.10R, the customer has identified the regulated mortgage

contract he wishes to purchase, specifying to the firm at least the

following information:

(a) the name of the mortgage lender;

(b) the rate of interest;

other type);

(d) the price or value of the property on which the regulated

mortgage contract would be secured (estimated where

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necessary);

(e) the length of the term required by the customer;

(f) the sum the customer wishes to borrow; and

(g) whether the customer wants an interest-only mortgage or a

repayment mortgage;

(2) for a contract variation not falling within MCOB 4.8A.10R (but

permitted by MCOB 4.8A.7R), the customer has specified at least

the following information, where applicable to the variation he

wishes to enter into:

(a) the price or value of the property;

(b) the length of term required (or confirmation that this should

remain unchanged); and

(3) for a contract variation falling within MCOB 4.8A.10R, the

customer has specified the variation he wishes to enter into;

(4) the customer has been informed, clearly and prominently and in a

durable medium (after providing the information in (1), (2), or (3),

where that is required):

(a) in any case falling within MCOB 4A.7A.24 R (Rejected

advice) where the firm has advised the customer that the

regulated mortgage contract (or variation) is unsuitable for

the customer, that that is the case; or

(b) in any other case, that in the provision of its services for the

execution-only sale the firm is not required to assess the

suitability of that regulated mortgage contract (or variation);

and in either case that the customer will not benefit from the

protection of the rules (in MCOB 4.7A) on assessing suitability. In

any case where there is spoken dialogue between the firm and the

customer at any point during the sale, the firm must also provide

this information orally; and

(5) once the customer has been provided with the information in (4), in

any case where there is spoken or other interactive dialogue

between the firm and the customer at any point during the sale, he

has confirmed, in writing, to the firm that he is aware of the

consequences of losing the protections of the rules on assessing

suitability and is making a positive election to proceed with an

execution-only sale. The written confirmation must be in the same

document as the information in durable medium in (4), which must

be separate from any other information or contractual

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documentation.

4.8A.15 R The requirements in MCOB 4.8A.14R(1) to (3) do not apply if the customer

is a high net worth mortgage customer or entering into the regulated

mortgage contract solely for a business purpose.

4.8A.16 G Where the information in MCOB 4.8A.14R(4) is given by electronic

means, the firm should ensure that the customer cannot progress to the next

stage of the sale unless the information has been communicated to the

customer.

Managing execution-only sales

4.8A.17 R A firm which intends to transact execution-only sales in regulated

mortgage contracts must have in place and operate in accordance with a

clearly defined policy which:

(1) sets out the amount of business the firm reasonably expects to

transact by way of execution-only sales and the steps to be taken by

the firm if that business exceeds the expected levels; and

(2) sets out its processes and procedures for ensuring compliance with

the rules in MCOB 4.8A; in particular:

(a) how it will ensure in every case that, before proceeding with

an execution-only sale it has obtained (where required) a

voluntary and informed positive election from the customer in

order to comply with MCOB 4.8A.14R(5);

(b) how it will ensure in every case that it acts in compliance with

MCOB 2.5A.1R and MCOB 4.8A.5R (The customer’s best

interests), including not encouraging a customer to enter into a

regulated mortgage contract (or variation) as an execution-

only sale; and

high net worth mortgage customer or professional customer, if

it will offer execution-only sales to those customers; and

(3) includes the arrangements for monitoring and auditing compliance

with the policy, processes and procedures.

Record keeping

4.8A.18 R (1) Whenever a firm enters into or arranges an execution-only sale for

a regulated mortgage contract, it must make and maintain a record

of:

(a) the information provided by the customer which satisfies

MCOB 4.8A.14R(1), (2) or (3);

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(b) the information in durable medium in MCOB 4.8A.14R(4);

4.8A.14R(5); and

(d) any advice from the firm which the customer rejected,

including the reasons why it was rejected, before deciding to

enter into an execution-only sale.

(2)

The record in (1) must be retained for a minimum of three years

from the date on which the regulated mortgage contract was

entered into or arranged (or the variation was entered into or

arranged).

(3)

A firm must keep an adequate and up-to-date record of the policy in

MCOB 4.8A.17R, where such policy is required by that rule. When

the policy is changed, a record of the previous policy must be

retained for one year from the date of change.

Forbearance

4.8A.19 R MCOB 4.8A does not apply to any variation which is made solely for the

purposes of forbearance where the customer has a payment shortfall, or in

order to avoid a payment shortfall.

Amend the following as shown.

4.9 Business loans and loans to high net worth mortgage customers: tailored

provisions

4.9.1 R For the purposes of the

rules in MCOB there is one market in regulated

mortgage contracts for a business purpose. Within this market, a firm

should describe its scope of service in accordance with MCOB 4.3.1R.

[deleted]

4.9.1A G Firms are reminded that in accordance with MCOB 1.2.3R and MCOB

1.2.3AR, they should either comply in full with MCOB, but in doing so

may opt to take account of or comply with all tailored provisions in MCOB

that relate to business loans or loans to high net worth mortgage customers,

as the case may be. Therefore, a firm may only follow the tailored

provisions in MCOB 4.9 in relation to one of these sectors if it also follows

all other tailored provisions in MCOB that relate to that sector. In either

case, the rest of MCOB applies in full.

4.9.2 G Where a personal recommendation or personalised information is provided

in connection with a regulated mortgage contract for a business purpose it

is recognised that there may be additional considerations beyond those

described in MCOB 4.7.11E as part of the assessment of whether the

regulated mortgage contract is appropriate to the needs and circumstances

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of the customer. [deleted]

Initial disclosure

4.9.3 G As explained in

MCOB 4.4.3G(1) the requirement to provide an initial

disclosure document is only triggered where the firm has identified the

possibility that it will be giving personalised information or advice to a

customer on a regulated mortgage contract for a business purpose.

[deleted]

4.9.4 G (1) Firms are reminded that MCOB 1.2.7R enables them to substitute an

alternative for 'mortgage' in the initial disclosure document in

relation to a regulated mortgage contract for a business purpose or a

high net worth mortgage customer (except in relation to sections 6

and 8 of any initial disclosure document or sections 5 and 8 of any

combined initial disclosure document).

(2) MCOB 1.2.7R also means that a firm must should amend any

combined initial disclosure document in relation to a regulated

mortgage contract for a business purpose or a high net worth

mortgage customer so that the final sentence of prescribed text in

section 4 states: 'You will receive an illustration which will tell you

about any fees relating to a particular [term used by the firm to

describe the borrowing, for example "mortgage secured overdraft"]'.

(3) Where the initial disclosure document in relation to a regulated

mortgage contract for a business purpose or a high net worth

mortgage customer makes reference to the permitted business of a

firm (for example, sections 6 5 and 8 of the initial disclosure

document combined initial disclosure document may refer to a firm

advising on or arranging regulated mortgage contracts) a firm can

add text explaining the relevance of these descriptions. One

approach may be to add an additional sentence such as: 'Secured

overdrafts are referred to here as "mortgages" because they involve a

charge being taken over your property'.

Non-advised sales

4.9.5 R MCOB 4.8.1R does not apply in relation to a regulated mortgage contract

for a business purpose. [deleted]

…

4.10 Home purchase plans: sales standards

Scope of service provided

4.10.1 R A firm must comply with the scope of service requirements at MCOB 4.3.1R

and MCOB 4.3.2R (Providing services within and beyond scope), MCOB

4.3.4A R and 4.3.4AR (Whole of market and MCOB 4.3.10R (Appointed

representatives). [deleted]

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Initial disclosure requirements

4.10.2 R (1)

A firm must, on first making contact with a customer when it

anticipates giving personalised information or advice on entering into

a new home purchase plan, ensure that the customer is, or has been,

provided with an appropriate initial disclosure document or combined

initial disclosure document in a durable medium.

(2) If the initial contact in (1) is by telephone, a firm must:

(a) (if the call is with a view to concluding a distance home

purchase mediation contract) give the following information

before proceeding further:

(i)

the name of the firm and (if initiated by the firm) the

commercial purpose of the call;

(ii) the scope of the service provided by the firm; and

(iii) whether or not the firm will provide the customer with

advice on those home purchase plans within its scope;

and

(b) Ensure that the customer is, or has been, provided with such a

document in a durable medium as soon as is practicable.

(3) A firm must not use a combined initial disclosure document in relation

to a combination of home purchase plans and equity release

transactions. [deleted]

4.10.3 G In accordance with Principle 7, where a firm is likely to provide services in

relation to both regulated mortgage contracts and home purchase plans, it

should provide a combined initial disclosure document rather than two

separate initial disclosure documents. [deleted]

4.10.3A R A firm must comply with the rules in MCOB 4.4A as if the references in

those rules to regulated mortgage contracts and mortgage lenders were to,

respectively, home purchase plans and home purchase providers.

4.10.3B R For the purposes of MCOB 4.4A.2R(1) there is one relevant market for home

purchase plans.

4.10.4 G The guidance on initial disclosure requirements at MCOB 4.4.2G to MCOB

4.4.4G in MCOB 4.4A may be relevant; in this context, that guidance should

be read using home purchase plan terminology instead of the equivalent

regulated mortgage contract terminology, where appropriate.

Additional requirements for distance home purchase mediation

contracts with retail customers

[Note: The rules regarding additional disclosure requirements for, and

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cancellation of, distance home purchase mediation contracts are set out in

MCOB 4.5 and MCOB 4.6 respectively.]

Advised sales: suitability

4.10.5 G In accordance with

Principle 9, a firm should take reasonable steps to obtain

from a customer all information likely to be relevant to ensuring the

suitability of its advice. [deleted]

4.10.5A

R If a firm gives advice to a particular customer to enter into a home purchase

plan, or to vary an existing home purchase plan, it must take reasonable

steps to ensure that the home purchase plan is, or after the variation will be,

suitable for that customer.

4.10.5B

R In MCOB 4.10, a reference to advice to enter into a home purchase plan is to

be read as including advice to vary an existing home purchase plan.

4.10.5C G A firm should take reasonable steps to obtain from a customer all

information likely to be relevant for the purposes of MCOB 4.10.5AR to

MCOB 4.10.9AR.

4.10.5D R For the purposes of MCOB 4.10.5AR:

(1) a home purchase plan will not be suitable for a customer unless the

home purchase plan is appropriate to the needs and circumstances of

the customer;

(2) a firm must base its determination of whether a home purchase plan is

appropriate to a customer’s needs and circumstances on the facts

disclosed by the customer and other relevant facts about the customer

of which the firm is or should reasonably be aware;

(3)

no advice must be given to a customer to enter into a home purchase

plan if there is no home purchase plan which is suitable from the

product range offered by the firm;

(4)

if a home purchase provider is dealing with an existing customer in

arrears, with a payment shortfall or otherwise in breach of their home

purchase plan and has concluded that there is no suitable replacement

home purchase plan, the firm must nonetheless have regard to MCOB

13.3; and

(5) the reasonable steps in that rule include considering why it is not

appropriate for the customer to take out a regulated mortgage

contract.

4.10.6 R A firm, before making a personal recommendation on a home purchase plan,

must take reasonable steps to ensure that it is:

(1) affordable;

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(2) appropriate to the customer’s needs and circumstances; and

(3)

the most suitable of those home purchase plans that the firm has

available to it within the scope of the service provided to the customer.

[deleted]

4.10.6A G MCOB 4.10.5DR(3) has the effect that a firm cannot recommend the 'least

worst' home purchase plan where the firm does not have access to home

purchase plan products appropriate to the customer’s needs and

circumstances.

4.10.7 G The guidance on suitability at MCOB 4.7.8G to MCOB 4.7.10G and MCOB

4.7.16G may be relevant Firms may wish to consider the following

provisions:

(1)

the rule at MCOB 4.7A.6R on the customer’s needs and

circumstances, as if it were guidance and to the extent applicable to

home purchase plans; and

(2) the guidance at MCOB 4.7A.1G(2), MCOB 4.7A.21G and MCOB

4.7A.23G (Other considerations when advising);

in each case using home purchase plan terminology instead of the equivalent

regulated mortgage contract terminology, where appropriate.

Non-advised sales

4.10.8 R If a firm arranges a home purchase plan or a variation to an existing home

purchase plan without giving a personal recommendation, it must ensure

that the questions it asks about the customer’s needs and circumstances are

scripted in advance. [deleted]

4.10.9 G The guidance on non

-advised sales at MCOB 4.8.2G and on scripted

questions at MCOB 4.8.5G and MCOB 4.8.6G may be relevant. [deleted]

Rejected recommendations

4.10.9A

R If a customer has rejected the advice given by a firm and instead requested

an execution-only sale of a home purchase plan, the firm may enter into or

arrange that execution-only sale provided the requirements in MCOB

4.8A.14R (as applied in relation to home purchase plans by MCOB

4.10.9BR and modified for home purchase plans by MCOB 4.10.9DR) are

satisfied.

Execution-only sales

4.10.9B

R MCOB 4.8A applies to a firm as if the references in that section to regulated

mortgage contracts and mortgage lenders were to, respectively, home

purchase plans and home purchase providers, but MCOB 4.8A.14R(1) and

(2) are modified in relation to home purchase plans as set out in MCOB

4.10.9DR.

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4.10.9C G As provided in MCOB 4.1.2BR, MCOB 4.8A only applies to home purchase

providers in relation to entering into home purchase plans where there is no

firm which is arranging the transaction and to which MCOB 4.8A applies.

4.10.9D R For home purchase plans, the following items of information replace those

set out in MCOB 4.8A.14R(1) and (2):

(1) the name of the home purchase provider;

(2) the length of the term required by the customer; and

(3) the sum required from the home purchase provider.

Risks and features statement and tariff of charges

4.10.10 R A firm must, before making a personal recommendation to advising a

customer of, or when a

customer requests or selects, to enter into, or entering

into or arranging a home purchase plan as an execution-only sale, ensure

that the customer is, or has been, provided with an appropriate risks and

features statement about that plan.

…

Record keeping

4.10.13 R (1) A firm must make and retain a record:

(a) of the customer information, including that relating to the

customer’s needs and circumstances that it has obtained for

the purposes of MCOB 4.10.5DR;

(b)

that explains why the firm has concluded that any advice

given to a customer complies with MCOB 4.10.5AR and

satisfies the suitability requirement in MCOB 4.10.5DR(1);

and

(c)

of any advice which the customer has rejected, including the

reasons why it was rejected and details of the home purchase

plan which the customer has proceeded with as an execution-

only sale.

(2) The records in (1) must be retained for a minimum of three years from

the date on which the advice was given.

4.10.14 G Firms should note the record-keeping requirements in MCOB 4.8A in

relation to execution-only sales which are imposed in relation to home

purchase plans by MCOB 4.10.9BR.

4.11 Sale and rent back: advising and selling standards

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Initial disclosure requirements

4.11.1 R (1) A regulated sale and rent back firm, on first making contact with a

potential SRB agreement seller for whom it might reasonably be

expected to carry on any regulated sale and rent back activity, must

make the following disclosures to him a customer, both orally and in

writing, during the initial contact:

…

Affordability and appropriateness Advised sales

4.11.3 R A regulated sale and rent back firm must not permit a potential SRB

agreement seller to become contractually committed to enter into a

regulated sale and rent back agreement unless it has reasonable grounds to

be satisfied that: a firm with permission to advise on regulated sale and rent

back agreements has advised the particular customer to enter into it.

(1) the customer can afford the payments he will be liable to make under

the agreement; and

(2) the proposed regulated sale and rent back agreement is appropriate to

the needs, objectives and circumstances of the customer.

Suitability

4.11.3A R A firm must take reasonable steps to ensure that it does not advise a

particular customer to enter into a regulated sale and rent back agreement

unless the regulated sale and rent back agreement is suitable for that

customer.

4.11.3B G A firm should take reasonable steps to obtain from a customer all

information likely to be relevant for the purposes of MCOB 4.11.3AR.

4.11.3C

R For the purposes of MCOB 4.11.3AR:

(1) a regulated sale and rent back agreement will not be suitable unless,

having regard to the facts disclosed by the customer and other relevant

facts about the customer of which the firm is or should reasonably be

aware, the firm concludes on reasonable grounds that:

(a) the customer can afford the payments he will be liable to make

under it; and

(b) the proposed regulated sale and rent back agreement is

appropriate to the needs and circumstances of the customer;

(2) a firm must base its determination of whether a customer can afford

the payments he will be liable to make under a regulated sale and rent

back agreement, and whether it is appropriate to his needs and

circumstances, on the facts disclosed by the customer and other

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relevant facts about the customer of which the firm is or should

reasonably be aware;

(3) no advice must be given to a customer to enter into a regulated sale

and rent back agreement if there is no regulated sale and rent back

agreement which is suitable from within the product range offered by

the firm.

4.11.4 E (1) In assessing whether a customer can afford to enter into a particular

regulated sale and rent back agreement, a firm should use the

following information:

(a) the rental payments that will be due under the tenancy agreement

which confers the right of the customer (or trust beneficiary or

related party) to continue residing in the property, stress tested to

take account of possible future rental increases during the fixed

term of the tenancy agreement by reference to the circumstances

in which the agreement permits increases or changes to the initial

rent;

(b) adequate information, obtained from the customer to establish

his average income and expenditure calculated on a monthly

basis, and any other resources that he has available, and verified

by the firm using evidence provided by the customer;

establish using the information referred to in (b);

(d) the customer’s entitlement to means-tested benefits and housing

benefits; and

(e) the effect of any likely future change to the customer’s income,

expenditure or resources during the period of the regulated sale

and rent back agreement.

(2) The firm should explain to the customer that it will base its assessment

on whether he can afford to enter into the particular regulated sale and

rent back agreement on the information he provides to the firm about

his income, expenditure and resources.

(3) In assessing affordability under (1) the firm:

(a) must not rely to a material extent on the capital of, or income

from, any lump sum the customer receives which represents

the net sale proceeds of the property; and

(b) must disregard any discount or any future sum that may be

payable to the customer under the terms of the regulated sale

and rent back agreement.

(4) Contravention of (1), (2) or (3) may be relied upon as tending to show

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contravention of MCOB 4.11.3CR(1)(a).

4.11.4A

R In assessing whether the regulated sale and rent back agreement is

appropriate to the needs and circumstances of the customer for the purposes

of MCOB 4.11.3C R(1) (b), as a minimum requirement a firm must consider

the following list of factors:

(1)

whether it is appropriate for the customer to sell his property for a

price less than its value (as determined by the valuation which is

required by MCOB 6.9.2R, including where applicable a valuation

obtained by the SRB agreement seller as described in MCOB 6.9.2R

(4)) (where this is proposed under the regulated sale and rent back

agreement);

(2)

whether it is appropriate for the customer because he is in financial

difficulty;

(3) whether all other options have been explored and eliminated,

including the customer speaking to his home finance provider and

other creditors, getting debt advice, releasing the equity by other

means and checking whether he is eligible for government or local

authority help;

(4) whether it would be more appropriate for the customer to sell his

home on the open market;

(5) whether the benefits to the customer in entering into the proposed

regulated sale and rent back agreement outweigh any adverse effects

it may have for him, including on his entitlement to means-tested

benefits and housing benefits;

(6) the feasibility of the customer raising funds by alternative methods

other than by a sale of his property; and

(7)

if the customer is not under threat of repossession, why it is

appropriate for the customer to take out a regulated sale and rent back

agreement rather than to use an alternative method of finance.

4.11.4B

E The following may be relied on as tending to show contravention of MCOB

2.5A.1R (The customer’s best interests):

(1) an attempt by the firm to misdescribe the customer’s reasons for

considering a regulated sale and rent back agreement; or

(2) an attempt to encourage a customer to enter into a regulated sale and

rent back agreement involving a sale price for his property which is

less than its value (as determined by the valuation which is required

by MCOB 6.9.2R, including where applicable a valuation obtained by

the SRB agreement seller as described in MCOB 6.9.2R(4)) if he is

not under threat of repossession.

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4.11.4C G Firms are reminded that the list in MCOB 4.11.4AR is not exhaustive. For

certain customers there may be additional considerations to explore beyond

those described in that rule.

4.11.5 E (1) In assessing whether a particular regulated sale and rent back

agreement is appropriate to the needs, objectives and circumstances of

a potential SRB agreement seller, a firm should have due regard to the

following:

(a) whether the benefits to the customer in entering into the

proposed regulated sale and rent back agreement outweigh

any adverse effects it may have for him, including on his

entitlement to means-tested benefits and housing benefits; and

(b)

the feasibility of the customer raising funds by alternative

methods other than by a sale of his property.

(2) Contravention of (1) may be relied upon as tending to show

contravention of MCOB 4.11.3R(2). [deleted]

…

4.11.7 G

…

(2) The firm should consider whether a customer in arrears with a

payment shortfall under his regulated mortgage contract or home

purchase plan has contacted his mortgage lender or home purchase

provider to discuss possible forbearance options that may be available.

Other possible alternative methods of raising funds will include the

availability of local authority or other government rescue schemes that

may apply in the customer’s circumstances.

…

Record keeping

4.11.8 R (1) A firm must make and retain a record of the customer information that

has been provided to it, including that relating to:

(a) the customer’s income, expenditure and other resources that it

has obtained from him for the purpose of assessing affordability,

together with the stress testing of the rental payments;

(b) the customer’s needs and individual circumstances that it has

obtained from him for the purpose of assessing appropriateness;

and

benefits, including any evidence provided by the customer, that

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it has obtained from him for the affordability and

appropriateness assessment;

and which explains why the firm concluded that the regulated sale and

rent back agreement was suitable for the customer could afford, and

why it was appropriate for him, and why it advised him to enter into

the proposed regulated sale and rent back agreement it.

(2) The record in (1) must be retained for a minimum of five years from

the date on which the assessment of affordability and appropriateness

suitability was made, or one year after the end of the fixed term of the

tenancy agreement under the regulated sale and rent back agreement,

if later.

Reliance on another firm

4.11.9 R A firm need not comply with the requirements imposed on a regulated sale

and rent back firm in this section to the extent that it is satisfied on

reasonable grounds that another firm, with the appropriate permission to do

so, has already done so.

4.11.10 G The effect of MCOB 4.11.9R is that a SRB agreement provider is expected

to carry out its own assessments of affordability and appropriateness advise

in relation to a particular regulated sale and rent back agreement, unless it

is reasonable for it to rely on another firm with permission to advise on

regulated sale and rent back agreements, to have done so in relation to a

particular transaction.

The following Annex is deleted in its entirety. The deleted text is not struck

through.

4 Annex 1R Initial disclosure document [deleted]

Amend the following as shown.

5.1 Application

…

What?

5.1.3 R (1) This chapter applies if a firm:

(a) makes a personal recommendation to advises a particular

customer to enter into, or arranges an execution-only sale in, a

home finance transaction; or

(b) provides information to a customer that is specific to the

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amount to be provided on a particular home finance

transaction, including information provided in response to a

request from a customer; or

it;

in connection with entering into, or agreeing to enter into, a home

finance transaction provided by a home finance provider, other than

an equity release transaction or a variation to an existing home

finance transaction.

…

5.2 Purpose

5.2.1 G …

(2) The purpose of MCOB 5 is to ensure that, before a customer submits

an application for a particular home finance transaction, he is supplied

with information that makes clear:

(a) (in relation to a regulated mortgage contract) its features, any

linked deposits, any linked borrowing and any tied products;

and

(b) the price that the customer will be required to pay under that

home finance transaction, to enable the customer to assess

whether it is affordable to him make a well-informed

purchasing decision.

…

5.4 Mortgage illustrations: Information on regulated mortgage contracts: general

…

Restriction on provision Provision of information

5.4.13 R A firm must not provide a customer with information that is specific to the

amount that the customer wants to borrow on a particular regulated mortgage

contract except in the following circumstances:

(1) when it is in the form of an illustration;

(2) when it is provided on screen, for example a computer screen;

(3) when supplementary information which is not contained within an

illustration is provided after or at the same time as an illustration; or

(4) when it is provided orally, for example by telephone. [deleted]

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5.4.13A G When providing information on regulated mortgage contracts, firms should

bear in mind that the information must be clear, fair and not misleading in

accordance with Principle 7 and MCOB 2.2.6R; and must be given in

accordance with MCOB 2.5A.1R (The customer’s best interests).

5.4.14 R Where MCOB 5.4.13R(2) applies:

(1)

if the customer initiates the accessing of quotation information on

screen (for example, by using the internet or interactive television),

the following warning must be displayed prominently on each page on

screen: 'This information does not contain all of the details you need

to choose a mortgage. Make sure that you read the separate key facts

illustration before you make a decision.'; and

(2)

a firm must not provide a customised print function where the

information on the screen would not be in the form of an illustration if

the information were printed in hard copy. [deleted]

5.4.15 R Where MCOB 5.4.13R(3) applies, supplementary information must only be

provided when it does not significantly duplicate information provided in the

illustration. [deleted]

5.4.16 G MCOB 5.4.13R 5 places no restrictions on the provision of information that is

not specific to the amount the customer wants to borrow, for example,

marketing literature including generic mortgage repayment tables or graphs

illustrating the benefits of making a regular overpayment on a flexible

mortgage. Such literature may, however, constitute a financial promotion and

be subject to the provisions of MCOB 3 (Financial promotion).

5.4.17 G Where MCOB 5.4.13R(2) and MCOB 5.4.13R(4) apply, firms should

encourage the customer to obtain a copy of an illustration in a durable

medium. This could be done, for example, if the information was contained

on the firm’s website, by a prompt which asked the customer whether he

wished to print off an illustration. [deleted]

5.4.18 R (1) Unless (2) applies, where MCOB 5.4.13R(2) or MCOB 5.4.13R(4)

apply, a firm must provide the means for the customer to obtain an

illustration as soon as practicable, through a delivery channel

acceptable to the customer.

(2) A firm does not need to provide an illustration if the customer refuses

to disclose key information (for example, in a telephone conversation,

his name or a communication address) or where the provision of an

illustration is not appropriate, for example, because on the basis of

discussions undertaken the customer is ineligible given the mortgage

lender’s lending criteria, or is not interested in pursuing the enquiry.

[deleted]

Messages to be given when providing information on regulated mortgage contracts

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5.4.18A R (1) Whenever a firm provides a customer with information specific to the

amount that the customer wants to borrow on a particular regulated

mortgage contract following an assessment of the customer’s needs

and circumstances in order to comply with MCOB 4.7A.2R, it must

give, clearly and prominently, the following information:

(a) the same information on the firm’s product range as is

required by MCOB 4.4A.1R(1), MCOB 4.4A.2R and MCOB

4.4A.4R(1); and

(b) that the customer has the right to request an illustration for

any regulated mortgage contract which the firm is able to

offer the customer.

(2)

A firm need not give the information in (1) if it has previously given

that information in compliance with this rule within the last ten

business days.

Message to be given when customer requests an execution-only sale

5.4.18B R (1) Whenever, as part of an execution-only sale (or potential execution-

only sale), a customer provides a firm with the information in MCOB

4.8A.14R(1), (2) or (3) the firm must inform the customer, clearly and

prominently, that the customer has the right to request an illustration

for any regulated mortgage contract which the firm is able to offer the

customer.

(2) Whenever, as part of an execution-only sale (or potential execution-

only sale), a high net worth mortgage customer or customer who

would be entering into a regulated mortgage contract solely for a

business purpose is provided with information specific to the amount

that the customer wants to borrow on a particular regulated mortgage

contract, the firm must inform the customer, clearly and prominently,

that the customer has the right to request an illustration for any

regulated mortgage contract which the firm is able to offer the

customer.

(3) A firm need not give the information in (1) and (2) if it has previously

given that information in compliance with this rule within the last ten

business days.

Guidance relevant to messages given to customer

5.4.18C G (1) In order to demonstrate compliance with MCOB 5.4.18AR(1), a firm

may wish to consider, for example, doing one or more of the

following: give the messages to the customer in a durable medium;

build the requirements into the firm’s training of staff, as evidenced by

its training and compliance manuals; insert appropriate prompts into

paper-based or automated sales systems; have procedures in place to

monitor compliance by its staff with that rule. What is required in

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each case will depend on all the circumstances.

(2)

The reference in the template illustration at MCOB 5 Annex 1R to the

possibility of obtaining other illustrations is not sufficient to comply

with the obligations in MCOB 5.4.18AR(1)(b) and MCOB 5.4.18BR.

A firm may, however, satisfy those obligations in a number of ways;

for example, by drawing the customer’s attention to the right to

request an illustration orally in a face-to-face meeting, or by referring

to it in a letter or electronic communication or other written

information.

…

Tied products

…

5.4.24 G The rules on the content of an illustration at MCOB 5.6 (Content of

illustrations) mean that if the regulated mortgage contract requires the

customer to take out a tied product, the illustration must include an accurate

quotation or a reasonable estimate of the payments the customer would need

to make for the tied product (see MCOB 5.6.52R(2) on where the tied product

is a repayment vehicle strategy that is a tied product and MCOB 5.6.74R on

insurance that is a where the tied product is insurance)…

…

5.5 Provision of illustrations

Timing

5.5.1 R (1) A firm must provide the customer with an illustration for a regulated

mortgage contract before the customer submits an application for that

particular regulated mortgage contract to a mortgage lender, unless

an illustration for that particular regulated mortgage contract has

already been provided.

(2)

A Except in the circumstances in MCOB 5.5.1AR, a firm must

provide the customer with an illustration for a regulated mortgage

contract when any of the following occurs, unless an illustration for

that regulated mortgage contract has already been provided:

(a) the firm makes a personal recommendation to advises the

particular customer in relation to enter into one or more that

regulated mortgage contracts, in which case an illustration

must be provided at the point the recommendation advice is

made given (and illustrations for all recommended regulated

mortgage contracts must be provided), unless the advice is

given by telephone, in which case the firm must provide an

illustration within 5 business days; or

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(b)

the firm provides written information that is specific to the

amount that the customer wants to borrow on a particular

regulated mortgage contract; or [deleted]

specific to the amount that the customer wants to borrow on a

particular regulated mortgage contract, unless the firm does

not wish to do business with the customer. [deleted]

(d) the customer requests an illustration for that regulated

mortgage contract, unless the firm is aware that it is unable to

offer that regulated mortgage contract to him; or

(e)

as part of an execution-only sale (or potential execution-only

sale) the customer has provided the firm with the information

in MCOB 4.8A.14R(1) to (3) to indicate which regulated

mortgage contract or variation he wishes to enter into; or

(f) as part of an execution-only sale (or potential execution-only

sale), a high net worth mortgage customer or a customer who

is entering into the regulated mortgage contract solely for a

business purpose, has indicated his intention to submit an

application for that regulated mortgage contract.

(3) Subject to MCOB 5.5.4R, the firm may comply with (1) and (2) by

providing an offer document containing an illustration, if this can be

done as quickly as providing an illustration.

5.5.1A R A firm need not provide an illustration:

(1) in relation to a direct deal;

(2) if the customer refuses to disclose key information (for example, in a

telephone conversation, his name or a communication address) or

where the customer is not interested in pursuing the enquiry; or

(3)

if the firm does not wish to do business with the customer.

5.5.1B R If the firm chooses not to give an illustration in the circumstances set out in

MCOB 5.5.1AR(1), where it has given advice on a direct deal, the firm must

give the customer a written record of the advice.

5.5.1C R If, notwithstanding MCOB 5.5.1AR(1), a firm chooses to give an illustration

in relation to a direct deal, it need not comply with MCOB 5.4.2R or MCOB

5.4.3R (Accuracy).

5.5.1D G In the circumstances in MCOB 5.5.1CR, a firm remains subject to MCOB

5.4.1R (Clear, fair and not misleading).

5.5.1E G In the circumstances in MCOB 5.5.1AR(2), the rule in MCOB 5.5.1R(1) will

mean that the customer may not make an application for a regulated

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mortgage contract as an illustration has not been provided.

…

5.5.4 R A firm must not accept fees, commission a

valuation, or undertake any other

action that commits the customer to an application (including accepting

product-related fees in relation to the regulated mortgage contract concerned)

until the customer has had the opportunity to consider an illustration.

…

5.5.6 G Subject to MCOB 5.5.1R and MCOB 5.5.15R when an illustration is

requested without delay, a firm may perform an internal credit score and

obtain information on the customer’s credit record from a credit reference

agency (subject to the consent of the customer), in order to provide a

customer with an approval in principle for a regulated mortgage contract,

without having to provide an illustration. [deleted]

…

No preference between repayment and interest-only

5.5.13 R If the customer expresses no preference between a repayment mortgage and

an interest-only mortgage, the firm must:

(1) provide an illustration for a repayment mortgage (except where the firm

does not provide repayment mortgages, in which case it must provide

only an illustration for an interest-only mortgage); and

(2) make the customer aware that it has provided the illustration on this

basis. [deleted]

Providing an illustration without delay in response to a customer request

5.5.14 G Where the customer requests written information from the

firm that is specific to

the amount that the customer wants to borrow on an illustration for a particular

regulated mortgage contract under (see MCOB 5.5.1R(2)(c)(d)), the purpose of

MCOB 5.5.15R , MCOB 5.5.16R and MCOB 5.5.17G is to ensure that the

customer receives an illustration without unnecessary delay. These requirements

do not restrict the information that the firm may obtain from the customer after it

has provided the customer with an illustration.

5.5.15 R In meeting a request for an illustration under in accordance with MCOB

5.5.1R(2)(c) (d), the firm must not delay the provision of the illustration by

requesting information other than:

…

(7) any of the following information where it affects the availability of the

regulated mortgage contract that the customer has requested information

on or affects the information to be included in the illustration:

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…

customer needs to self-certify his income; [deleted]

…

5.6 Content of illustrations

…

Content: required information

…

5.6.6 R As a minimum the illustration must be personalised to reflect the following

requirements of the customer:

…

(4) the term of the regulated mortgage contract (where the customer is unable

to suggest a date at which he expects to repay the loan, for example in the

case of an open-ended secured bridging loan bridging loan, secured

overdraft or mortgage credit card, then a term of 12 months must be

assumed and this assumption stated); and

…

Section 5: “Overall cost of this mortgage”

5.6.31 R Under the section heading 'Overall cost of this mortgage' where the regulated

mortgage contract has an agreed term for repayment and a regular payment plan

(that is, it is not a revolving credit agreement such as a secured overdraft or

mortgage credit card, or a regulated mortgage contract where all of the interest

rolls up, such as an open-ended bridging loan bridging loan):

…

5.6.32 R Under the section heading 'Overall cost of this mortgage' where the regulated

mortgage contract has no agreed term for repayment, (and a 12 month term has

been assumed), or no regular payment plan, or both (for example, a revolving

credit agreement such as a secured overdraft or mortgage credit card or a

regulated mortgage contract where all the interest rolls up such as an open-

ended bridging loan bridging loan):

…

(2) where all the interest on the regulated mortgage contract rolls up and is

repaid as a lump sum at the end of the regulated mortgage contract, for

example a secured bridging loan bridging loan, then the following text

must follow the text in (1): 'It assumes that you pay back the total amount

owing as a lump sum at the end of the mortgage term.';

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…

Section 6: ‘What you will need to pay each [insert frequency of payments from

MCOB 5.6.40R]’

5.6.39 R MCOB 5.6.40R to MCOB 5.6.57G do not apply to loans without a term or

regular payment plan where some or all of the interest rolls up, for example

secured bridging loans bridging loans, secured overdrafts or mortgage credit

cards. In these cases, MCOB 5.6.134R to MCOB 5.6.138G apply.

…

5.6.52 R Where all or part of the regulated mortgage contract to which the illustration

relates is an interest-only mortgage:

…

(2) if the regulated mortgage contract requires the customer to take out a

repayment vehicle that is a tied product as a repayment strategy either

through the mortgage lender or mortgage intermediary then:

…

(b) include an accurate quotation or a reasonable estimate of the

payments the customer will need to make for the repayment

vehicle that tied product; and

…

(3)

if the illustration includes a quotation for the payments that would need to

be made into the repayment vehicle by the customer for the repayment

strategy:

…

(b) the illustration must provide a brief description only of the type of

repayment vehicle strategy illustrated (full details of the

repayment vehicle strategy may be provided separately);

…

(4) if a quotation for the repayment vehicle strategy is not provided in the

illustration, the illustration must include a '?' sign in the column for

payments alongside the following text…

(5) unless MCOB 5.6.55R applies, if a quotation for the repayment vehicle

strategy has been included in the illustration, Section 6 must be extended

to illustrate the monthly cost inclusive of the savings plan and must have

the sub-heading 'What you will need to pay each [insert frequency of

payments from MCOB 5.6.40R] including the cost of a savings plan to

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repay the capital' and must include:

…

(b)

the sum of what the customer would need to pay in each

instalment for the regulated mortgage contract and for the

repayment vehicle strategy in the payments column. For example

if payments are made monthly, this would be the amount that the

customer would need to pay each month for the regulated

mortgage contract and the repayment vehicle strategy…

…

Multi-part mortgages

…

5.6.56 R Where MCOB 5.6.55R applies and part of the regulated mortgage contract is

an interest-only mortgage:

(1) if a quotation for the repayment vehicle strategy has been included in

the illustration in accordance with MCOB 5.6.52R(3) then MCOB

5.6.52R(5) does not apply.

…

Section 7: ‘Are you comfortable with the risks’?

5.6.58 R MCOB 5.6.59R to MCOB 5.6.65R do not apply to loans without a term or

regular repayment plan where some or all of the interest rolls up, for example,

secured bridging loans bridging loans, secured overdrafts or mortgage credit

cards. In these cases MCOB 5.6.140R to MCOB 5.6.145R apply.

5.6.59 R Under the section heading 'Are you comfortable with the risks?':

(1)

under the sub-heading 'What if interest rates go up?' the illustration

must include the following:

…

(e)

…

(ii) where a repayment vehicle strategy has been included in

the illustration in accordance with MCOB 5.6.52R(3),

the payments quoted in (i) must include the cost of the

repayment vehicle strategy and state that this is the case;

…

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…

Alternative requirements for loans without a term or a regular repayment plan

Section 6: “ What you will need to pay each [insert frequency of payments from

MCOB 5.6.40R]”

5.6.133 R MCOB 5.6.134R to MCOB 5.6.138G apply only to loans without a term or

regular payment plan where some or all of the interest rolls up, for example

secured bridging loans bridging loans, secured overdrafts or mortgage credit

cards.

5.6.134 R The heading for Section 6 of the illustration and the heading of the column on

the right-hand side of this section must state the frequency with which

payments must be made by the customer. (For example, if payments were to be

made on a monthly basis, the heading for this section would be 'What you will

need to pay each month' and the column would be headed 'Monthly payments').

Where no regular payments are required on the regulated mortgage contract,

for example where all interest is rolled-up on a secured bridging loan bridging

loan, then this section must be retained and the frequency of payments assumed

must be 'monthly'.

5.6.135 R All the payments in Section 6 of the illustration must be calculated based on the

frequency used for the purposes of the headings in MCOB 5.6.40R and must be

shown in the column on the right-hand side of this section. If no payments are

required, for example on a secured bridging loan bridging loan or secured

overdraft, then this column should be marked on the illustration as nil.

5.6.136 R Section 6 of the illustration must contain the following information:

…

(3) where no payments are required (or no payments are allowed), for

example a secured bridging loan bridging loan or secured overdraft,

then section 6 of the illustration should state if no payments are required

or no payments can be made; or

…

Section 7: “Are you comfortable with the risks?”

5.6.139 R MCOB 5.6.140R to MCOB 5.6.145R apply only to loans without a term or

regular payment plan where some or all of the interest rolls up, for example

secured bridging loans bridging loans, secured overdrafts or mortgage credit

cards.

…

5.7 Business loans and loans to high net worth mortgage customers: tailored

provisions

5.7.1 R

Where the regulated mortgage contract is for a business purpose or a high net

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worth mortgage customer, a firm may choose to provide a business illustration

or high net worth illustration (as applicable)

(in compliance with MCOB

5.7.2R) instead of complying with MCOB 5.6.

5.7.1A G Firms are reminded that, in accordance with MCOB 1.2.3R, they should either

comply in full with MCOB, but in doing so may opt to take account of or

comply with all tailored provisions in MCOB that relate to business loans or

loans to high net worth mortgage customers. Therefore, a firm may only follow

the tailored provisions in MCOB 5.7 in relation to one of these sectors if it also

follows all other tailored provisions in MCOB if it also follows all other tailored

provisions in MCOB that relate to that sector. In either case, the rest of MCOB

applies in full.

5.7.2 R A business illustration or high net worth illustration

provided to a customer

must:

…

(4) use font sizes and typefaces consistently throughout the business

illustration or high net worth illustration which are sufficiently legible

so that the business illustration or high net worth illustration can be

easily read by a typical customer;

…

5.7.3 G …

(3) A firm may also choose to include other information beyond that

required by MCOB 5.6. However, when adding additional material a

firm should have regard to:

(a)

the intended use of the business illustration or high net worth

illustration as an aid to comparison by customers; and

(b) the requirement in MCOB 2.2.6R that any communication

should be clear, fair and not misleading.

(4)

The business illustration or high net worth illustration provided in

accordance with MCOB 5.7.2R should be based upon the total

borrowing that the firm is willing to provide under the regulated

mortgage contract. This means that there is no requirement for a firm

to provide a further business illustration or high net worth illustration

(or business offer document or high net worth offer document) where a

customer redraws against payments made under the regulated

mortgage contract, providing this redrawing does not exceed the

borrowing described in the original business offer document or high

net worth offer document.

(5) MCOB 5.6.6R(4) requires that where the term of the regulated

mortgage contract is open-ended, the business illustration or high net

worth illustration must be based on an assumed term of 12 months and

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that this assumption must be stated. This does not mean that a firm is

limited in the actual term of the regulated mortgage contract. A firm is

able to include in the business illustration or high net worth illustration

an explanation that while a 12-month term has been assumed for the

purpose of the business illustration or high net worth illustration, the

regulated mortgage contract itself will be open-ended.

5.7.4 R Any business illustration or high net worth illustration provided by a firm must

be limited to facilities provided under a regulated mortgage contract.

5.7.5 R MCOB 5.6.31R(2), MCOB 5.6.52R(1) and MCOB 5.6.52R(4) prescribe text

that should be used to remind a customer with an interest-only mortgage that

there is a need to separately arrange for the repayment of capital. The options

for repayment of capital may be different where the regulated mortgage

contract is for a business purpose or a high net worth mortgage customer, and a

firm must vary the prescribed wording in the business illustration or high net

worth illustration to reflect this. One approach may be for the firm to revise the

wording to reflect how the customer has said he will repay the capital.

5.7.6 R (1) When providing a business illustration or high net worth illustration in

accordance with MCOB 5.7.2R a firm should describe facilities

provided under the regulated mortgage contract that are not a loan

within section 12 (Additional features) of the business illustration or

high net worth illustration.

(2) In complying with (1), a firm should follow the requirements in MCOB

5.6.92R - MCOB 5.6.108G where these are relevant. Where the facility

is of a type not considered in MCOB 5.6.92R - MCOB 5.6.108G the

firm should provide in section 12:

(a) a brief description of the facility involved;

(b)

the term of the facility if different from the term described

elsewhere in the business illustration or high net worth

illustration; and

(c)

a summary of any charges, including any early repayment

charges, which apply to the operation of the facility.

(3) Full information on any facility described in section 12 must be

provided in supplementary materials that accompany the business

illustration or high net worth illustration.

5.7.7 G (1) In accordance with MCOB 5.7.6R(1), where the regulated mortgage

contract includes a loan, the facilities described in section 12 of the

business illustration or high net worth illustration should include the

existence of, and a simple explanation of, any all monies charge, any

contingent liabilities such as guarantees and so on.

(2) Where the regulated mortgage contract includes more than one loan

facility (such as a secured loan and a separate secured overdraft

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facility) the business illustration or high net worth illustration should

be based upon the primary facility and describe any other loan within

section 12.

5.8 Home purchase plans

…

Financial information statement: timing

5.8.1 R A Except in the circumstances in MCOB 5.8.1AR, a firm dealing directly with

a customer must ensure that the customer is, or has been, provided with an

appropriate financial information statement for a home purchase plan in a

durable medium:

(1) before the customer submits an application for that particular plan to a

home purchase provider; and

(2) without undue delay when any of the following occurs:

(a) the firm makes a personal recommendation to advises the

particular customer to enter into a one or more home purchase

plan plans, in which case a financial information statement

must be provided at the point the advice is given (and financial

information statements for all recommended home purchase

plans must be provided), (unless the personal recommendation

advice is made given by telephone, in which case a firm must

ensure the financial statement is or has been provided as soon

as practicable after the telephone call) the firm must provide a

financial information statement within five business days; or

(b)

the firm provides written information that is specific to the

amount of finance to be provided on a particular plan; or

[deleted]

(c)

the customer requests written information from the firm that is

specific to the amount of finance to be provided on a particular

plan, unless the firm does not wish to do business with the

customer. [deleted]

(d) the customer requests a financial information statement, unless

the firm is aware that it is unable to offer that home purchase

plan to him; or

(e) as part of an execution-only sale (or potential execution-only

sale) the customer has provided the firm with the information

in MCOB 4.10.9DR (Execution-only sales) (see MCOB

4.10.9BR and MCOB 4.10.9CR) to indicate which home

purchase plan or variation he wishes to enter into.

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(3) A firm may comply with (1) and (2) by providing an offer document if

this can be done as quickly as providing a financial information

statement.

5.8.1A R A firm need not provide a financial information statement:

(1) in relation to a direct deal; or

(2)

if the customer refuses to disclose key information (for example, in a

telephone conversation, his name or a communication address) or where

the customer is not interested in pursuing the enquiry; or

(3) if the firm does not wish to do business with the customer.

5.8.1B R If the firm chooses not to give a financial information statement in the

circumstances set out in MCOB 5.8.1AR, where it has given advice on a direct

deal, the firm must give the customer a written record of the advice.

…

Financial information statement: format

…

5.8.5 R A financial information statement, if not set out in a separate document, must

be:

(1) in a prominent place within the other document and clearly

identifiable as key information that the customer should read; and

(2) separate from the other content of the document in which it is

included.

…

Message to be given when providing information on home purchase plans

5.8.12 R (1) Except in the circumstances in (2), whenever a firm provides a customer

with information specific to the amount of finance to be provided on a

particular home purchase plan following an assessment of the

customer’s needs and circumstances in order to comply with MCOB

4.10.5DR, it must give, clearly and prominently, the following

information:

(a) the same information on the firm’s product range as is required

by MCOB 4.4.A1R(1), MCOB 4.4A.2R and MCOB 4.4A.4R (1)

(as applied in relation to home purchase plans by MCOB

4.10.3AR); and

(b) that the customer has the right to request a financial information

statement for any home purchase plan which the firm is able to

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offer the customer.

(2)

A firm need not give the information in (1) if it has previously given

that information in compliance with this rule within the last ten business

days.

Message to be given when customer requests an execution-only sale

5.8.13

R Whenever, as part of an execution-only sale (or potential execution-only sale),

a customer provides a firm with the information in MCOB 4.10.9DR

(Execution-only sales) (see MCOB 4.10.9BR and MCOB 4.10.9CR) the firm

must inform the customer, clearly and prominently, unless the firm has

previously given this information in compliance with this rule within the last

ten business days, that the customer has the right to request a financial

information statement for any home purchase plan which the firm is able to

offer the customer.

…

6.4 Mortgages: content of the offer document

…

Modifications to the illustration

6.4.4 R The illustration provided as part of the offer document in accordance with

MCOB 6.4.1R(1) must meet the requirements of MCOB 5.6 (Content of

illustrations) with the following modifications:

…

(7) MCOB 5.6.52 R to MCOB 5.6.53 G is replaced by the following:

Where all or part of the regulated mortgage contract is an interest-

only mortgage, the illustration in the offer document must:

(a) clearly state that the payments on the regulated mortgage

contract cover only interest, and not the capital borrowed; and

(b) state the repayment vehicle the customer intends to use where the

firm knows details of the specific repayment vehicle from the

application by the customer; if the firm does not know how the

customer intends to repay the capital borrowed, the firm must

clearly state that the repayment vehicle is unknown, and must

provide the customer with a clear reminder of the need to put

suitable arrangements in place; and [deleted]

the performance of any investment used as a repayment vehicle

strategy, to see whether it is likely to be adequate to repay the

capital and, where applicable, pay the interest accrued at the end

of the term of the regulated mortgage contract;

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(7A) The illustration may state the repayment strategy the customer intends

to use.

…

Other information contained in the offer

…

6.4.11A

R If the illustration provided by the firm to the customer does not state the

repayment strategy the customer intends to use, as permitted by MCOB

6.4.4R(7A), that information must be included in the offer document.

…

6.7 Business loans and loans to high net worth mortgage customers: tailored

provisions

6.7.1 R (1)

Where the regulated mortgage contract is for a business purpose or a

high net worth mortgage customer, a firm may choose to provide a

customer with a business offer document or high net worth offer

document (as applicable) instead of the offer document referred to in

MCOB 6.4.1R.

(2) If a firm provides a customer with a business offer document or high

net worth offer document in accordance with (1), it must ensure that:

(a) an updated business illustration or high net worth illustration (as

applicable), as required by MCOB 5.7 (Pre-application

disclosure for business Business loans and loans to high net

worth mortgage customers: tailored provisions), forms part of

the business offer document or high net worth offer document;

and

(b)

subject to the tailoring required by MCOB 5.7 (Pre-application

disclosure for business Business loans and loans to high net

worth mortgage customers: tailored provisions), the business

offer document complies with MCOB 6.4 (Mortgages: Content

content of the offer document).

6.7.1A G Firms are reminded that in accordance with MCOB 1.2.3R and MCOB

1.2.3AR, they should either comply in full with MCOB, but in doing so may

opt to take account of or comply with all tailored provisions in MCOB that

relate to business loans or loans to high net worth mortgage customers (as

applicable). Therefore, a firm may only follow the tailored provisions in

MCOB 6.7 in relation to one of these sectors if it also follows all other

tailored provisions in MCOB that relate to that sector. In either case, the rest

of MCOB applies in full.

6.7.2 G MCOB 6.7.1R(2) means, for example, that the required text in MCOB

6.4.4R(7) should be replaced by text that satisfies the requirements for

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business illustrations or high net worth illustrations in MCOB 5.7.5R.

6.7.3 G A firm may supplement the first paragraph of text prescribed in MCOB

6.4.4R(5)(a) to clarify that, while the regulated mortgage contract is not

binding until the relevant mortgage document has been signed and funds have

been released, the business offer document or high net worth offer document

may form part of a wider set of negotiated facilities and that the customer is

separately bound by these.

...

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6.9 Regulated sale and rent back agreements

Process for concluding regulated sale and rent back agreements

6.9.1 R A SRB agreement provider must not enter into a

enter into a regulated sale

and rent back agreement unless it follows the process outlined in this section.

Valuation of the property

6.9.2 R (1) A SRB agreement provider intending to enter into a enter into a

specific regulated sale and rent back agreement with a SRB

agreement seller and before it complies with the other requirements in

this section, must ensure that the property is properly valued by a

valuer: …

…

7.4 Mortgages: disclosure at the start of the contract

Disclosure requirements

7.4.1 R (Subject to MCOB 7.7.5R) a firm that enters into a regulated mortgage

contract with a customer must provide the customer with the following

information before the customer makes the first payment under that regulated

mortgage contract:

…

(4) confirmation of whether, in connection with the regulated mortgage

contract, insurance or investments (such as a repayment vehicle

strategy, term assurance, buildings and contents insurance or payment

protection insurance) have been purchased through the firm;

…

(8) if all or part of the regulated mortgage contract is an interest-only

mortgage, a reminder to the customer to check that a repayment

vehicle strategy is in place, if the repayment vehicle strategy is not

provided by the firm;

(9) what to do if the customer falls into arrears a payment shortfall,

explaining the benefit of making early contact with the firm, providing

the address and telephone number of a contact point for the firm and

drawing the customer’s attention to the arrears charges set out in the

tariff of charges.

…

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7.5 Mortgages: statements

…

Annual statement: content

7.5.3 R The statement required by MCOB 7.5.1R must contain the following:

(1) except in the case of mortgage credit cards, information on the type of

regulated mortgage contract, including:

…

(b) a prominent reminder, where all of the regulated mortgage

contract is an interest-only mortgage, that:

(i) the customer’s payments to the firm do not include the any

costs of any the repayment vehicle strategy (if that is the case);

and…

…

mortgage contract is an interest-only mortgage, that:

(i) the customer’s payments to the firm do not include the any

costs of any the repayment vehicle strategy (if that is the case);

and…

…

(4) information at the date the statement is issued on:

…

(e) the cost of redeeming the regulated mortgage contract (this must

be shown as the sum of MCOB 7.5.3R(4)(a) and MCOB

7.5.3R(4)(d) plus any linked borrowing that cannot be retained

(including the outstanding balances) plus any other charges that

can be quantified at the date the statement is issued); if

additional charges are payable that cannot be quantified at the

point that the statement is issued (for example if the customer is

in arrears

arrears) a warning must be included to that effect; and

…

7.5.4 R In the limited circumstances where it would be unlikely for Where payments

are not being made for a repayment vehicle to be set up strategy for an

interest-only mortgage (for example, for a short term bridging loan bridging

loan) MCOB 7.5.3R(1)(b)(ii) or MCOB 7.5.3R(1)(c)(ii) is replaced with the

following: "As all or part of your mortgage is an interest-only mortgage, it

assumes that you pay back the total amount borrowed on an interest-only

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basis as a lump sum at the end of the mortgage term."

...

Annual statement: additional content for customers in arrears

7.5.8 G If a firm chooses to use the annual statement to provide a customer with a

regular written statement in accordance with MCOB 13.5.1R (Statements of

charges), as described in MCOB 13.5.2G(4), it will need to include the actual

payment shortfall

payment shortfall in the annual statement.

…

7.6 Mortgages: event-driven information

…

Further advances

7.6.7 R Before a customer submits an application to a firm for a further advance on an

existing regulated mortgage contract or for a further advance that is a new

regulated mortgage contract, if the further advance requires the approval of

the mortgage lender, the firm must provide the customer with an illustration

that complies with the requirements of MCOB 5 (Pre-application disclosure)

and MCOB 7.6.9R to MCOB 7.6.17R for the further advance, unless an

illustration has already been provided or the regulated mortgage contract is

for a business purpose and the firm has chosen to comply with the tailored

provisions for regulated mortgage contracts for a business purpose or loans

to high net worth mortgage customers (see MCOB 7.7 (Business loans and

loans to high net worth mortgage customers: tailored provisions)).

…

7.6.9

R The illustration provided in accordance with MCOB 7.6.7R must:

…

(4) include a clear statement, where all or part of the regulated mortgage

contract is an interest-only mortgage and the amount paid in each

instalment does not include the cost of a repayment vehicle strategy,

to indicate that these payments do not include the cost of any savings

plan or other investment.

…

7.7 Business loans and loans to high net worth mortgage customers: tailored

provisions

Further advances

7.7.1 R (1) Where, in relation to a regulated mortgage contract for a business

purpose or a high net worth mortgage customer, a customer either:

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(a)

seeks an immediate increase in the borrowing provided under the

regulated mortgage contract; or

(b) overdraws on the borrowing under the regulated mortgage

contract;

the further advance rules in MCOB 7.6.7R to MCOB 7.6.17R do not

apply.

(2)

Where (1) applies, the firm must within five business days (for a loan

for a business purpose) or in good time before the customer is bound

by the regulated mortgage contract (for a high net worth mortgage

customer) provide the customer with either:

(a)

a business illustration or high net worth illustration (as

applicable) for the new total borrowing; or

…

7.7.1A G Firms are reminded that in accordance with MCOB 1.2.3R, they should either

comply in full with MCOB, but in doing so may opt to take account of or

comply with all tailored provisions in MCOB that relate to business loans or

loans to high net worth mortgage customers. Therefore, a firm may only

follow the tailored provisions in MCOB 7.7 in relation to one of these sectors

if it also follows all other tailored provisions in MCOB that relate to that

sector. In either case, the rest of MCOB applies in full.

…

7.7.3 R Where a customer applies for a further advance that is a regulated mortgage

contract for a business purpose or a high net worth mortgage customer and

MCOB 7.7.1R does not apply:

(1) the business illustration or high net worth illustration must be based

upon the total borrowing; and

(2)

MCOB 7.6.9R to MCOB 7.6.10G and MCOB 7.6.12G do not apply.

Arrangements to repay capital

7.7.4 R Where MCOB 7.6.28R(5) applies, a firm may omit the final sentence of the

required text where it is aware, in the context of an interest-only mortgage,

that the customer’s intention is not to use a savings plan as a repayment

vehicle strategy.

Disclosure

7.7.5 R MCOB 7.4 (Disclosure at the start of the contract) does not apply in relation

to a regulated mortgage contract that is for a business purpose or a high net

worth mortgage customer.

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…

7.8 Home purchase plans

…

Annual statement – additional content for customers in arrears

7.8.4 G If a firm uses the annual statement to provide a customer with a written

statement relating to arrears, it will need to include the actual payment

shortfall payment shortfall in the annual statement (see MCOB 13.5.2G(4)).

...

8.1 Application

Who?

8.1.1 R This chapter applies to a firm in a category listed in column (1) of the table

in MCOB 8.1.2 R in accordance with column (2) of that table.

8.1.2 R This table belongs to MCOB 8.1.1R

(1) Category of firm (2) Applicable section

equity release provider

whole chapter except MCOB 8.5A and MCOB

8.7, MCOB 8.6A in accordance with MCOB

8.1.2AR

equity release adviser

whole chapter except MCOB 8.6. MCOB 8.7

does not apply in relation to a lifetime

mortgage

equity release arranger

whole chapter except MCOB 8.5A. MCOB 8.7

does not apply in relation to a lifetime

mortgage

8.1.2A R MCOB 8.6A only applies to an equity release provider in relation to

entering into an equity release transaction where there is no firm which is

arranging (bringing about) the equity release transaction to which MCOB

8.6A applies.

8.1.2B G MCOB 8.1.2AR means that the situations where MCOB 8.6A applies to an

equity release provider include where an equity release intermediary has

been involved in arranging (bringing about) an equity release transaction

but is no longer involved in the transaction.

What?

8.1.3 R (1)

This chapter applies to a firm which in the course of carrying on an

equity release activity: enters into, advises on or arranges an equity

release transaction or a variation of the terms of an equity release

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transaction.

(a)

makes, or anticipates making, a personal recommendation

about; or

(b) gives, or anticipates giving, personalised information relating

to;

the customer:

(c)

entering into an equity release transaction; or

(d) varying the terms of an equity release transaction entered

into by the customer .

(2) In respect of arranging or advising on a home reversion plan for a

customer who is acting in his capacity as an unauthorised reversion

provider, only MCOB 8.1, MCOB 8.2 and MCOB 8.7 apply.

…

8.1.5 G If a firm is an authorised professional firm, MCOB 1.2.10R(3) has the effect

that when the firm conducts non-mainstream regulated activities with a

customer, MCOB 4.4 (Initial disclosure requirements) (as modified by

MCOB 8) applies. The firm is only required to provide the initial disclosure

information in section 7 (What to do if you have a complaint) and section 8

(Are we covered by the Financial Services Compensation Scheme (FSCS)?)

of the initial disclosure document or combined initial disclosure document.

[deleted]

8.2 Purpose

8.2.1 G The purpose of this chapter for

equity release transactions is the same as

that for regulated mortgage contracts and home purchase plans in MCOB 4.

[deleted]

8.2.2 G (1) This chapter amplifies Principle 6 (Customers' interests), Principle 7

(Communications with clients) and Principle 9 (Customers:

relationships of trust).

(2) The purpose of this chapter is to ensure that:

(a) customers are adequately informed about the nature of the

service they may receive from a firm in relation to equity

release transactions. In particular firms need to make clear to

customers the range of equity release transactions available

from them and the basis of the firm’s remuneration;

(b) where advice is given, it is suitable for the customer;

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(c)

customers for equity release transactions receive advice in all

cases;

(d) subject to certain limited exceptions (which are set out in

MCOB 8.6A), execution-only sales are only provided where

the customer has rejected advice which has been given, has

been warned about the implications of proceeding and has

specifically instructed the firm that he wishes to do so.

(3) This chapter also implements certain requirements of the Distance

Marketing Directive in relation to distance mortgage mediation

contracts.

8.3 Application of rules in MCOB 4

8.3.1 R (1) (a) Subject to (c), MCOB 4.1 to MCOB 4.6A and MCOB 4.8 (with

the modifications stated in MCOB 8.3.32BR and to MCOB

8.3.4R) apply to a firm where the home finance transaction is a

lifetime mortgage.

(b) MCOB 4.1 to MCOB 4.4A and MCOB 4.8 (with the

modifications stated in MCOB 8.3.32BR and to MCOB 8.3.4R)

apply to a firm where the home finance transaction is a home

reversion plan, except for those provisions that by their nature

are only relevant to regulated mortgage contracts.

interest roll-up mortgage.

…

8.3.2 R In applying initial disclosure requirements to equity release transactions, the

market for equity release transactions should be treated as one single market

with two separate sectors. Re

ferences to the 'whole market' must be read as

references to the whole market for equity release transactions. This is unless

the firm only gives personalised information or advice to customers on

products in one market sector, in which case references to the 'whole market'

must be read as references to the whole market for lifetime mortgages or

home reversion plans as the case may be. [deleted]

8.3.2A G The effect of the rules on independence is that a firm that sells lifetime

mortgages and home reversion plans from the whole market and enables the

customer to pay a fee for the provision of the service, can hold itself out as

being 'independent' for the equity release market (see MCOB 4.3.7 R). If the

firm offers a service on this basis for only one of these market sectors, then it

can only describe itself as 'independent' for that sector. [deleted]

8.3.2B R For the purposes of MCOB 4.4A.2R(1) there is one relevant market for

equity release transactions. Accordingly, a firm offering a customer only

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lifetime mortgages or only home reversion plans must include in its

disclosure under MCOB 4.4A.1R(1) that it is limited in that regard in the

range of products that it can offer to the customer.

8.3.2C G In the light of MCOB 8.3.2BR, a firm may wish to consider using a sentence

appropriate to the circumstances, along the following lines:

• “We offer a comprehensive range of equity release products from

across the market.”

• “We sell home reversion plans only and not lifetime mortgages,

though we will consider all home reversion plans available in the

market.”

8.3.3 R Table of modified cross-references to other rules: This table belongs to

MCOB 8.3.1R.

Subject Rule or

guidance

Reference

in rule or

guidance

To be read as a

reference to:

Advice or information from

the whole market

MCOB

4.3.4R(2)

MCOB

4.7.2R

MCOB 8.5.2R

Initial disclosure

requirement (for equity

release transactions only)

MCOB

4.4.1R(1)(

c) and (3)

MCOB 4

Ann 1R

MCOB 8 Ann

Initial disclosure

requirements

MCOB

4.4.3G

MCOB 4 MCOB 4 as

modified by

MCOB 8

Initial disclosure

requirements where initial

contact is by telephone (for

equity release transactions

only)

MCOB

4.4.7R(2)

MCOB

Ann 1R

MCOB

8 Ann

Additional disclosure for

distance mortgage mediation

contracts

MCOB

4.5

MCOB 4 MCOB 4 as

modified by

MCOB 8

Non-advised sales

MCOB

4.8.6G

MCOB 4.7 MCOB 8.5

8.3.4 R Table of rules in MCOB 4 replaced by rules in MCOB 8: This table belongs

to MCOB 8.3.1 R.

Subject Rule(s) Rule(s) replaced by

Advised sales MCOB 4.7A MCOB 8.5A

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Execution-only sales MCOB 4.8A MCOB 8.6A

…

MCOB 8.5 is deleted in its entirety and replaced with a new section MCOB 8.5A. The

deleted text is not shown and the new text is not underlined.

8.5A Advised sales

8.5A.1 G (1) MCOB 8.5A sets out standards to be observed by firms when

advising a particular customer on equity release transactions.

(2) The rules at MCOB 8.6A require firms selling equity release

transactions to provide advice to the customer, subject to the

customer’s right to reject advice which has been given and to

proceed on an execution-only basis.

Suitability

8.5A.2 R If a firm gives advice to a particular customer to enter into an equity release

transaction, or to vary an existing equity release transaction, it must take

reasonable steps to ensure that the equity release transaction is, or after the

variation will be, suitable for that customer.

8.5A.3 R In MCOB 8.5A, a reference to advice to enter into an equity release

transaction is to be read as including advice to vary an existing equity

release transaction.

8.5A.4 G A firm should take reasonable steps to obtain from a customer all

information likely to be relevant for the purposes of MCOB 8.5A.

8.5A.5 R For the purposes of MCOB 8.5A.2R:

(1) an equity release transaction will not be suitable for a customer

unless the equity release transaction is appropriate to the needs and

circumstances of the customer;

(2)

a firm must base its determination of whether an equity release

transaction is appropriate to a customer’s needs and circumstances

on the facts disclosed by the customer and other relevant facts about

the customer of which the firm is or should reasonably be aware;

(3)

no advice must be given to a customer to enter into an equity release

transaction if there is no equity release transaction which is suitable

from the product range offered by the firm;

(4) if a mortgage lender is dealing with an existing customer with a

payment shortfall and has concluded that there is no equity release

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transaction which satisfies the requirements of MCOB 8.5A.2R, the

firm must nonetheless have regard to MCOB 13.3.

8.5A.6 R When a firm assesses whether the equity release transaction is appropriate

to the needs and circumstances of the customer for the purposes of MCOB

8.5A.5R(1), the factors it must consider include the following:

(1)

whether the benefits to the customer outweigh any adverse effect on:

(a)

the customer’s entitlement (if any) to means-tested benefits; and

(b) the customer’s tax position (for example the loss of an Age

Allowance);

(2) alternative methods of raising the required funds such as, in particular:

(a)

(where relevant) a local authority (or other) grant; or

(b) taking a further advance under an existing regulated mortgage

contract (including a lifetime mortgage), or a new regulated

mortgage contract (including a lifetime mortgage) to replace an

existing one, or an additional release under an existing home

reversion plan;

(3)

whether the customer’s requirements appear to be within the equity

release provider’s known eligibility criteria for the equity release

transaction;

(4) the customer’s preferences for his estate (for example, whether the

customer wishes to be certain of leaving a bequest to his family or

others);

(5) the customer’s health and life expectancy;

(6)

the customer’s future plans and needs (for example, whether the

customer is likely to need to raise further funds or is likely to move

house);

(7) whether the customer has a preference or need for stability in the

amount of payments (where payments are required) especially having

regard to the impact on the customer of significant interest rate

changes in the future;

(8) whether the customer has a preference or need for any other features

of an equity release transaction; and

(9) for lifetime mortgages only, whether it is more appropriate for the

customer to pay any fees or charges in relation to the lifetime

mortgage up front, rather than adding them to the sum advanced (see

also MCOB 4.6A).

8.5A.7 G Examples of eligibility criteria in MCOB 8.5A.6R(3) are: the amount that

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the customer wishes to borrow or to release; the loan-to-value ratio; the age

of the customer; the value of the property which would be the subject of the

equity release transaction.

The customer’s needs and circumstances: means-tested benefits, customer’s tax

position and alternative methods of finance

8.5A.8 R In considering the factor at MCOB 8.5A.6R(1), where a firm has

insufficient knowledge of means-tested benefits and tax allowances to reach

a conclusion, the firm must refer a customer to an appropriate source or

sources such as the Pension Service, HM Revenue and Customs or Citizens

Advice Bureau (or other similar agency) to establish the required

information.

8.5A.9 E (1) In considering the factor at MCOB 8.5A.6R(2)(a), a firm should:

(a) establish, on the basis of information given by the customer

about his needs and objectives, whether these appear to be

within the general scope of a local authority (or other) grant

(for example where the customer requires funds for essential

repairs to his property); and

(b) refer a customer to an appropriate source such as his local

authority or Citizens Advice Bureau (or other similar agency)

to identify whether such a grant is available to him.

(2) Compliance with (1) may be relied upon as tending to show

compliance with MCOB 8.5A.6R(2)(a).

8.5A.10 R If for any reason a customer:

(1)

declines to seek further information on means-tested benefits, tax

allowances or the scope for local authority (or other) grants; or

(2) rejects the conclusion of a firm that alternative methods of raising the

required funds are more suitable;

a firm can advise the customer (in accordance with the remaining

requirements of this chapter) to enter into an equity release transaction

where there is an equity release transaction (or more than one equity

release transaction) that is appropriate to the needs and circumstances of

the customer, but must confirm to the customer, in a durable medium, the

basis on which the advice has been given.

Debt consolidation

8.5A.11

R In relation to MCOB 8.5A.5R(1), when a firm advises a customer in relation

to entering into an equity release transaction where the main purpose for

doing so is the consolidation of existing debts by the customer, it must also

take account of the following in assessing whether the equity release

transaction is suitable for the customer:

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(1) the costs associated with increasing the period over which a debt is to

be repaid;

(2) whether it is appropriate for the customer to secure a previously

unsecured loan; and

(3) where the customer is known to have payment difficulties, whether it

would be more appropriate for the customer to negotiate an

arrangement with his creditors than to enter into an equity release

transaction.

8.5A.12 E An attempt by the firm to misdescribe the customer’s purpose or to

encourage the customer to tailor the amount he wishes to borrow so that

MCOB 8.5A.11R does not apply may be relied on as tending to show

contravention of MCOB 2.5A.1R (The customer’s best interests).

Further advances

8.5A.13 R Where the customer is looking to increase the borrowing secured on the

property which is the subject of an existing regulated mortgage contract, a

firm must inform the customer (either orally or in writing) that it may be

possible, and more appropriate, for the customer to take a further advance

with the existing lender rather than entering into an equity release

transaction with another provider.

8.5A.14 G MCOB 8.5A.13R does not mean that firms are under any obligation to

explore whether a further advance with the existing lender is, in fact, more

appropriate for the customer.

Other considerations when advising

8.5A.15 R When advising a customer on the suitability of an equity release

transaction, a firm must explain to the customer that the assessment of

whether the equity release transaction is appropriate to his needs and

circumstances is based on the customer’s current circumstances, which may

change in the future.

8.5A.16 G Different considerations apply when dealing with a customer with a

payment shortfall. For example, the circumstances of the customer may

mean that, viewed as a new transaction, a customer should not be advised to

enter into an equity release transaction. In such cases, a firm may still be

able to advise the customer to enter into an equity release transaction where

it is more suitable than the customer’s existing home finance transaction.

8.5A.17 G MCOB 8.5A.5R(3) means that where the advice provided is based on a

selection of equity release transactions from a single or limited number of

providers, the assessment of suitability should not be limited to the types of

equity release transactions which the firm offers. A firm cannot

recommend the 'least worst' equity release transaction where the firm does

not have access to products appropriate to the customer’s needs and

circumstances. This means, for example, that if a firm only has access to

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lump sum equity release transactions it should not recommend or arrange

one of these if approached by a customer requiring regular payments.

8.5A.18

G MCOB 8.5A.5R(1) does not require a firm to provide advice on investments.

Whether such advice should be given will depend upon the individual needs

and circumstances of the customer. MCOB 8 does not restrict the ability of

an adviser to refer the customer to another source of investment advice (for

example, where the adviser is not qualified to provide advice on

investments).

Record keeping

8.5A.19 R (1) A firm must make and retain a record:

(a)

of the customer information, including that relating to the

customer’s needs and circumstances and the customer’s

apparent satisfaction of the equity release provider’s known

eligibility criteria, that it has obtained for the purposes of MCOB

8.5A;

(b) that explains why the firm has concluded that any advice given

to a customer complies with MCOB 8.5A.2R and satisfies the

suitability requirement in MCOB 8.5A.5R(1);

reasons why they were rejected and details of the equity release

transaction which the customer has proceeded with as an

execution-only sale; and

(d) where applicable, of the customer’s positive choice in MCOB

4.6A.2R (Rolling up of fees or charges into loan).

(2) The records in (1) must be retained for a minimum of three years from

the date on which the advice was given or, in the case of (1)(d), the

making of the choice.

MCOB 8.6 is deleted in its entirety and replaced with a new section MCOB 8.6A. The

deleted text is not shown and the new text is not underlined.

8.6A Execution-only sales

Scope and application of this section

8.6A.1 G (1) MCOB 8.6A provides that a firm may only enter into an equity

release transaction with a customer, or arrange such a transaction

for a customer, as an execution-only sale if the customer has

rejected advice, identified the product he wishes to purchase and

positively elected to proceed with an execution-only sale.

(2) The aim of MCOB 8.6A is to ensure that, in all sales of equity

release transactions, there is one firm which advises the customer

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on the equity release transaction and, where applicable, is

responsible for ensuring that the conditions for an execution-only

sale are satisfied. So, as provided in MCOB 8.1.2AR, MCOB 8.6A

only applies to equity release providers in relation to entering into

equity release transactions where there is no firm which is

arranging the transaction and to which MCOB 8.6A applies.

The customer’s best interests

8.6A.2 G Firms are reminded that MCOB 2.5A.1R (The customer’s best interests)

applies in all cases, including in relation to execution-only sales.

8.6A.3 R A firm must not encourage a customer to reject advice received by him on

equity release transactions.

The conditions for execution-only sales

8.6A.4 R A firm must not enter into or arrange an execution-only sale for a equity

release transaction unless:

(1)

the customer has rejected the advice given by the firm and instead

requested an execution-only sale of an equity release transaction;

(2) the customer has identified which particular equity release

transaction he wishes to purchase, and specified to the firm at least

the required additional information (where applicable);

(3) after providing the required information in (2), the customer has

been informed, clearly and prominently and in a durable medium,

and that the customer will not benefit from the protection of the

rules (in MCOB 8.5A) on assessing suitability.

(a) in any case where the firm has advised the customer that the

equity release transaction is unsuitable for the customer, that

that is the case; and

(b) in any other case, that in the provision of its services for the

execution-only sale the firm is not required to assess the

suitability of that equity release transaction;

and in either case that the customer will not benefit from the

protection of the rules (in MCOB 8.5A) on assessing suitability. In

any case where there is spoken dialogue between the firm and the

customer at any point, the firm must also provide this information

orally; and

(4) after the customer has been provided with the information in (3), in

any case where there is spoken or other interactive dialogue between

the firm and the customer at any point, the customer has confirmed

in writing to the firm that he is aware of the consequences of losing

the protections of the rules on assessing suitability and is making a

positive election to proceed with an execution-only sale. The written

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confirmation must be in the same document as the information in

durable medium in (3), which must be separate from any other

information and contractual documentation.

Exception: rate switches and other variations to lifetime mortgages

8.6A.5 R (1) The condition in MCOB 8.6A.4R(1) does not apply in the case of a

variation of a lifetime mortgage, provided that:

(a) the variation would not involve the customer taking on

additional borrowing beyond the amount currently outstanding

under the existing lifetime mortgage, other than to finance any

product fee or arrangement fee for the proposed new or varied

contract; and

(b) where the variation will (in whole or part) change from one

interest rate to another, the firm has presented to the customer,

using a non-interactive channel, all products offered by it for

which the customer is eligible, whether or not the customer then

selects from those products using an interactive channel.

(2) The reference to a variation in (1) (and in all other provisions which

cross-refer to this rule) must be read as including any new lifetime

mortgage which would replace an existing lifetime mortgage between

the customer (or, where there are joint borrowers, at least one of them)

and the firm (either as the original equity release provider or as the

transferee of the existing contract).

8.6A.6 G (1) The variation in MCOB 8.6A.5R might involve the addition or

removal of a borrower for joint mortgages or a change in payment

method. This list is not exhaustive.

(2) Examples of rate changes in MCOB 8.6A.5R(2) are: a transfer from a

variable rate to a fixed rate; and a transfer from one fixed rate to

another fixed rate.

(3) Firms are reminded that, if their presentation in MCOB 8.6A.5R(1)(b)

has (either explicitly or implicitly) steered the customer towards any

one or more if the products offered by them such as to constitute

advice, the requirements of MCOB 8.5A will apply.

8.6A.7 R The required additional information in MCOB 8.6A.4R(2) is:

(1) for a lifetime mortgage other than one falling within MCOB 8.6A.5R:

(a) the name of the mortgage lender;

(b) the rate of interest;

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(d) the price or value of the property on which the lifetime

mortgage would be secured (estimated where necessary); and

(e) the sum the customer wishes to borrow under it, either

immediately or in the future (including the amount of any

lump sum, any regular drawdown or flexible facility or any

combination of amounts the customer wishes to apply for);

(2) for a home reversion plan:

(a) the name of the equity release provider;

(b) any initial lump sum required and any lump sum required in

the future;

plan would relate (estimated where necessary); and

(d) in the case of a home reversion plan which is not a full

reversion, the amount or percentage of the value of the

property that the customer wishes to retain.

8.6A.8 G Where the information in MCOB 8.6A.4R(3) is given by electronic means,

the firm should ensure that the customer cannot progress to the next stage of

the sale unless the information has been communicated to the customer.

Record keeping

8.6A.9 R (1) Whenever a firm enters into or arranges an execution-only sale for

an equity release transaction, it must make and maintain a record

of:,

(a) the required information provided by the customer which

satisfies MCOB 8.6A.4R(2);

(b) the information in durable medium in MCOB 8.6A.4R(3);

applicable); and

(d) any advice from the firm which the customer rejected,

including the reasons why it was rejected, before deciding to

enter into an execution-only sale.

(2)

The record in (1) must be retained for a minimum of three years

from the date on which the equity release transactions was entered

into or arranged.

Forbearance

8.6A.10 R The restrictions in MCOB 8.6A on entering into execution-only sales do not

apply to any variation which is made solely for the purposes of forbearance

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where the customer has a payment shortfall, or in order to avoid a payment

shortfall.

The following Annex is deleted in its entirety. The deleted text is not shown

struck through.

8 Annex 1R: Initial Disclosure Document [deleted]

Amend the following as shown.

9.3 Pre-application disclosure

…

9.3.1 R ...

(2) The table in MCOB 9.3.2R shows how the relevant rules and

guidance in MCOB 5 must be modified by replacing the cross-

references with the relevant cross-references to rules and guidance

in MCOB 9.3 and MCOB 9.4 applicable to equity release

transactions.

…

9.3.2 R

Table of modified cross-references to other rules.

This table belongs to MCOB 9.3.1R.

Subject

Rule or

guidance

Reference in

rule or

guidance

To be read

as a

reference to:

…

Applying for a

lifetime mortgage

MCOB 5.3.2G

MCOB

5.6.26R and

MCOB

5.6.27R

MCOB

9.4.26R and

MCOB

9.4.27R

Messages to be

given when

providing

information on

equity release

transactions

MCOB

5.4.18AR(1)

MCOB

5.4.18AR(1)(a)

MCOB

4.7A.2R

MCOB

4.4A.1R(1),

MCOB

4.4A.2R and

MCOB

8.5A.2R

MCOB

4.4A.1R(1),

MCOB

4.4A.2R and

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MCOB

4.4A.4R(1)

MCOB

4.4A.4R(1),

each as

applied by

MCOB

8.3.1R in

modified

form

Messages to be

given when

customer requests an

execution-only sale

MCOB

5.4.18BR(1)

MCOB

4.8A.14R(1)

to (3)

MCOB

8.6A.4R(2)

Guidance relevant to

messages given to

customer

MCOB 5.4.18CG MCOB 5

Annex 1R

MCOB 9

Annex 1R for

a lifetime

mortgage;

MCOB 9

Annex 2R for

a home

reversion

plan.

Tied products

MCOB 5.4.24G

MCOB

5.6.74R

MCOB

9.4.73R or

MCOB

9.4.160R

Provision of

illustrations: timing

MCOB

5.5.1R(2)(e)

MCOB

4.8A.14R(1),

(2) or (3)

MCOB

8.6A.4R(2)

…

9.3.3 R

Table of rules in MCOB 5 replaced by rules in MCOB 9: This table

belongs to MCOB 9.3.1R

Subject Rule(s) or

guidance

Rule(s) or guidance

replaced by:

…

Information that is not

an illustration

MCOB 5.4.14R MCOB 9.3.11R

…

9.3.4 R

Table of rules in MCOB 5 which do not apply to MCOB 9: This table

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belongs to MCOB 9.3.1R.

Subject Rule(s)

Illustrations for repayment mortgages and interest-only

mortgages

MCOB

5.5.13R

Business loans and loans to high net worth mortgage

customers: tailored provisions

MCOB 5.7

…

9.3.11 R Where a firm provides a customer with information specific to an equity

release transaction on a screen:

(1) if the customer initiates the accessing of quotation information on

screen (for example, by using the internet or interactive

television), the following warning must be displayed equally

prominently on each page on screen: This information does not

contain all of the details you need to choose an equity release

product . Make sure that you read the separate key facts

illustration before you make a decision.

(2) a firm must not provide a customised print function where the

information on the screen would not be in the form of an

illustration if the information were printed in hard copy. [deleted]

9.3.12 R In meeting a request for written information specific to the customer’s

requirements on an illustration in relation to a particular equity release

transaction (see MCOB 5.5.1R(2)(c)(d)), the firm must not delay the

provision of the illustration by requesting information other than:

…

9.7 Disclosure at the start of the contract: lifetime mortgages

…

Disclosure requirements where interest payments are required

9.7.2 R A firm that enters into a lifetime mortgage with a customer where interest

payments are required (whether or not they will be collected by deduction

from the income from an annuity or other linked investment product)

must provide the customer with the following information before the

customer makes the first payment under the contract:

…

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(9) if it is possible for arrears a payment shortfall to occur, what to do

if the customer falls into

arrears has a payment shortfall,

explaining the benefit of making early contact with the firm,

providing the name, address and telephone of a contact point with

the firm, and drawing the customer’s attention to the arrears

charges set out in the tariff of charges;

…

Disclosure requirements where a lump sum payment is made to the customer and

interest is rolled up

9.7.8 R Where the lifetime mortgage provides for a lump sum payment to be

made to the customer, and all or part of the interest will be rolled up

during the life of the mortgage, the firm must provide the customer with

the following information before the customer makes the first payment

under the contract, or if no payment are required from the customer,

within seven days of completion of the mortgage:

…

(2) If payments are required from the customer:

…

(d) what to do if the customer falls into arrears has a payment

shortfall, explaining the benefit of making early contact with the

firm, providing the name, address and telephone of a contact point

with the firm, and drawing the customer’s attention to the arrears

charges set out in the tariff of charges;

…

MCOB 11.1, 11.2 and 11.3 are deleted in their entirety and replaced with new sections

MCOB 11.4 et seq. The deleted text is not shown and the new text is not underlined.

11 Responsible lending, and responsible financing of home

purchase plans

11.1

Application [deleted]

11.2

Purpose [deleted]

11.3 Responsible lending, and responsible financing of home

purchase plans [deleted]

11.4 Application

Who?

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11.4.1 R This chapter applies to a firm in a category listed in column (1) of the

table in MCOB 11.4.2R in accordance with column (2) of that table.

11.4.2 R This table belongs to MCOB 11.4.1R

(1) Category of

firm

(2) Applicable section

mortgage lender

Whole chapter

home purchase

provider

Whole chapter except MCOB 11.6.1G (2), MCOB 11.6.5R (3) and (4),

MCOB 11.6.18R, MCOB 11.6.19G, MCOB 11.6.20R (2) and (9), MCOB

11.6.40G to MCOB 11.6.59G, MCOB 11.6.60R(2)(e), (3) and (4) and

MCOB 11.7.3 R

What?

11.4.3 R This chapter applies:

(1) if a firm enters into a regulated mortgage contract or home

purchase plan with a customer; or

(2) if a firm varies an existing regulated mortgage contract or home

purchase plan; and

throughout the term of any regulated mortgage contract or home

purchase plan which a firm has entered into.

11.5 Purpose

11.5.1 G (1) This chapter requires a firm to treat customers fairly by assessing,

before deciding to:

(a) enter into a regulated mortgage contract or home purchase

plan; or

(b) vary a regulated mortgage contract or home purchase

plan;

whether the customer will be able to repay the sums borrowed and

interest (in the case of a regulated mortgage contract) or pay the

sums due (in the case of a home purchase plan).

(2) This chapter aims to ensure that customers are not exploited by

firms that provide finance in circumstances where the customers

are self-evidently unable to repay (or pay) through income and

have no alternative means of repayment (or payment).

(3) This chapter sets out some limited exceptions to the requirement

to assess the customer’s ability to repay (or pay), including

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transitional arrangements in relation to customers with existing

regulated mortgage contracts or home purchase plans which

satisfy certain conditions.

(4) This chapter also applies in relation to extending the term of a

bridging loan.

11.6 Responsible lending and financing

Contents of this section

11.6.1 G (1) This section sets out rules and guidance for lenders and providers

under regulated mortgage contracts and home purchase plans, in

relation to the assessment of affordability for the customer of these

contracts. Firms have the option of applying certain of the rules

and guidance on a modified basis in relation to regulated mortgage

contracts and home purchase plans which are solely for a business

purpose or are with high net worth mortgage customers. This

section also contains (at MCOB 11.6.41R to MCOB 11.6.52G)

additional rules, with accompanying guidance, in relation to

regulated mortgage contracts which are interest-only mortgages.

These rules:

(a) restrict the circumstances in which interest-only mortgages

may be entered into, and impose additional requirements on

mortgage lenders in those limited cases where they are

permitted; and

(b) provide for an exception to the requirement to assess

affordability in relation to those interest-only mortgages

which are interest roll-up mortgages, and restrict the

circumstances in which interest roll-up mortgages may be

used (see MCOB 11.6.57R to MCOB 11.6.59G).

(2) This section also contains (at MCOB 11.6.53E to MCOB 11.6.54G)

special provisions for mortgage lenders in relation to bridging

loans, including some which apply only where the bridging loan is

an interest-only mortgage.

The assessment of affordability

11.6.2 R (1)

Except as provided in MCOB 11.6.3R, MCOB 11.6.57R (Interest

roll-up mortgages) and MCOB 11.7 (Transitional arrangements):

(a) before entering into, or agreeing to vary, a regulated

mortgage contract or home purchase plan, a firm must

assess whether the customer (and any guarantor of the

customer’s obligations under the regulated mortgage

contract or home purchase plan) will be able to pay the

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sums due; and

(b) the firm must not enter into the transaction in (a) unless it

can demonstrate that the new or varied regulated mortgage

contract or home purchase plan is affordable for the

customer (and any guarantor).

(2) In MCOB 11.6, references to payment of sums due means:

(a) in the case of a regulated mortgage contract, the making of

the payments to repay the sums advanced and interest

reasonably expected to be accrued under the regulated

mortgage contract; and

(b) in the case of a home purchase plan¸ the payment of sums

due under the home purchase plan;

in each case as they fall due.

(3) In MCOB 11.6, references to the customer must be read as

referring also to any guarantor of the customer’s obligations

under the regulated mortgage contract, where the context

permits.

11.6.3 R (1) MCOB 11.6.2R does not apply to:

(a) entering into a new regulated mortgage contract or home

purchase plan as a replacement for an existing regulated

mortgage contract or home purchase plan between the

customer and the firm (either as the original mortgage

lender or home purchase provider or as the transferee of

the existing contract), whether or not the new contract

relates to the same property; or

(b) a variation of an existing regulated mortgage contract or

home purchase plan;

provided the conditions in (2) are satisfied.

(2) The conditions referred to in (1) are that:

(a) the proposed new or varied regulated mortgage contract

or home purchase plan would not involve the customer

taking on additional borrowing or (for a home purchase

plan, increasing the amount of finance provided under the

plan) beyond the amount currently outstanding under the

existing regulated mortgage contract or home purchase

plan, other than to finance any product fee or arrangement

fee for the proposed new or varied contract; and

(b) there is no change to the terms of the regulated mortgage

contract or home purchase plan which is likely to be

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material to affordability.

(3) MCOB 11.6.2R does not apply to a variation to the terms of a

regulated mortgage contract or home purchase plan which is

made solely for the purposes of forbearance where the customer

has a payment shortfall, or in order to avoid a payment shortfall.

11.6.4 E (1) If a firm treats any of the following changes as not likely to be

material to affordability, this may be relied upon as tending to

show contravention of MCOB 11.6.2R:

(a) an extension of the term of the regulated mortgage contract

or home purchase plan which it is reasonable to expect will

extend into the customer’s retirement; or

(b) changing from a repayment mortgage to an interest-only

mortgage, or vice versa; or

(2) The list in (1) is not exhaustive.

11.6.5 R When assessing for the purposes of MCOB 11.6.2R whether a customer

will be able to pay the sums due, a firm:

(1) must not base its assessment of affordability on the equity in the

property which is used as security under the regulated mortgage

contract or is subject to the home purchase plan, or take account

of an expected increase in property prices;

(2) must take full account of:

(a) the income of the customer, net of income tax and national

insurance; and, as a minimum

(b) (i) the customer’s committed expenditure; and

(ii) the basic essential expenditure and basic quality-

of-living costs of the customer’s household;

(3)

(if it is a mortgage lender) must assess affordability on the basis

of both repayment of capital and payment of interest over the

term, except where lending under an interest-only mortgage in

accordance with MCOB 11.6.41R(1); and

(4) (if it is a mortgage lender) must take account of the impact of

likely future interest rate increases on affordability, as set out in

MCOB 11.6.18R.

11.6.6 R For the purposes of MCOB 11.6.2R, a firm must not rely on a general

declaration of affordability by the customer or his representative.

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Income multiples

11.6.7

G A firm may wish to impose a limit, expressed as a multiple of the

customer’s income, on the amount it is prepared to advance under a

regulated mortgage contract or home purchase plan. Such an approach

is not, of itself, inconsistent with MCOB 11.6.2R but, in accordance with

the rules in this section, the firm must be able to demonstrate that the loan

is affordable, having taken full account of the customer’s income and

expenditure, and (for a mortgage lender) the impact of future likely

interest rate increases on affordability.

Income

11.6.8 R

In taking account of the customer’s income (in accordance with MCOB

11.6.5R(2)(a)) for the purposes of its assessment of whether the customer

will be able to pay the sums due:

(1) a firm must obtain evidence of the income declared by the

customer for the purposes of the customer’s application for the

regulated mortgage contract or home purchase plan (or

variation). The evidence, whether document-based or derived

through the use of automated systems, must be of a type and for

a period which is adequate to support each element of income

that the firm is taking into account, and subject to appropriate

anti-fraud controls; and

(2) a firm must not accept self-certification of income by the

customer, and the source of the evidence in (1) must be

independent of the customer.

11.6.9 G In relation to taking account of the customer’s income for the purposes of

its assessment of whether the customer will be able to pay the sums due:

(1) income may be derived from sources other than employment

(such as pensions or investments), or from more than one job;

(2) the evidence necessary to comply with MCOB 11.6.8R will vary

according to factors such as the employment status and the

nature of the employment of the customer (for example, whether

he is employed, self-employed, a contractor or retired), his

length of employment and, in particular, any elements of income

that are not contractually guaranteed. For example: income from

overtime working may be evidenced by payslips over a period of

time or by checking the level of income regularly paid into a

bank account;

(3) for a self-employed customer, a firm may wish to consider using

projections of future income, where these form part of a credible

business plan;

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(4) a firm may use information it already holds about a customer’s

income, for example where the customer holds a current account

with the mortgage lender;

(5) the source of evidence may be independent of the customer even

where it is supplied by the customer; for example, in the form of

payslips, bank statements or tax returns;

(6) a firm may use information provided to it by a home finance

intermediary or other third party, including electronic sources of

information, but the firm will retain responsibility for

compliance with this chapter; and

(7) mortgage lenders and home purchase providers are reminded of

their obligations under SYSC 8 in respect of outsourcing where

they choose to use a third party to verify income information.

Expenditure

11.6.10 R For the purposes of a mortgage lender’s or home purchase provider’s

assessment of whether the customer will be able to pay the sums due:

(1) the committed expenditure of a customer in MCOB

11.6.5R(2)(b)(i) is his credit and other contractual commitments

which will continue after the regulated mortgage contract or

home purchase plan (or variation) is entered into;

(2) the basic essential expenditure of a customer’s household in

MCOB 11.6.5R(2)(b)(ii) comprises expenditure for:

housekeeping (food and washing); gas, electricity and other

heating; water; telephone; council tax; buildings insurance;

ground rent and service charge for leasehold properties; and

essential travel (including to work or school); and

(3) the basic quality-of-living costs of a customer’s household in

MCOB 11.6.5R(2)(b)(ii) are its expenditure which is hard to

reduce and gives a basic quality of life (beyond the absolute

essential expenditure in (2)).

11.6.11

G (1) Examples of committed expenditure are: credit commitments

such as loans and credit cards; hire purchase agreements; child

maintenance; alimony; and the cost of a repayment strategy

where the customer has an interest-only mortgage (where

affordability has not been assessed on a capital and interest

basis: see MCOB 11.6.48R (Assessing affordability under an

interest-only mortgage)).

(2) Examples of basic quality-of-living costs (which can be reduced,

but only with difficulty) are: clothing; household goods (such as

furniture and appliances) and repairs; personal goods (such as

toiletries); basic recreation (television, some allowance for basic

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recreational activities, some non-essential transport); and

childcare.

11.6.12

R For the purposes of its assessment of whether the customer will be able to

pay the sums due:

(1) a firm may generally rely on any evidence of income or

information on expenditure provided by the customer unless,

taking a common sense view, it has reason to doubt the evidence

or information;

(2) in taking account of the customer’s committed expenditure, a

firm must take reasonable steps to obtain details of the

customer’s actual outstanding commitments; and

(3) in taking account of the basic essential expenditure and basic

quality-of-living costs of a customer’s household, a firm may

obtain details of the actual expenditure. Alternatively, it may

use statistical data or other modelled data appropriate to the

composition of the customer’s household, including the

customer, dependent children and other dependents living in the

household. If it uses statistical or other modelled data a firm

must apply realistic assumptions to determine the level of

expenditure of the customer’s household.

11.6.13 G (1) Examples of evidence of income in MCOB 11.6.12R(1) are

payslips and bank statements.

(2) If a firm obtains details of the customer’s credit commitments

from the customer, it should corroborate the information, for

example by making a credit reference agency search or checking

credit card or bank statements.

(3) Where the customer’s credit or contractual commitments are due

to end shortly after the regulated mortgage contract or home

purchase plan (or variation) has been entered into, a firm should

take a common sense approach to deciding whether to include

those commitments in its assessment of whether the customer

will be able to pay the sums due, according to such factors as the

remaining term of the commitment and the magnitude of

payments required under it.

Future changes to income and expenditure

11.6.14

R If a firm is, or should reasonably be aware from information obtained

during the application process, that there will, or are likely to, be future

changes to the income and expenditure of the customer during the term of

the regulated mortgage contract or home purchase plan, the firm must

take them into account when assessing whether the customer will be able

to pay the sums due for the purposes of MCOB 11.6.2R.

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11.6.15 G (1) Examples of future changes to income and expenditure in MCOB

11.6.14R are: reductions in income that may come about following

the customer’s retirement; where it is known that the customer is

being made redundant; or where the firm is aware of another loan

commitment that will become due during the term of the regulated

mortgage contract or home purchase plan, such as an equity loan

to assist in property purchase.

(2) If the term of a regulated mortgage contract or home purchase

plan would extend beyond the date on which the customer expects

to retire (or, where that date is not known, the state pension age), a

firm should take a prudent and proportionate approach to assessing

the customer’s income beyond that date. The degree of scrutiny to

be adopted may vary according to the period of time remaining to

retirement when the assessment is made. The closer the customer

is to retiring, the more robust the evidence of the level of income in

retirement should be. For example, where retirement is many

years in the future, it may be sufficient merely to confirm the

existence of some pension provision for the customer by requesting

evidence such as a pension statement; where the customer is close

to retirement, the more robust steps may involve considering

expected pension income from a pension statement. In accordance

with MCOB 11.6.12R(1), a firm should take a common sense view

when assessing any information provided by the customer on his

expected retirement date.

(3) Where an additional loan commitment is expected to become due

during the term of the regulated mortgage contract or home

purchase plan, the mortgage lender should assess whether the

regulated mortgage contract or home purchase plan will remain

affordable when the loan commitment becomes due, unless there is

an appropriate repayment strategy in place to repay that loan, such

as through the sale of the property which is the subject of the

regulated mortgage contract or home purchase plan.

Debt consolidation and credit-impaired customers

11.6.16 R (1) This rule applies where:

(a) a purpose of a regulated mortgage contract or home purchase

plan (or variation) is debt consolidation; and

(b) the customer is a credit-impaired customer.

(2) Subject to (3), where each of the conditions in (1) is satisfied and, if

the debts which are to be repaid using the sums raised by the

regulated mortgage contract or home purchase plan (or variation)

were not repaid, the transaction would not be affordable for the

customer, the firm must take reasonable steps to ensure that, on

completion of the transaction, those debts are actually repaid.

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(3) The requirement in (2) does not apply if the firm has assumed that

the customer’s existing debts which are to be repaid using the sums

raised by the regulated mortgage contract or home purchase plan

(or variation) will not in fact be repaid and, accordingly, include

them as committed expenditure in the affordability assessment for

the customer.

11.6.17

G The requirement in MCOB 11.6.16R(2) for reasonable steps may be

satisfied by the mortgage lender’s, or home purchase provider’s,

repaying the committed expenditure directly to the creditors concerned as

a condition of granting the regulated mortgage contract or home

purchase plan.

Considering the effect of future interest rate rises

11.6.18 R (1) Under MCOB 11.6.5R(4), in taking account of likely future interest

rate increases for the purposes of its assessment of whether the

customer will be able to pay the sums due, a mortgage lender must

consider the likely future interest rates over a minimum period of

five years from the expected start of the term of the regulated

mortgage contract (or variation), unless the interest rate under the

regulated mortgage contract is fixed for a period of five years or

more from that time, or for the duration of the regulated mortgage

contract (or variation), if less than five years.

(2) A mortgage lender must be able to justify the basis it uses for

determining likely future interest rates for the purposes of this rule

by reference to market expectations.

(3) For the purposes of this rule, even if the basis used by the mortgage

lender in (2) indicates that interest rates are likely to fall, or to rise

by less than 1%, during the first five years of the regulated

mortgage contract (or variation), a mortgage lender must assume

that interest rates will rise by a minimum of 1% over that period.

11.6.19 G In relation to MCOB 11.6.18R(2):

(1) an example of market expectations is the forward sterling rate

published on the Bank of England website. A mortgage lender

should not use its own forecast; and

(2) a mortgage lender should not link its determination to market

expectations without considering the likely effect of rate changes in

accordance with the market expectations on the specific regulated

mortgage contract in question.

Responsible lending or financing policy

11.6.20 R A firm must put in place, and operate in accordance with, a written policy

(which may be contained in more than one document), approved by its

governing body, setting out the factors it will take into account in

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assessing a customer’s ability to pay the sums due. The policy must

address the following matters:

(1) how income and expenditure is to be assessed, including (except

as provided in MCOB 11.6.32R(1) and MCOB 11.6.39R(1)):

(a) details of the types of income which are acceptable;

(b) the proportion of different income streams which is

acceptable;

aware, are to be considered;

(d) what is acceptable evidence of income (including the time

period to be covered by the evidence); and

(e) how committed expenditure, basic essential expenditure

and basic quality-of-living costs are taken into account

when assessing affordability;

(2) how future interest rates are taken into account when assessing

affordability;

(3) the calculations used to determine whether the regulated

mortgage contract or home purchase plan is affordable;

(4) how the mortgage lender’s or home purchase provider’s anti-

fraud controls are incorporated into affordability assessments;

(5) how the mortgage lender’s or home purchase provider’s method

of calculating the size of the advance for each customer, based on

a consideration of the customer’s income and expenditure, is to be

monitored, including the timing of reviews and key performance

indicators to be used (see MCOB 11.6.22R (Monitoring));

(6) the actions to be taken if the mortgage lender’s or home purchase

provider’s calculation method, referred to in (5), does not perform

as expected;

(7) how regular audits of compliance with the mortgage lender’s or

home purchase provider’s responsible lending or financing policy

established in accordance with this rule are to be undertaken (as

required by MCOB 11.6.24R);

(8) how the record keeping requirements in MCOB 11.6.60R are to be

met;

(9) (if applicable) the matters required by MCOB 11.6.50R (Interest-

only policy); and

(10) (if applicable) how the firm will apply the rules in MCOB 11.7

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(Transitional arrangements) so as to permit exceptions to its

procedures for affordability assessments, to include arrangements

for use of management information to monitor its application of

those exceptions.

11.6.21

G Examples of different income streams in MCOB 11.6.20R(1)(b) are:

income derived from sources other than employment; income from more

than one job; and elements of income that are not contractually

guaranteed.

Monitoring

11.6.22 R A firm must put in place, and be able to demonstrate that it has, robust

systems and controls (including the use of management information and

key performance indicators) to monitor the effectiveness of its

affordability assessments, including in preventing payment difficulties.

11.6.23 G Except as provided in MCOB 11.6.32R(2) and MCOB 11.6.39R(2), the

monitoring in MCOB 11.6.22R should:

(1) include use of management information, key performance

indicators and root cause analysis to review and (where

appropriate) adjust and improve the mortgage lender’s or home

purchase provider’s method of calculating the size of the advance

for each customer, based on a consideration of the customer’s

income and expenditure; and

(2) take place on a regular basis. However, a firm should put in place

key performance indicators that trigger more frequent reviews; for

example, if the incidence of customers being in arrears, or of

early arrears, is higher than expected.

11.6.24 R A firm must ensure that its compliance with the responsible lending or

financing policy required by MCOB 11.6.20R is reviewed at least once

per calendar year:

(1) in any case where the firm has an internal audit function or

outsourced equivalent, by that function; and

(2) in any other case, by the firm’s internal compliance function or an

outsourced equivalent.

Alternative provisions for loans which are solely for a business purpose

11.6.25 R Where a regulated mortgage contract is solely for a business purpose, a

firm may opt to apply MCOB 11.6.26R to MCOB 11.6.31R in place of

MCOB 11.6.5R to MCOB 11.6.19G.

11.6.26 R When assessing for the purposes of MCOB 11.6.2R whether a customer

will be able to pay the sums due, a firm:

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(1) must not base its assessment of affordability on the equity in the

property which is used as security under the regulated mortgage

contract, or take account of an expected increase in property

prices;

(2) must:

(a) where the repayments will be made from the resources of

the customer:

(i) take full account of the income, net of income tax

and national insurance, or net assets (or both) of

the customer; and the customer’s committed

expenditure; and

(ii) take account, in general terms as a minimum, of

the basic essential expenditure and basic quality-

of-living costs of the customer’s household; and

(b) where the repayments will be made from the financial

resources of the business, take full account of the strength

of those resources;

(3) in a case falling within (2)(b), if the customer is relying on the

business for his personal income, must as a minimum consider in

general terms whether the business can support the customer’s

basic essential expenditure and basic quality-of-living costs;

(4)

must assess affordability on the basis of both repayment of capital

and payment of interest over the term, except where lending under

an interest-only mortgage in accordance with MCOB 11.6.41R(1);

and

(5) must take account of the impact of likely future interest rate

increases on affordability.

11.6.27 R For the purposes of MCOB 11.6.2R, a firm must not rely on a general

declaration of affordability by the customer or his representative.

11.6.28 R In taking account (in accordance with MCOB 11.6.26R(2)) of the

customer’s income or net assets (or both) and the resources of the

business for the purposes of its assessment of whether the customer will

be able to pay the sums due:

(1) a firm must obtain evidence of the income or net assets (or both)

of the customer and the resources of the business, as declared by

the customer for the purpose of the customer’s application for

the regulated mortgage contract (or variation); and

(2) a firm must not accept self-certification of income by the

customer, and the source of the evidence in (1) must be

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independent of the customer.

11.6.29

R In MCOB 11.6.26R, for the purposes of taking full account of committed

expenditure and taking account in general terms of basic essential

expenditure and basic quality-of-living costs, the meaning of those

phrases is as set out in MCOB 11.6.10R.

11.6.30

G The information which a firm should consider when taking account, for

the purposes of MCOB 11.6.26(2)(b), of the strength of the financial

resources of the business will vary according to the characteristics of the

business, but may include factors such as the cash flow, assets and

liabilities of the business.

11.6.31 R If a firm is, or should reasonably be aware from information obtained

during the application process, that there will, or are likely to, be future

changes to the income and expenditure of the customer, or the resources

of the business, during the term of the regulated mortgage contract, the

firm must take them into account when assessing whether the customer

will be able to pay the sums due for the purposes of MCOB 11.6.2R.

11.6.32

R Where a firm chooses, in accordance with MCOB 11.6.25R, to apply the

provisions of MCOB 11.6.26R to MCOB 11.6.31R in place of MCOB

11.6.5R to MCOB 11.6.19G:

(1) its policy in MCOB 11.6.20R(1) need not address each of the

matters prescribed in sub-paragraphs (a) to (e) of that rule;

(2) MCOB 11.6.23G does not apply; and

(3) in each case the record-keeping requirements in MCOB

11.6.60R(2)(a) to (d) apply only to the extent relevant, but the

record in MCOB 11.6.60R(1) must also include, to the extent

relevant:

(a) the customer’s assets and the evidence relied on to assess

them; and

(b) the details considered in relation to the resources of the

business.

Alternative provisions for loans with high net worth mortgage customers

11.6.33 R Where a regulated mortgage contract is for a high net worth mortgage

customer, a firm may opt to apply MCOB 11.6.34R to MCOB 11.6.38R in

place of MCOB 11.6.5R to MCOB 11.6.19G.

11.6.34 R When assessing for the purposes of MCOB 11.6.2R whether a customer

will be able to pay the sums due, a firm:

(1) must not base its assessment of affordability on the equity in the

property which is used as security under the regulated mortgage

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contract, or take account of an expected increase in property prices;

(2) must:

(a) take full account of the income, net of income tax and national

insurance, or net assets (or both) of the customer; and the

customer’s committed expenditure; and

(b) take account, in general terms as a minimum, of the basic

essential expenditure and basic quality-of-living costs of the

customer’s household;

(3)

must assess affordability on the basis of both repayment of capital

and payment of interest over the term, except where lending under

an interest-only mortgage in accordance with MCOB 11.6.41R(1);

and

(4) must take account of the impact of likely future interest rate

increases on affordability.

11.6.35 R For the purposes of MCOB 11.6.2R, a firm must not rely on a general

declaration of affordability by the customer or his representative.

11.6.36 R In taking account of the customer’s income or net assets (or both) (in

accordance with MCOB 11.6.34R(2)(a)) for the purposes of its

assessment of whether the customer will be able to pay the sums due:

(1) a firm must obtain evidence of the income or net assets (or both)

declared by the customer for the purpose of the customer’s

application for the regulated mortgage contract (or variation); and

(2) a firm must not accept self-certification of income by the customer,

and the source of the evidence in (1) must be independent of the

customer.

11.6.37 R In MCOB 11.6.34R, for the purposes of taking full account of committed

expenditure and taking account in general terms of basic essential

expenditure and basic quality-of-living costs, the meaning of those

phrases is as set out in MCOB 11.6.10R.

11.6.38 R If a firm is, or should reasonably be, aware from information obtained

during the application process, that there will, or are likely to, be future

changes to the income and expenditure of the customer during the term of

the regulated mortgage contract, the firm must take them into account

when assessing whether the customer will be able to pay the sums due for

the purposes of MCOB 11.6.2R.

11.6.39 R Where a firm chooses, in accordance with MCOB 11.6.33R, to apply the

provisions of MCOB 11.6.34R to MCOB 11.6.38R in place of MCOB

11.6.5R to MCOB 11.6.19G:

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(1) its policy in MCOB 11.6.20R(1) need not address each of the

matters prescribed in sub-paragraphs (a) to (e) of that rule;

(2) MCOB 11.6.23G does not apply; and

(3) in each case the record-keeping requirements in MCOB

11.6.60R(2)(a) to (d) apply only to the extent relevant, but the

record in MCOB 11.6.60R(1) must also include, to the extent

relevant, the customer’s assets and the evidence relied on to assess

them.

Interest-only mortgages

11.6.40 G The rules in this part (MCOB 11.6.41R to MCOB 11.6.49R) provide that

interest-only mortgages may be entered into by mortgage lenders in

limited circumstances.

Entering into interest-only mortgages

11.6.41 R (1) A mortgage lender may only enter into an interest-only mortgage,

or switch a repayment mortgage onto an interest-only basis for all

or part of its term, if:

(a) it has evidence that the customer will have in place a clearly

understood and credible repayment strategy; and

(b) as far as it is reasonably able to assess at that time, the

repayment strategy has the potential to repay the capital

borrowed and any interest reasonably expected to be

accrued under the interest-only mortgage.

(2) In MCOB 11.6, a reference to an interest-only mortgage is to be

read as including any regulated mortgage contract which includes

an interest-only period or where part of the sum is advanced on an

interest-only basis.

(3) A mortgage lender must not accept speculative repayment

strategies for the purposes of (1).

11.6.42 G Firms are reminded that:

(1) interest-only mortgages include those where some, but not all,

interest is payable at the end of the term. Accordingly, the

requirement in MCOB 11.6.41R(1)(b) applies equally to such

interest-only mortgages as it does to those where all of the interest

is accrued until the end of the term; and

(2) a lifetime mortgage is a type of interest-only mortgage, as full

repayment of capital and interest is not required over the term.

Accordingly, the requirements in the Handbook (including in

MCOB 11.6 and MCOB 11.7) which apply to interest-only

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mortgages apply to lifetime mortgages, unless specifically

disapplied. Depending always on its terms, a lifetime mortgage may

also be an interest roll-up mortgage, as noted in MCOB 11.6.59G.

11.6.43

R MCOB 11.6.41R(1) does not prevent a mortgage lender, when

appropriate, from making a temporary concession, by which he accepts

payment of interest only, with a customer who is in arrears or has a

payment shortfall, or is at risk of arrears or a payment shortfall, on a

regulated mortgage contract.

11.6.44 G Firms are reminded that whether it is appropriate to take the action

contemplated by MCOB 11.6.43R will depend on all the circumstances of

the particular case and must be considered having regard to, among other

things, Principle 6 and the rules in MCOB 13.

11.6.45 G The following are examples of repayment strategies that may, subject to

the circumstances of the customer, be acceptable for the purposes of

MCOB 11.6.41R(1):

(1) regular deposits into a savings or investment product;

(2) the periodic repayment of capital from irregular sources of income

(such as bonuses or some sources of income from self-

employment); and

(3) the sale of assets such as another property or other land owned by

the customer.

11.6.46 E Acceptance by a mortgage lender of any of the following repayment

strategies for the purposes of MCOB 11.6.41R(1) may be relied upon as

tending to show contravention of that rule:

(1) an expectation that the value of the property which is the subject of

the regulated mortgage contract will increase over its term

sufficiently to enable the customer to sell the property to repay the

capital borrowed and, where applicable, pay the interest accrued

under the interest-only mortgage;

(2) an intention on the part of the customer to utilise an expected, but

uncertain, inheritance to repay the capital borrowed and, where

applicable, pay the interest accrued under the interest-only

mortgage; and

(3) the sale of the property which is the subject of the regulated

mortgage contract, where that is the customer’s main residence and

the mortgage lender does not consider whether the property will

have the potential to:

(a) provide sufficient funds for the customer to repay the capital

borrowed and, where applicable, the interest accrued under

the interest-only mortgage; and

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(b) allow the customer to purchase a cheaper property to reside

in or execute any other associated strategy.

The above list is not exhaustive.

11.6.47 G In complying with MCOB 11.6.41R(1), where a customer’s repayment

strategy is the sale of the property which is the subject of the regulated

mortgage contract, a mortgage lender may wish to consider, as part of its

assessment of that repayment strategy, factors such as the equity in the

property when considered in relation to the level of property prices in the

relevant area at the time of the consideration or, for a lifetime mortgage,

the borrower’s life expectancy.

Assessing affordability under an interest-only mortgage

11.6.48

R For the purposes of MCOB 11.6.2R, where a mortgage lender is lending

under an interest-only mortgage in accordance with MCOB 11.6.41R(1),

it may assess affordability on the basis of payment of interest only over

the term (plus repayment of such capital as may be due to be repaid over

the term). If it does so, it must consider as part of the customer’s

committed expenditure under MCOB 11.6.5R(2)(b)(i) (or the equivalent

alternative provision for transactions with high net worth mortgage

customers or solely for business purposes) the cost to the customer of the

repayment strategy.

Review during the term of interest-only mortgages

11.6.49 R (1) This rule applies in relation to all interest-only mortgages which a

mortgage lender enters into on or after 26 April 2014 except:

(a) lifetime mortgages;

(b) bridging loans; and

and, if applicable, interest accrued, is certain.

(2) Except as set out in (3), a mortgage lender must carry out a review

(as a minimum, once) during the term of the mortgage, in which

contact is made with the customer, to check that the customer’s

repayment strategy is still in place, and that it is still reasonable to

expect that the repayment strategy has the potential to repay the

capital borrowed and, where applicable, pay the interest reasonably

expected to be accrued under the interest-only mortgage. The

review must be carried out at a stage of the term when, if the

repayment strategy is not in place, or not adequate, there is likely to

be sufficient time prior to the end of the term for the customer to

take appropriate steps to remedy the situation.

(3) The review in (2) is not required in any case where, despite

reasonable efforts to contact the customer, the mortgage lender has

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been unable to do so.

(4) Following the review in (1), where appropriate the mortgage lender

must take reasonable steps to discuss with the customer what may

be done to address the situation.

Interest-only policy

11.6.50

R A mortgage lender which enters into interest-only mortgages (unless

they are only lifetime mortgages) must include in the policy which is

required by MCOB 11.6.20R (Responsible lending and financing policy)

a policy on interest-only mortgages, setting out its processes and

procedures for ensuring compliance with MCOB 11.6.41R(1) and for

safeguarding the interests of customers during the term of interest-only

mortgages. This policy must include:

(1) details of the mortgage lender’s plans for lending by way of

interest-only mortgages, including its planned volumes of lending

on that basis over a specified period, and provision for reviewing

the actual volumes of lending on that basis, including the timing

and method of review;

(2) specification of the types of repayment strategy which will be

considered acceptable, and the evidential requirements and other

controls which will be applied to ensure that only such types will be

accepted, including the controls to be applied where the repayment

strategy is the sale of the property which is the subject of the

regulated mortgage contract;

(3) the procedures for checking the existence and adequacy of the

repayment strategy in line with the policy, including questions to be

asked of the customer;

(4) the arrangements for monitoring and auditing compliance with the

policy, processes and procedures (see MCOB 11.6.22R and MCOB

11.6.24R (Monitoring)); and

(5) the process for the review required by MCOB 11.6.49R which, as a

minimum:

(a) prescribes the timing of the review;

(b) prescribes the content of the review, including the questions

to be asked of the customer and the actions to be taken if the

customer proves difficult to contact or otherwise does not

co-operate with the review;

repayment strategy meets the criteria in MCOB 11.6.49R(2);

and

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(d) sets out the actions which will be appropriate to be

considered during the discussions in MCOB 11.6.49R(2),

depending on the circumstances of the customer.

11.6.51 G (1) The controls in MCOB 11.6.50R(2) may include, where

appropriate: maximum loan to value limits; minimum equity

requirements; regional factors such as property prices; or other

eligibility requirements.

(2) The policy and procedures for safeguarding the interests of a

customer under an interest-only mortgage should not permit the

mortgage lender to change the interest-only mortgage to a

repayment mortgage, extend the term or otherwise change the

features of the interest-only mortgage unless to do so is compatible

with the duties of the mortgage lender under Principle 6 and any

other applicable rules and regulations, including those relating to

arrears or payment shortfall. A mortgage lender should also have

regard to the Unfair Terms Regulations when drafting the

provisions of regulated mortgage contracts in relation to changes to

their features.

11.6.52 G MCOB 11.6.50R sets out requirements for mortgage lenders to have

appropriate procedures for managing interest-only mortgages in order to

safeguard the interests of customers. Firms are reminded of the rules and

guidance in SYSC (notably SYSC 7.1) relating to systems and controls for

the management of risks to which firms themselves are exposed. Firms

will need to consider whether their systems and controls are adequate in

relation to the management of risks arising from interest-only mortgages.

Assessing the customer’s repayment strategy for bridging loans

11.6.53

E For a bridging loan which is an interest-only mortgage, acceptance by a

mortgage lender as a repayment strategy for the purposes of MCOB

11.6.41R(1) of an expectation that, by entering into the bridging loan, the

customer’s credit status will be sufficiently improved to enable him to

refinance to a longer-term regulated mortgage contract (except where the

mortgage lender has evidence of a guaranteed offer for such a longer-

term contract) may be relied upon as tending to show contravention of

that rule.

11.6.54 G For a bridging loan which is an interest-only mortgage, in complying

with MCOB 11.6.41R(1):

(1) where the customer’s repayment strategy is the sale of his existing

home, the mortgage lender may wish to consider asking for it to

be supported by an independent valuation of that property, as a

condition of accepting that repayment strategy; and

(2) where the customer’s repayment strategy is the replacement of the

bridging loan with a mainstream regulated mortgage contract, the

mortgage lender should not accept that repayment strategy unless

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it is reasonably satisfied that a mainstream mortgage lender will

be willing to enter into a regulated mortgage contract with the

customer. A firm may wish to consider requesting evidence of a

guaranteed offer or agreement in principle that will be in place

once the existing term of the bridging loan has expired, or obtain

the necessary income and expenditure information, in order to be

so satisfied.

Extending the term of a bridging loan

11.6.55 R Except in relation to a secured overdraft which is solely for a business

purpose or is with a high net worth mortgage customer:

(1) when considering extending the term of a bridging loan, a

mortgage lender must comply with MCOB 11.6.2R as if the

bridging loan were a new loan;

(2) where MCOB 11.6.2R does not apply in relation to extending the

term of a bridging loan (because the bridging loan is an interest

roll-up mortgage, and therefore MCOB 11.6.57R applies), the

mortgage lender must consider with the customer, before he

commits himself to extend the term, the impact of the extension

on the customer’s remaining equity in the property which is the

subject of the bridging loan; and

(3) a firm must not agree to extend the term of a bridging loan unless

the customer has made a positive choice to do so.

11.6.56 G Firms are reminded that, when extending the term of a bridging loan to

which MCOB 11.6.55R does not apply, in accordance with MCOB

2.5A.1R, they must act honestly, fairly and professionally in accordance

with the best interests of their customer.

Interest roll-up mortgages

11.6.57 R The requirements in MCOB 11.6.2R (and any Handbook provisions

applicable only to that rule) do not apply in relation to an interest roll-up

mortgage.

11.6.58 R A mortgage lender may not enter into an interest roll-up mortgage, or

vary an existing regulated mortgage contract so that it becomes an

interest roll-up mortgage, unless it is:

(1) a lifetime mortgage; or

(2) a bridging loan; or

(3) a loan to a high net worth mortgage customer; or

(4) a loan solely for business purposes.

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11.6.59 G Firms are reminded that an interest roll-up mortgage is a type of interest-

only mortgage, where no payments of interest or capital are required or

anticipated until the mortgage comes to an end. Depending always on

their terms, it is possible to structure the types of product set out in

MCOB 11.6.58R(1) to (4) as an interest roll-up mortgage. Where that is

the case, MCOB 11.6.2R will not apply in relation to them, but MCOB

11.6.40G to MCOB 11.6.52G will apply to all interest roll-up mortgages,

to the extent they are permitted by MCOB 11.6.58R.

Record-keeping

11.6.60 R (1) A firm must make, in paper or electronic form, an adequate record

of the steps it takes to comply with the rules in this chapter in

relation to each customer.

(2) The record in (1) must include the information taken into account

in each affordability assessment, so that it is possible to

understand from the record the basis of the mortgage lender’s or

home purchase provider’s lending or financing decision,

including (except as provided in MCOB 11.6.32R(3) and MCOB

11.6.39R(3)):

(a) the customer’s income, including, where relevant, a

breakdown of the different income types;

(b) the customer’s committed expenditure;

costs of the customer’s household (whether actual

expenditure for that household or assumed expenditure

from statistical or other modelled data, including

information to show why the assumed data is appropriate

to that customer’s household);

(d) the evidence relied on to assess income and expenditure;

(e) the rate or assumptions used to test affordability against

likely future interest rate rises;

(f) the repayment type and term of the regulated mortgage

contract, or the term of the home purchase plan; and

(g) the calculation used to determine whether the regulated

mortgage contract, home purchase plan is (or, where

applicable, following the variation, remains) affordable

for the customer.

(3) In relation to interest-only mortgages, the record in (1) must

include:

(a) the reasons for each decision to offer an interest-only

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mortgage to a customer;

(b) the evidence of the customer’s repayment strategy and,

where applicable, its cost;

where required by MCOB 11.6.49R; and

(d) the outcome of each review required by MCOB 11.6.49R

(whether conducted once during the term of the interest-

only mortgage or more frequently).

(4) In relation to the extension of the term of a bridging loan which

falls within MCOB 11.6.55R, the record in (1) must include:

(a) the customer’s positive choice to extend the term;

(b) the reasons for the decision to extend the term; and

cost.

(5) A firm must retain the records required by (1) to (4) for the term

of the regulated mortgage contract or home purchase plan.

(6) Where a firm enters into or varies a regulated mortgage contract

or home purchase plan under MCOB 11.7 (Transitional

arrangements), it must keep, for the term of the contract or plan, a

record of:

(a) the outstanding balance on the existing contract or plan;

(b) the cost of the repairs or maintenance work to the property,

where relevant;

additional borrowing taken on under the contract or

increase in the amount of finance provided under the plan;

and

(d) the rationale for each decision made to enter into or vary a

regulated mortgage contract or home purchase plan under

MCOB 11.7 (Transitional arrangements), including why

the firm considered it to be in the customer’s best interests.

(7) A firm must make, and keep up to date, an adequate record of the

policy required by MCOB 11.6.20R. When the policy is changed,

a record of the previous policy must be retained for so long as any

regulated mortgage contract or home purchase plan to which it

was applicable remains outstanding.

11.6.61 G For the purposes of MCOB 11.6.60R(2)(c) and (g), if it is not practicable

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for the firm to record on the customer’s file full details of the calculation

method applied, it should record clearly which version of that method

was applied in order that the file can be reviewed in conjunction with the

applicable version of the method, so that it is possible to reconstruct the

lending decision.

11.7 Transitional arrangements

11.7.1 R When considering entering into or varying a regulated mortgage contract

or home purchase plan, a firm need not apply the rules in MCOB 11.6.2R

to MCOB 11.6.18R inclusive (as modified by MCOB 11.6.25R to MCOB

11.6.31R and MCOB 11.6.33 to MCOB 11.6.38R, where applicable) if it

has established, acting reasonably, that the following conditions are

satisfied:

(1) the customer has:

(a) an existing regulated mortgage contract (whether or not

entered into on or after 31 October 2004) or home purchase

plan (whether or not entered into on or after 6 April 2007)

which was in existence prior to 26 April 2014; or

(b) an existing regulated mortgage contract or home purchase

plan which was entered into in reliance on, and in

compliance with, MCOB 11.7;

(2) subject to MCOB 11.7.2R, the proposed regulated mortgage

contract or home purchase plan, or variation, would not involve

the customer taking on additional borrowing (or, for a home

purchase plan, increasing the amount of finance provided under

the plan) beyond the amount currently outstanding under the

existing regulated mortgage contract or home purchase plan,

other than to finance any product fee or arrangement fee for the

proposed new or varied contract;

(3) the proposed transaction would be in the customer’s best interests;

and

(4) the customer has not, after 26 April 2014 increased the size of the

advance under the existing regulated mortgage contract or home

purchase plan other than to finance any relevant product fee or

arrangement fee in relation to, or the cost of essential repairs or

maintenance to the property which is the subject of, that regulated

mortgage contract or home purchase plan.

11.7.2 R The condition in MCOB 11.7.1R(2) does not apply if each of the

following conditions is satisfied:

(1) the firm is the mortgage lender or home purchase provider under

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the existing regulated mortgage contract or home purchase plan

in MCOB 11.7.1R(1);

(2) the value of the property which is the subject of the regulated

mortgage contract or home purchase plan is at risk if repairs or

maintenance work to the property are not carried out;

(3) the funds generated by the additional borrowing or increase in

finance provided are to be used to carry out the repairs or

maintenance work; and

(4) the firm has obtained credible evidence which demonstrates that

the additional borrowing or increase in finance are no more than

the cost of the repairs or maintenance work.

11.7.3 R (1) When considering entering into or varying an interest-only

mortgage, a mortgage lender need not apply the rules in MCOB

11.6.41R(1), MCOB 11.6.49R, MCOB 11.6.50R and MCOB

11.6.60R(3) if the conditions in MCOB 11.7.1R) are satisfied, and

if it has established, acting reasonably, that the existing regulated

mortgage contract in MCOB 11.7.1R(1) is an interest-only

mortgage.

(2) Where only part of the sum advanced under the existing regulated

mortgage contract is on an interest-only basis, (1) applies, but

only to that part.

11.7.4 G In accordance with its obligation under Principle 6 to treat its customers

fairly, a firm should not treat a customer with whom it enters into or

varies a regulated mortgage contract or home purchase plan pursuant to

this section 11.7 less favourably than it would treat other customers with

similar characteristics, for example by offering less favourable interest

rates or other terms.

11.7.5 G Firms should note the record-keeping requirements at MCOB

11.6.60R(6) which apply when regulated mortgage contracts and home

purchase plans are entered into or varied under this section.

Amend the following as shown.

12.1 Application

...

What?

...

12.1.4 R The arrears

payment shortfall charges and excessive charges requirements

in this chapter will continue to apply to a firm after a regulated mortgage

contract has come to an end following the sale of a repossessed property.

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The excessive charges requirements will continue to apply to a firm after a

home reversion plan has ended. References in this chapter to ‘customer’

will include references to a former customer as appropriate.

12.1.5 G 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 sale shortfall are not excessive and are subject to the same

considerations as apply with respect to arrears

payment shortfall charges

under this chapter.

...

12.4 Arrears Payment shortfall charges: regulated mortgage contracts

12.4.1 R (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 for arrears a payment shortfall on a customer

except where that unless the firm is able objectively to justify that

the charge is equal to or lower than a reasonable estimate

calculation of the cost of the additional administration required as

a result of the customer being in arrears having a payment

shortfall.

(2) Paragraph (1) does not prevent a firm from entering into a

regulated mortgage contract with a customer under which the firm

may change the rate of interest charged to the customer from a

fixed or discounted rate of interest to the firm’s standard variable

rate if the customer goes into arrears, providing that this standard

variable rate is not a rate created especially for customers in

arrears. [deleted]

12.4.1A E The imposition of a charge for arrears a payment shortfall 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).

12.4.1B R When a customer has a payment shortfall payment shortfall in respect of a

regulated mortgage contract, a firm must ensure that any payments

received from the customer are allocated first towards paying off the

balance of the shortfall payment shortfall (excluding any interest or

charges on that balance).

12.4.2 G For each type of payment shortfall charge (for example, a monthly

arrears management charge), A a firm may calculate the same level of

arrears charges additional administration costs and payment shortfall

charges

for all regulated mortgage contracts where the customer is in

arrears

payment shortfall, rather than performing a calculation on the

basis of the individual regulated mortgage contract with the particular

customer.

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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)).

12.4.4

R In 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) the following types of costs:

(a) funding or capital;

(b) general bank charges that are not incurred as a result of a

customer having a payment shortfall;

(c)

unrecovered fees;

(d)

advertising costs; and

(e) regulatory fines;

(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) 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.

12.4.5 R In MCOB 12.4, ‘executive staff’ means the staff or business owners

responsible for the management of the firm’s business.

12.4.6

G (1) For some firms, their executive staff will be the executive board

members.

(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) 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.

12.4.7 G In calculating the cost of the additional administration required as a result

of a customer having a payment shortfall, the firm:

(1) may, where appropriate, take into account the following types of

costs:

(a) providing information or documents;

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(b) non-executive staff costs;

(c)

premises costs;

(d) human resources costs; and

(e) information technology costs;

(2) should consider the extent to which the cost of the additional

administration is shared with the rest of its business; and

(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.

12.4.8 R A firm must not impose a charge for a payment shortfall that is calculated

as a proportion of the outstanding loan.

…

12.6 Business loans and loans to high net worth mortgage

customers: tailored provisions

12.6.1 G Firms are reminded that, in relation to a regulated mortgage contract

which is solely for a business purpose or is with a high net worth

mortgage customer in circumstances where MCOB 7.7.1R applies, if there

is a new early repayment charge or a change to the existing early

repayment charge, MCOB 7.7.1R(2) requires a firm to notify the customer

within five business days of the maximum amount payable as an early

repayment charge.

12.6.2 G Firms are also reminded that in accordance with MCOB 1.2.3R, they

should either comply in full with MCOB, but in doing so may opt to take

account of or comply with all tailored provisions in MCOB that relate to

business

loans solely for a business purpose or loans to high net worth

mortgage customers.

...

13 Arrears, payment shortfalls and repossessions: regulated mortgage

contracts and home purchase plans

13.1 Application

...

What?

...

13.1.5 G The FSA expects a firm to treat a sale shortfall in the same way that it

FSA 2012/46

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treats a payment shortfall payment shortfall.

...

13.3 Dealing fairly with customers in arrears

with a payment shortfall: policy

and procedures

...

13.3.1 R (1) A firm must deal fairly with any customer who:

(a) is in arrears has a payment shortfall on a regulated mortgage

contract or home purchase plan;

…

13.3.1A

R (1) Where a customer has a payment shortfall in relation to a regulated

mortgage contract or home purchase plan, a firm must not attempt

to process more than two direct debit requests in any one calendar

month.

(2) Where a firm’s direct debit request, in respect of a customer who has

a payment shortfall on a regulated mortgage contract or home

purchase plan, has been refused, on at least one occasion in each of

two consecutive months, due to insufficient funds, the firm must:

(a) consider whether the method of payment remains suitable for

the customer;

(b)

make reasonable efforts to contact the customer to discuss

whether the method of payment remains suitable for the

customer; and

(c)

not pass on any costs to the customer which were incurred as a

consequence of presenting direct debit requests during this

period of consideration.

13.3.1B G MCOB 13.3.1AR(2)(c) does not prevent a firm from attempting to process

up to two direct debit requests in any one calendar month provided the

firm has made reasonable efforts to contact the customer and the customer

has failed to respond.

...

13.3.2A R A firm must, when dealing with any customer in payment difficulties:

(1) make reasonable efforts to reach an agreement with a customer over

the method of repaying any payment shortfall payment shortfall or

sale shortfall, in the case of the former having regard to the

desirability of agreeing with the customer an alternative to taking

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possession of the property;

(2) liaise, if the customer makes arrangements for this, with a third party

source of advice regarding the payment shortfall

payment shortfall

or sale shortfall;

(3) allow a reasonable time over which the payment shortfall payment

shortfall or sale shortfall should be repaid, having particular regard

to the need to establish, where feasible, a payment plan which is

practical in terms of the circumstances of the customer;

…

13.3.4A R In complying with MCOB 13.3.2AR(6):

(1) a firm must consider whether, given the individual circumstances of

the customer, it is appropriate to do one of more of the following in

relation to the regulated mortgage contract or home purchase plan

with the agreement of the customer:

…

(d) treat the payment shortfall

payment shortfall as if it was part of

the original amount provided (but a firm must not

automatically capitalise a payment shortfall payment shortfall

where the impact would be material); or

…

13.3.4AA R In MCOB 13.3.4AR, the impact of a capitalisation would be material if,

either on its own or taken together with previous automatic

capitalisations, it increased:

(1) the interest payable over the term of the regulated mortgage

contract by £50 or more; or

(2) the contractual monthly repayment amount under the regulated

mortgage contract by £1 or more.

13.3.4B R …

…

13.3.4D G In the FSA’s view, in order to comply with Principle 6, firms should not

agree to capitalise a payment shortfall payment shortfall save where no

other option is realistically available to assist the customer.

...

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13.3.6 G In relation to adopting a reasonable approach to the time over which the

payment shortfall

payment shortfall or sale shortfall should be repaid, the

FSA takes the view that the determination of a reasonable payment period

will depend upon the individual circumstances. In appropriate cases this

will mean that repayments are arranged over the remaining term.

...

Record keeping: arrears payment shortfalls and repossessions

13.3.9 R (1) A mortgage lender or administrator must make and retain an

adequate record of its dealings with a customer whose account is in

arrears has a payment shortfall or who has a sale shortfall, which

will enable the firm to show its compliance with this chapter. That

record must include a recording of all telephone conversations

between the firm and the customer which discuss the sums due any

amount in arrears or any amount subject to payment shortfall

charges.

(2) A mortgage lender or administrator must retain the record required

by (1) for three years from the date of the dealing.

13.3.10 G The record referred to in MCOB 13.3.9R should contain, or provide

reference to, matters such as:

(1) the date of first communication with the customer, after the account

was identified as being in arrears having a payment shortfall;

(2) in relation to correspondence issued to a customer in arrears with a

payment shortfall, the name and contact number of the employee

dealing with that correspondence, where known;

(3) the basis for issuing tailored information in accordance with MCOB

13.7.1R in relation to a loan solely for a business purpose;

(4) information relating to any new payment arrangements proposed;

(5) the date of issue of any legal documents;

(6) the arrangements made for sale after the repossession (whether legal

or voluntary); and

(7) the date of any communication summarising the customer’s

outstanding debt after sale of the repossessed property; and

(8) the date and time of each call for the purposes of MCOB 13.3.9R(1).

...

13.4 Arrears: provision of information to the customer of a regulated mortgage

contract

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13.4.1 R If a customer falls into arrears on a regulated mortgage contract, a firm

must as soon as possible, and in any event within 15 business days of

becoming aware of that fact, provide the customer with the following in a

durable medium:

…

(3) the total sum of the payment shortfall payment shortfall;

(4) the charges incurred as a result of the payment shortfall

payment

shortfall;

…

(6) an indication of the nature (and where possible the level) of charges

the customer is likely to incur unless the payment shortfall

payment

shortfall is cleared.

...

13.4.3 G (1) …

(2) Where a firm provides the information in MCOB 13.4.1R when a

payment shortfall payment shortfall occurs but before the

customer’s account falls into arrears, it need not repeat the

provision of the information in MCOB 13.4.1R when the customer’s

account falls into arrears.

Customer in arrears within the past 12 months

13.4.4 R If a customer’s account has previously fallen into arrears within the past

12 months (and at that time the customer received the disclosure required

by MCOB 13.4.1R), the arrears have been cleared and the customer’s

account falls into arrears on a subsequent occasion a firm must either:

(1) …

(2) provide, as soon as possible, and in any event within 15 business

days of becoming aware of the further arrears, a statement, in a

durable medium, of the payments due, the actual payment shortfall

payment shortfall, any charges incurred and the total outstanding

debt excluding any charges that may be added on redemption,

together with information as to the consequences, including

repossession, if the payment shortfall payment shortfall is not

cleared.

...

13.5 Dealing with a customer in arrears or with a sale shortfall on a regulated

mortgage contract

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Statement of charges

13.5.1 R Where an account is in arrears, and the payment shortfall

payment

shortfall or sale shortfall is attracting charges, a firm must provide the

customer with a regular written statement (at least once a quarter) of the

payments due, the actual payment shortfall payment shortfall, the charges

incurred and the debt.

13.5.2 G …

(3) If an account in arrears is subject to a payment plan agreed

between a firm and a customer, and the account is operating in

accordance with that plan, the firm will still need to send the

customer a written statement if the payment shortfall or sale

shortfall is attracting charges. [deleted]

(4) Information provided should cover the period since the last

statement. Firms may use the annual statement to comply with

MCOB 13.5.1R, in which case the annual statement will need to be

supplemented to include the actual payment shortfall payment

shortfall.

...

13.7 Business loans and loans to high net worth mortgage customers: tailored

provisions

13.7.1 R Where the regulated mortgage contract is for a business purpose or is

with a high net worth mortgage customer, a firm may as an alternative to

MCOB 13.4.1R(1) provide the following information in a durable medium

instead of the Money Advice Service information sheet "Problems paying

your mortgage":

(1) details of the consequences if the payment shortfall payment

shortfall is not cleared;

(2) a description of the options available to the customer for clearing

the payment shortfall

payment shortfall; and

(3) (in the case only of loans for a business purpose) details of sources

of fee-free advice for business customers.

13.7.2 G Firms are reminded that in accordance with MCOB 1.2.3R, they should

either comply in full with MCOB, but in doing so may opt to take account

of or comply with all tailored provisions in MCOB that relate to business

loans solely for a business purpose or loans to high net worth mortgage

customers. Therefore, a firm may only follow the relevant tailored

provisions in MCOB 13.7, if it also follows all other relevant tailored

provisions in MCOB. In either case, the rest of MCOB applies in full.

FSA 2012/46

Page 128 of 138

…

Schedule 1 Record keeping requirements

...

Sch 1.3 G

Handbook

reference

Subject of

record

Contents of record When record

must be made

Retention

period

MCOB

1.2.9CR(1)

A high net

worth

mortgage

customer

Evidence of

satisfaction of

definition of high net

worth mortgage

customer

When it is used or

obtained

Three years

from when

obtained or,

if later, used

MCOB

1.2.9CR(2)

A high net

worth

mortgage

customer

Written statement

confirming the

customer is a high

net worth mortgage

customer

When it is used or

obtained

Three years

from when

obtained or,

if later, used

MCOB

1.2.9DR

A loan

solely for a

business

purpose

Business plan When it is used or

obtained

Three years

from when

obtained or,

if later, used

MCOB

1.2.9ER

professional

customer

Evidence of

satisfaction of

definition of

professional

customer

When it is used or

obtained

Three years

from when

obtained or,

if later, used

…

MCOB

4.4A.23G

Disclosures Appropriate records

of disclosures

required by section

4.4A

When disclosure

made

As required

by SYSC 9

MCOB

4.7.17R

(1)(a)

Suitability

Details of the

customer information

obtained, including

the customer’s needs

and circumstances,

for the purpose of

assessing the

suitability of a

regulated mortgage

contract

When the

personal

recommendation is

made

Three years

MCOB

4.7.17R

(1)(b)

Suitability

An explanation of the

reasons why the firm

believes the

personal

recommendation

complies with the

suitability

When the personal

recommendation is

made

Three years

FSA 2012/46

Page 129 of 138

requirements in

MCOB 4.7.4 R (1)

MCOB

4.7.17R

(1)(b)

Suitability

An explanation of the

reasons why a

personal

recommendation has

been made on a basis

other than that

described in MCOB

4.7.13E(1)

When the

personal

recommendation is

made

Three years

MCOB

4.8.7R

Scripted

questions

A re

cord of the

scripted questions

used in non-advised

sales

The date on which

the scripted

questions are first

used

One year

from the

date on

which the

scripted

questions

are

superseded

by a more

up-to-date

record

MCOB

4.6.11R

Notice of

cancellation

A record of the fact

that notice has been

given (including the

original notice

instructions and a

copy of any receipt of

notice issued)

When the firm first

becomes aware that

notice has been

served

Three years

MCOB

4.7A.25R

(1)(a)

Suitability

of regulated

mortgage

contracts

Customer

information obtained

for the purposes of

assessing suitability

of a regulated

mortgage contract

When advice given Three years

MCOB

4.7A.25R

(1)(b)

Suitability

of regulated

mortgage

contracts

An explanation of

why the firm has

concluded its advice

is suitable

When advice given Three years

MCOB

4.7A.25R

(1)(c)

Rolling-up

of fees or

charges into

loan

The customer’s

positive choice to add

fees or charges to the

sum advanced

When choice made Three years

MCOB

4.8A.18R

(1)(a)

Execution-

only sales of

regulated

mortgage

contracts

Information provided

by the customer

about the regulated

mortgage contract he

wishes to purchase.

The date a

regulated mortgage

contract was

entered into or

arranged

Three years

MCOB

4.8A.18R

(1)(b)

Execution-

only sales of

regulated

mortgage

The warning to the

customer in a durable

medium regarding his

lack of protection of

The date a

regulated mortgage

contract was

entered into or

Three years

FSA 2012/46

Page 130 of 138

contracts the rules on assessing

suitability

arranged

MCOB

4.8A.18R

(1)(c)

Execution-

only sales of

regulated

mortgage

contracts

The customer’s

confirmation of his

positive election to

proceed with an

execution-only sale

The date a

regulated mortgage

contract was

entered into or

arranged

Three years

MCOB

4.8A.18R

(1)(d)

Execution-

only sales of

regulated

mortgage

contracts

Details of advice

rejected.

The date a

regulated mortgage

contract was

entered into or

arranged

Three years

MCOB

4.8A.18R

(3)

Execution-

only sales of

regulated

mortgage

contracts

The firm’s policy for

managing execution-

only sales

When the policy is

made

One year

from when

the policy is

changed

MCOB

4.10.9BR

Execution-

only sales of

home

purchase

plans

Information provided

by the customer

about the home

purchase plan he

wishes to purchase;

the warning to the

customer in a durable

medium regarding his

lack of protection of

the rules on assessing

suitability; the

customer’s

confirmation of his

positive election to

proceed with an

execution-only sale.

The firm’s policy for

managing execution-

only sales

The date a home

purchase plan was

entered into or

arranged

When the policy is

made

Three years

One year

from when

the policy is

changed

MCOB

4.10.13R(1)

(a)

Suitability

of home

purchase

plans

Customer

information obtained

for the purposes of

assessing suitability

of a home purchase

plan

When advice given Three years

MCOB

4.10.13R(1)

(b)

Suitability

of home

purchase

plans

An explanation of

why the firm has

concluded its advice

is suitable

When advice given Three years

MCOB

4.10.13R(1)

(c)

Advice on

home

purchase

plans

Any advice rejected,

including the reasons

rejected and details of

any home purchase

plan the customer has

When advice given Three years

FSA 2012/46

Page 131 of 138

proceeded with as an

execution-only sale

…

MCOB

4.11.8R

Customer

information

on which an

assessment

of the

affordability

and

appropriaten

ess

suitability

and basis of

advice for a

regulated

sale and

rent back

agreement

was based

Customer

information on his

income, expenditure,

resources, needs,

objectives and

individual

circumstances

The date on which

the firm reached a

conclusion on

affordability and

appropriateness

assessed suitability

Five years,

or one year

after the end

of the fixed

term of the

tenancy

agreement,

if later

…

MCOB

8.5.2

2R(1)

(a)

Suitability Details of the

customer information

obtained, including

the customer’s needs

and circumstances,

for the purpose of

assessing the

suitability of a equity

release transaction

When the

personal

recommendation is

made

Three years

MCOB

8.5.22R(1)

(b)

Suitability An explanation of the

reasons why the firm

believes the

personal

recommendation

complies with

suitability

requirements in

MCOB 8.5.4R(1)

When the

personal

recommendation is

made

Three years

MCOB

8.5.22R(1)

(b)

Suitability An explanation of the

reasons why a

personal

recommendation has

been made on a basis

other than that

described in MCOB

8.5.17E(1)

When the

personal

recommendation is

made

Three years

MCOB

8.3.1R(1)

Scripted

questions

A record of the

scripted questions

used in non-advised

sales

The

date on which

the scripted

questions are first

used

One year

from the

date on

which the

scripted

questions

FSA 2012/46

Page 132 of 138

are

superseded

by a more

up-to-date

record

MCOB

8.3.1R(1)

Notice of

cancellation

A record of the fact

that notice has been

given (including the

original notice

instructions and a

copy of any receipt of

notice issued)

When the firm first

becomes aware that

notice has been

served

Three years

MCOB

8.5A.19R

(1)(a)

Suitability

of equity

release

transactions

Customer

information obtained

for the purposes of

assessing suitability

of an equity release

transaction

When advice given Three years

MCOB

8.5A.19R

(1)(b)

Suitability

of equity

release

transactions

An explanation of

why the firm has

concluded its advice

is suitable

When advice given Three years

MCOB

8.5A.19R

(1)(c)

Advice on

equity

release

transactions

Any advice rejected,

including the reasons

rejected and details of

any regulated

mortgage contract

the customer has

proceeded with as an

execution-only sale

When advice given Three years

MCOB

8.5A.19R

(1)(d)

Rolling-up

of fees or

charges into

loan

The customer’s

positive choice to add

fees or charges to the

sum advanced

When choice made Three years

MCOB

8.6A.9R

Execution-

only sales of

equity

release

transactions

Information provided

by the customer

about the equity

release transaction

he wishes to

purchase; the

warning to the

customer in a durable

medium regarding his

lack of protection of

the rules on assessing

suitability; the

customer’s

confirmation of his

positive election to

proceed with an

execution-only sale;

any advice from the

firm which the

customer rejected,

The date a home

purchase plan was

entered into or

arranged

Three years

FSA 2012/46

Page 133 of 138

including the reasons

why it was rejected.

…

MCOB

11.3.1R(2)

Ability of

the customer

to repay

advance

Evidence to

demonstrate that the

firm has taken into

account the

customer’s ability to

repay

When the

assessment of the

customer’s ability

to repay is made

One year

from the

date on

which the

regulated

mortgage

contract is

entered into,

or the

further

advance

provided

MCOB

11.3.4R(2)

Responsible

lending

policy

A record of the

firm’s

written policy setting

out the factors the

firm will take into

account in assessing

the customer’s ability

to repay

The date on which

the policy is set

One year

from the

date on

which the

policy is

replaced

MCOB

11.6.60R(1)

to (4)

Responsible

lending and

financing

Steps taken to

comply with rules

including:

information taken

into account in each

affordability

assessment; in

relation to interest-

only mortgages, the

reasons for the offer

decision, evidence

relating to the

customer’s

repayment strategy,

details of the firm’s

attempts to contact

the customer and the

outcome of each mid-

term review;

information relating

to the extension of

the term of bridging

loans which are

neither with a high

net worth mortgage

customer nor or a

secured overdraft

solely for a business

purpose

When regulated

mortgage contract

or home purchase

plan (or variation)

is entered into, or

the mid-term

review takes place

The term of

the contract

or plan

MCOB

11.6.60R(6)

(a)

Transitional

arrange-

ments

The outstanding

balance on the

existing contract

When new contract

or variation is

entered into

For the term

of the

regulated

FSA 2012/46

Page 134 of 138

mortgage

contract or

home

purchase

plan

MCOB

11.6.60R(6)

(b)

Transitional

arrange-

ments

The cost of repairs or

maintenance work to

the property

When new contract

or variation is

entered into

For the term

of the

regulated

mortgage

contract or

home

purchase

plan

MCOB

11.6.60R(6)

(c)

Transitional

arrange-

ments

Any product fee or

arrangement fee

financed by any

additional borrowing

or increase in finance

When new contract

or variation is

entered into

For the term

of the

regulated

mortgage

contract or

home

purchase

plan

MCOB

11.6.60R(6)

(d)

Transitional

arrange-

ments

The rationale for each

decision to enter into

or vary a contract

under MCOB 11.7

When new contract

or variation is

entered into

For the term

of the

regulated

mortgage

contract or

home

purchase

plan

MCOB

11.6.60R(7)

Responsible

lending and

financing

policy

The firm’s policy,

setting out the factors

it will take into

account in assessing a

customer’s ability to

pay the sums due

When the policy is

made

For so long

as any

regulated

mortgage

contract or

home

purchase

plan to

which it was

applicable

remains

outstanding.

MCOB

13.3.9R

Dealings

with

customers in

arrears with

a payment

shortfall, or

with a

mortgage

sale

shortfall

debt

Details of all dealings

with the customer

(including a

recording of all

telephone

conversations which

discuss any arrears

or any amount

subject to payment

shortfall charges);

information relating

to any repayment

plan; date of issue of

any legal

The date of the

dealing

Three years

from the

date on

which the

record is

made

FSA 2012/46

Page 135 of 138

proceedings;

arrangements made

for sale of a

repossessed property;

and the basis of any

tailored information

where the loan is for

a business purpose.

Part 2: Comes into force on 26 October 2012

11.8 Customers unable to change regulated mortgage contract, home purchase

plan or provider

11.8.1 E Where a customer is unable to:

(1) enter into a new regulated mortgage contract or home purchase

plan or vary the terms of an existing regulated mortgage contract or

home purchase plan with the existing mortgage lender or home

purchase provider; or

(2) enter into a new regulated mortgage contract or home purchase

plan with a new mortgage lender or home purchase provider;

the existing mortgage lender or home purchase provider should not (for

example, by offering less favourable interest rates or other terms) take

advantage of the customer’s situation or treat the customer any less

favourably than it would treat other customers with similar characteristics.

To do so may be relied on as tending to show contravention of Principle 6

(Customers’ interests).

FSA 2012/46

Page 136 of 138

Annex E

Amendments to the Supervision manual (SUP)

In this Annex, underlining indicates new text and striking through indicates deleted text.

16 Annex 18BG

NOTES FOR COMPLETION OF

THE RETAIL MEDIATION ACTIVITIES RETURN (‘RMAR’)

…

Section G: Training & Competence (‘T&C’)

…

Section G: guide for completion of individual fields

…

What types of advice were

provided?

For each type of advice, the firm should indicate whether or not

staff have provided advice on that basis / business type. I

relation to their home finance mediation activities¸ firms are not

required by MCOB 4.4A to use a label to describe the service

they provide to customers. In filling out this section they should

simply answer ‘no’ for each category relating to their home

finance mediation activities.

…

Independent (whole of market plus

option of fee-only)

To hold itself out as acting independently, a firm carrying on

home finance mediation activity must consider products from

across the whole of the market, and offer its clients the

opportunity to pay by fee (

MCOB 4.3.7R).

…

FSA 2012/46

Page 137 of 138

Annex F

Amendments to the Professional Firms sourcebook (PROF)

In this Annex, striking through indicates deleted text.

5.3 Reference to other sourcebooks or manuals

…

Mortgages: Conduct of business sourcebook

…

5.3.8 MCOB 1.2.10R provides that MCOB does not apply to an authorised

professional firm with respect to its non-mainstream regulated activities except

for MCOB 2.2 (Clear, fair and not misleading communication), and MCOB 3

(Financial promotion) and to a limited extent MCOB 4.4 (Initial disclosure

requirements).

FSA 2012/46

Page 138 of 138

Annex G

Amendments to the Perimeter Guidance manual (PERG)

In this Annex, underlining indicates new text and striking through indicates deleted text.

4.4 What is a regulated mortgage contract?

…

Type of lending

4.4.11 G The definition of regulated mortgage contract also covers a variety of

types of product. Apart from the normal mortgage loan for the purchase

of property, the definition also includes other types of secured loan, such

as secured overdraft facility, a secured bridging loan bridging loan, a

secured credit card facility and regulated lifetime mortgage contracts

under which the borrower (usually an older person) takes out a loan

where repayment of the capital (and in some cases the interest) is not

required until the property is sold, usually on the death of the borrower.

PS12/16

Mortgage Market Review: Feedback on CP11/31 and final rules

Made rules – Prudential sourcebook

for Mortgage and Home Finance

Firms, and Insurance Intermediaries

(Non-Bank Lenders)

Instrument 2012

FSA 2012/47

PRUDENTIAL SOURCEBOOK FOR MORTGAGE AND HOME FINANCE FIRMS,

AND INSURANCE INTERMEDIARIES (NON-BANK LENDERS)

INSTRUMENT 2012

Powers exercised

A. The Financial Services Authority makes this instrument in the exercise of:

(1) the following powers and related provisions in the Financial Services and

Markets Act 2000 (“the Act”):

(a) section 138 (General rule-making power);

(b) section 156 (General supplementary powers);

(2) the other powers and related provisions listed in Schedule 4 (Powers

exercised) to the General Provisions of the Handbook.

B. The rule-making powers referred to above are specified for the purpose of section

153(2) (Rule-making instruments) of the Act.

Commencement

C. This instrument comes into force on 26 April 2014.

Amendments to the Handbook

D. The Glossary of definitions is amended in accordance with Annex A to this

instrument.

E. The Prudential sourcebook for Mortgage and Home Finance Firms, and Insurance

Intermediaries (MIPRU) is amended in accordance with Annex B to this instrument.

Citation

F. This instrument may be cited as the Prudential Sourcebook for Mortgage and Home

Finance Firms, and Insurance Intermediaries (Non-Bank Lenders) Instrument 2012.

By order of the Board

27 September 2012

FSA 2012/47

Annex A

Amendments to the Glossary of definitions

In this Annex, underlining indicates new text and striking through indicates deleted text.

exposure

…

(2) (in accordance with Article 77 of the Banking Consolidation

Directive and for the purposes of the calculation of the

credit risk capital component and the counterparty risk

capital component (including BIPRU 3 (Standardised credit

risk), BIPRU 4 (The IRB approach), BIPRU 5 (Credit risk

mitigation), and BIPRU 9 (Securitisation) or for the

purposes of the calculation of the credit risk capital

requirement in MIPRU 4.2 (Capital resources requirement))

an asset or off-balance sheet item.

…

risk weight

(in relation to an exposure) a degree of risk expressed as a

percentage assigned to that exposure in accordance with:

(a) whichever is applicable of the standardised approach to

credit risk and the IRB approach, including (in relation to a

securitisation position) under BIPRU 9 (Securitisation); or

(b) (for a firm to which MIPRU 4 applies), MIPRU 4.2A.10R to

MIPRU 4.2A.13R.

risk weighted exposure

amount

(in relation to an exposure) the value of an exposure for the

purposes of the calculation of (in the case of a BIPRU firm) the

credit risk capital component or (in the case of a firm to which

MIPRU 4 applies) the credit risk capital requirement under

MIPRU 4.2A.4R, in both cases after application of a risk weight.

securitisation

…

(2) (in accordance with Article 4(36) of the Banking

Consolidation Directive (Definitions), and in BIPRU and

MIPRU 4) a transaction or scheme whereby the credit risk

associated with an exposure or pool of exposures is tranched

having the following characteristics:

(a) payments in the transaction or scheme are dependent

upon the performance of the exposure or pool of

exposures; and

(b) the subordination of tranches determines the

distribution of losses during the ongoing life of the

Page 2 of 20

FSA 2012/47

transaction or scheme.

sponsor

…

(2) (in BIPRU), in accordance with Article 4(42) of the Banking

Consolidation Directive (Definitions) and in MIPRU 4 and

in relation to a securitisation within the meaning of

paragraph (2) of the definition of securitisation), an

undertaking other than an originator that establishes and

manages an asset backed commercial paper programme or

other securitisation scheme that purchases exposures from

third party entities.

Page 3 of 20

FSA 2012/47

Annex B

Amendments to the Prudential sourcebook for Mortgage and Home Finance Firms, and

Insurance Intermediaries (MIPRU)

In this Annex, underlining indicates new text and striking through indicates deleted text,

unless otherwise stated.

4.2 Capital resources requirements

Applicable guidance within BIPRU

4.2.-1 G Unless otherwise specified, where MIPRU 4.2 to MIPRU 4.2D refers to a

guidance provision contained in BIPRU, a firm should regard that guidance

provision as applying to it in the same way that that provision applies to a

BIPRU firm.

General solvency requirement

4.2.1 R A firm must at all times ensure that it is able to meet its liabilities as they fall

due.

4.2.1A G Specific liquidity requirements for a firm carrying on any home financing or

home finance administration connected to regulated mortgage contracts are

set out in MIPRU 4.2D.

…

4.2.10 R Table: Application of capital resources requirements

Regulated activities Provisions

1. (a) insurance mediation activity; or

(b) home finance mediation activity

(or both); and no other regulated

activity.

MIPRU 4.2.11R

2. (a) home financing not connected to

regulated mortgage contracts; or

(b) home financing and home

finance administration (not

connected to regulated mortgage

contracts); and no other regulated

activity.

MIPRU 4.2.12R to MIPRU

4.2.17E

…

Page 4 of 20

FSA 2012/47

6. Any combination of regulated

activities not within rows 1 to 5.

MIPRU 4.2.22R [deleted]

7. (a) home financing connected to

regulated mortgage contracts; or

(b) home financing and home

finance administration connected to

regulated mortgage contracts; and

no other regulated activity.

MIPRU 4.2.23R

8. any combination of regulated

activities not within rows 1 to 7.

MIPRU 4.2.22R

4.2.10A G MIPRU 4.2.12R to MIPRU 4.2.23R have the effect that a firm carrying on

any home financing or home finance administration which is connected to

regulated mortgage contracts will be subject to different capital

requirements to a firm that carries on those activities without connection to

regulated mortgage contracts. To identify which of the rules in MIPRU

4.2.12R to MIPRU 4.2.23R is applicable, a firm should consider which

regulated activities it performs as part of its home financing and home

finance administration activities and determine whether any of those

regulated activities (no matter what proportion) are connected to regulated

mortgage contracts.

…

Capital resources requirement: home financing and home finance administration

not connected to regulated mortgage contracts (but not home finance

administration only)

4.2.12 R (1) The capital resources requirement for a firm carrying on only home

financing which is not connected to regulated mortgage contracts, or

home financing and home finance administration which is not

connected to regulated mortgage contracts (and no other regulated

activity) is the higher of:

(a) £100,000; and

(b) 1% of:

(i) its total assets plus total undrawn commitments and

unreleased amounts under the home reversion plan;

less

(ii) excluded loans or amounts plus intangible assets (see

Note 1 in the table in MIPRU 4.4.4R).

…

Page 5 of 20

FSA 2012/47

Capital resources requirement: home finance administration only

4.2.18 R The capital resources requirement for a firm carrying on home finance

administration only, which has all or part of the home finance transactions

that it administers on its balance sheet, is: the amount which is applied to a

firm carrying on home financing or home financing and home finance

administration (and no other regulated activity) (see MIPRU 4.2.12R)

(1) in the case of a firm carrying on only home finance administration

which is not connected to regulated mortgage contracts, the amount

which is applied to a firm under MIPRU 4.2.12R; or

(2) in the case of a firm carrying on any home finance administration

which is connected to regulated mortgage contracts, the amount

which is applied to a firm under MIPRU 4.2.23R.

…

Capital resources requirement: insurance mediation activity and home

financing or home finance administration

4.2.20 R The capital resources requirement for a firm carrying on insurance mediation

activity and home financing or home finance administration is the sum of the

requirements which are applied to the firm by:

(1) the capital resources requirement rule for a firm carrying on

insurance mediation activity or home finance mediation activity (and

no other regulated activity) (see MIPRU 4.2.11R); and

(2) (a) in the case of a firm carrying on home financing which is not

connected to regulated mortgage contracts, or home finance

administration which is not connected to regulated mortgage

contracts, the capital resources requirement rule for a firm

carry

ing on home financing or home financing and home

finance administration (and no other regulated activity) (see

amount which is applied to a firm under MIPRU 4.2.12R); or

(aa)

in the case of a firm carrying on any home financing which is

connected to regulated mortgage contracts or any home

finance administration that it administers on its balance sheet

which is connected to regulated mortgage contracts, the

amount which is applied to a firm under MIPRU 4.2.23R; or

(b) if, in addition to its insurance mediation activity, the firm

carries in the case of a firm carrying on home finance

administration with all the assets

home finance transactions

that it administers off balance sheet, the capital resources rule

for such amount which is applied to a firm (see under MIPRU

4.2.19R).

Capital resources requirement: home finance mediation activity and home

Page 6 of 20

FSA 2012/47

financing or home finance administration

4.2.21 R (1) If a firm carrying on home finance mediation activity and home

financing or home finance administration does not hold client money

or other client assets in relation to its home finance mediation

activity, the capital resources requirement is the amount applied to a

firm, according to the activities carried on by the firm, by:

(a) in the case of a firm carrying on home financing which is not

connected to regulated mortgage contracts or home finance

administration which is not connected to regulated mortgage

contracts, the capital resources requirement rule for a firm

carrying on home financing or home financing and home

finance administrator (and no other regulated activity) (see

amount applied to a firm under

MIPRU 4.2.12R); or

(aa)

in the case of a firm carrying on any home financing which is

connected to regulated mortgage contracts or any home

finance administration that it administers on its balance sheet

which is connected to regulated mortgage contracts, the

amount applied to a firm under MIPRU 4.2.23R; or

(b) if, in addition to its home finance mediation activity, the firm

carries in the case of a firm carrying on home finance

administration with all the assets home finance transactions

that it administers off balance sheet, the amount applied to a

firm under capital resources rule for such a firm (see MIPRU

4.2.19R).

…

Capital resources requirement: other combination of activities

4.2.22 R The capital resources requirement for a firm carrying on any other

combination of regulated activities which is not set out in MIPRU 4.2.10R to

MIPRU 4.2.21R and MIPRU 4.2.23R is: the amount which is applied to a

firm carrying on insurance mediation activity and home financing or home

finance administration (see MIPRU 4.2.20R)

(1) if the combination of regulated activities includes carrying on any

home financing connected to regulated mortgage contracts or home

finance administration connected to regulated mortgage contracts,

the sum of the amounts which are applied to a firm under:

(a) MIPRU 4.2.20R(1); and

(b) MIPRU 4.2.23R; or

(2) in all other cases, the sum of the amounts which are applied to a firm

under:

Page 7 of 20

FSA 2012/47

(a) MIPRU 4.2.20R(1); and

(b) MIPRU 4.2.12R.

Capital resources requirement: home financing and home finance administration

connected to regulated mortgage contracts

4.2.23 R The capital resources requirement for a firm carrying on any home financing

which is connected to regulated mortgage contracts, or home financing and

home finance administration which is connected to regulated mortgage

contracts (and no other regulated activity), is the higher of:

(1) £100,000; and

(2) the sum of:

(a) the credit risk capital requirement calculated in accordance

with MIPRU 4.2A; and

(b) 1% of:

(i) its total assets plus total undrawn commitments and

unreleased amounts under the home reversion plan;

less

(ii) intangible assets (see Note 1 in the table in MIPRU

4.4.4R) plus loans, securitisation positions and CIU

positions subject to MIPRU 4.2A.4R.

After MIPRU 4.2 insert the following new sections. The text is not underlined.

4.2A Credit risk capital requirement

Application

4.2A.1 R This section applies to a firm to which MIPRU 4.2.23R applies.

Purpose

4.2A.2 G The purpose of MIPRU 4.2A is to:

(1) set out how a firm should calculate its credit risk capital requirement;

(2) set out how a firm should calculate its risk weighted exposure

amounts for exposures on its balance sheet; and

(3) identify which provisions of BIPRU 3 will apply to a firm, in addition

to the provisions of MIPRU 4.2A, to enable it to make those

calculations.

Page 8 of 20

FSA 2012/47

4.2A.3 G A firm should refer to BIPRU 5 (as amended by MIPRU 4.2C.3R) with

regard to the effect of credit risk mitigation on the calculation of risk

weighted exposure amounts.

Calculation of credit risk

4.2A.4 R The credit risk capital requirement of a firm is 8% of the total of its risk

weighted exposure amounts for exposures that:

(1) are on its balance sheet; and

(2) derive from:

(a) a loan entered into; or

(b) a securitisation position originated; or

on or after 26 April 2014; and

(3) have not been deducted from the firm’s capital resources under

MIPRU 4.4.4R;

calculated in accordance with MIPRU 4.2A.

4.2A.5 R Any arrangements entered into on or after [date to be confirmed] which

increase the amount of a loan already advanced or change the security to a

loan already advanced or change the contractual terms (other than if the firm

is exercising forbearance) of a loan already advanced will be subject to the

credit risk capital requirement under MIPRU 4.2A.4R(2)(a) provided that,

where the arrangements only increase the amount of a loan already

advanced, such requirement shall only apply to the amount of such increase.

4.2A.5A G The arrangements excluded from the credit risk capital requirement include:

(1) a loan acquired by a firm after 26 April 2014 if that loan was made

before 26 April 2014;

(2) arrangements made as a result of forbearance procedures, including:

(a) a change in the basis of interest payments from variable to

fixed rate; or

(b) a change from a repayment mortgage to interest only; or

outstanding, where there is no element of new borrowing.

4.2A.6 R The exposure value of an asset item must be its balance sheet value.

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FSA 2012/47

4.2A.7 R When calculating risk weighted exposure amounts, a firm must comply with

BIPRU 3.2.3R, BIPRU 3.2.9R to BIPRU 3.2.19G, and BIPRU 3.2.38R in the

same way that these provisions apply to a BIPRU firm, except to the extent

that a provision is modified or excluded in the table in MIPRU 4.2A.8R.

4.2A.8 R This table belongs to MIPRU 4.2A.7R

BIPRU provision Adjustment

All provisions of BIPRU

3.2

A reference to a provision of BIPRU 3, BIPRU

5 or BIPRU 9 must be read in conjunction with

MIPRU 4.2A.8R, MIPRU 4.2B.3R and MIPRU

4.2C.3R

All provisions of BIPRU

3.2

All references to capital resources in BIPRU

3.2 are replaced by references to capital

resources calculated under MIPRU 4.4

BIPRU 3.2.14G The last two sentences do not apply

BIPRU 3.2.38R The references to BIPRU 14, BIPRU 13.3.13R

and BIPRU 13.8.8R (Exposure to a central

counterparty) do not apply

BIPRU 3.2.10R and

BIPRU 3.2.19G

The references to €1m are replaced by

references to £1m.

4.2A.9 R For the purposes of applying a risk weight, the exposure value must be

multiplied by the risk weight determined in accordance with MIPRU

4.2A.10R, MIPRU 4.2A.11R, MIPRU 4.2A.12R or MIPRU 4.2A.13R.

4.2A.10 R To calculate risk weighted exposure amounts on exposures secured by

mortgages on residential property, risk weights must be applied to all such

exposures, unless deducted from capital resources calculated under MIPRU

4.4, in accordance with BIPRU 3.4.56R to BIPRU 3.4.88G.

4.2A.11 R To calculate risk weighted exposure amounts on exposures in CIUs, risk

weights must be applied to all such exposures, unless deducted from capital

resources under MIPRU 4.4, in accordance with BIPRU 3.4.114R to BIPRU

3.4.125R.

4.2A.12 R Risk weighted exposure amounts for securitised exposures must be

calculated in accordance with MIPRU 4.2B.

4.2A.13 R To calculate risk weighted exposure amounts on exposures other than those

provided for in MIPRU 4.2A.10R to MIPRU 4.2A.12R, risk weights must be

applied to all such exposures, unless deducted from capital resources

calculated under MIPRU 4.4, in accordance with BIPRU 3.5.5G as though

that provision were a rule.

Page 10 of 20

FSA 2012/47

4.2A.14 G Rather than risk weighting exposures individually under MIPRU 4.2A.13R, a

firm should apply a single risk weight to all exposures in each exposure

class.

4.2A.15 R If a firm calculates risk weighted exposure amounts under MIPRU 4.2A.13R

and is directed by BIPRU 3.5.5G to the “normal rules”, it must, in the

calculation of those risk weighted exposure amounts, comply with BIPRU

3.4 in the same way that that section applies to a BIPRU firm.

4.2A.16 R Exposures must be assigned a risk weight of 100% if MIPRU 4.2A.10R to

MIPRU 4.2A.13R do not set out a calculation for risk weighted exposure

amounts applicable to that exposure.

4.2A.17 R A firm must apply BIPRU 3.4.96R to BIPRU 3.4.102R to all past items due.

4.2A.18 G A firm may apply BIPRU 3.5.6G and BIPRU 3.5.7G to exposures. MIPRU

4.2C sets out the amendments to the BIPRU 5 rules referenced within these

provisions.

4.2B Securitisation

Application

4.2B.1 R This section applies to a firm to which MIPRU 4.2.23R applies.

Purpose

4.2B.2 G The purpose of MIPRU 4.2B is to set out:

(1) how a firm that is required to calculate the credit risk capital

requirement under MIPRU 4.2.23R should calculate the risk

weighted exposure amounts for securitisation positions; and

(2) the requirements that investors, originators and sponsors of

securitisations on the balance sheet will have to meet (BIPRU

9.3.1AR and BIPRU 9.3.15R to BIPRU 9.3.20R).

Calculation of risk weighted exposure amount for securitisation positions

4.2B.3 R To calculate the risk weighted exposure amount for securitisation positions,

a firm must comply with BIPRU 9 in the same way that that section applies

to a BIPRU firm, except to the extent that a provision of BIPRU 9 is

modified or excluded in the table in MIPRU 4.2B.4R.

4.2B.4 R This table belongs to MIPRU 4.2B.3R

BIPRU provision Adjustment

All sections of All references to capital resources in BIPRU 9 are

replaced by references to capital resources calculated

Page 11 of 20

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BIPRU 9 under MIPRU 4.4

All sections of

BIPRU 9

A reference to a provision of BIPRU 3, BIPRU 5 or

BIPRU 9 must be read in conjunction with MIPRU

4.2A.8R, MIPRU 4.2B.4R and MIPRU 4.2C.4R

BIPRU 9.1.1R This rule does not apply

BIPRU 9.1.2G This provision does not apply

BIPRU 9.1.8AG(3) The words “and these should be taken into account

under the overall Pillar 2 rule” do not apply

BIPRU 9.1.9G This provision does not apply

BIPRU 9.1.10G This provision does not apply

BIPRU 9.2 This section does not apply

BIPRU 9.3.7R to

BIPRU 9.3.14R

These rules do not apply

BIPRU 9.3.15R The first sentence of this rule is amended to read as

follows: “A firm, whether acting as sponsor or

originator, must apply the same sound and well

defined criteria used for credit granting in respect of

exposures held on its balance sheet to exposures to be

securitised.”

BIPRU 9.3.16R This rule is amended to read as follows: “A firm must

apply the same standards of analysis to exposures

under BIPRU 9.3.15R regardless of whether it has

purchased or originated those exposures.”

BIPRU 9.3.17R Where a firm is an originator, it must comply with

this rule as it applies to a credit institution

BIPRU 9.3.18R Where a firm is an originator or sponsor of a

securitisation, it must comply with this rule in the

same way that it applies to a credit institution

BIPRU 9.3.19R Where a firm is an originator or sponsor of a

securitisation, it must comply with this rule in the

same way that it applies to a credit institution

BIPRU 9.3.21G This provision does not apply

BIPRU 9.3.22G This provision does not apply

BIPRU 9.4.1R This rule is amended to read as follows: “The

originator of a traditional securitisation may exclude

securitised exposures from the calculation of risk

Page 12 of 20

FSA 2012/47

weighted exposure amounts and expected loss

amounts if significant credit risk associated with the

securitised exposures has been transferred to third

parties and the transfer complies with the conditions

in BIPRU 9.4.2R to BIPRU 9.4.10R.”

BIPRU 9.4.11R to

BIPRU 9.4.18G

These provisions do not apply

BIPRU 9.5.1R(1) This rule is amended to read as follows: “An

originator of a synthetic securitisation may calculate

risk weighted exposure amounts, and, as relevant,

expected loss amounts, for the securitised exposures

in accordance with BIPRU 9.5.3R and BIPRU

9.5.4R, if significant credit risk has been transferred

to third parties, either through funded or unfunded

credit protection, and the transfer complies with the

conditions in (2) – (5).”

BIPRU 9.5.1R(3) The reference to BIPRU 4.10 (Credit risk mitigation

under the IRB approach) does not apply

BIPRU 9.5.1R(6) This rule does not apply

BIPRU 9.5.1R(7) This rule does not apply

BIPRU 9.5.1AG to

BIPRU 9.5.1FG

These provisions do not apply

BIPRU 9.5.3R(1) The reference to BIPRU 9.9 to BIPRU 9.14 is

replaced by a reference to BIPRU 9.9 to BIPRU 9.11

The reference to BIPRU 3 is replaced by a reference

to MIPRU 4.2A

The reference to BIPRU 4 (IRB approach) does not

apply

BIPRU 9.5.3R(2) This rule does not apply

BIPRU 9.5.4R The reference to BIPRU 9.9 to BIPRU 9.14 is

replaced by a reference to BIPRU 9.9 to BIPRU 9.11

BIPRU 9.5.7R The reference to BIPRU 4.10 (Credit risk mitigation

under the IRB approach) does not apply

BIPRU 9.5.8R The reference to BIPRU 9.9 to BIPRU 9.14 is

replaced by a reference to BIPRU 9.9 to BIPRU 9.11

BIPRU 9.6.8G This provision does not apply

BIPRU 9.7.3G This provision does not apply

Page 13 of 20

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BIPRU 9.8.1R The reference to BIPRU 9 is replaced by a reference

to MIPRU 4.2B

BIPRU 9.8.2R The reference to BIPRU 9 is replaced by a reference

to MIPRU 4.2B

BIPRU 9.8.7R The references to BIPRU 4.10 (Credit risk mitigation

under the IRB approach) do not apply

BIPRU 9.9.1R The reference to BIPRU 9.9 to BIPRU 9.14 is

replaced by a reference to BIPRU 9.9 to BIPRU 9.11

BIPRU 9.9.2R The reference to BIPRU 9.9 to BIPRU 9.14 is

replaced by a reference to BIPRU 9.9 to BIPRU 9.11

BIPRU 9.9.4R(2) This rule does not apply

BIPRU 9.9.5R This rule does not apply

BIPRU 9.9.6R The reference to BIPRU 9.14 does not apply

BIPRU 9.9.7R The reference to BIPRU 4.10 (Credit risk mitigation

under the IRB approach) and the reference to BIPRU

9.14 do not apply

BIPRU 9.9.9R The words “subject to the provisions of GENPRU

that deal with the deduction of securitisation

positions at stage M in the relevant capital resources

table” do not apply

BIPRU 9.10.1R The references to the IRB approach do not apply

BIPRU 9.10.2R This rule does not apply

BIPRU 9.10.3R The reference to BIPRU 9.12.8R does not apply

BIPRU 9.10.4R to

9.10.7R

These rules do not apply

BIPRU 9.12 This section does not apply

BIPRU 9.13 This section does not apply

BIPRU 9.14 This section does not apply

BIPRU 9.15 This section does not apply

4.2B.5 G Subject to BIPRU 9.3.6G, for the purposes of BIPRU 9.4.1R and BIPRU

9.5.1R the transfer of credit risk to third parties should only be considered

significant if the proportion of risk transferred is broadly commensurate

with, or exceeds, the proportion by which risk weighted exposure amounts

Page 14 of 20

FSA 2012/47

are reduced.

4.2B.6 G For measuring the reduction in risk and risk weighted exposure amounts, an

originator should assess the securitisation positions it holds against the

underlying exposures as if they had never been securitised.

4.2B.7 G An originator should use an appropriate method, consistent with its own

internal processes, to assess whether the risk transferred is significant.

4.2B.8 G If the result of:

(1) applying a risk weight of 1250% to all positions that an originator

holds in the securitisation; or

(2) deducting all those positions from capital resources;

is a reduction in the originator’s capital requirement compared to the capital

requirements that would apply had it not transferred the securitised

exposures, then the originator may treat the risk transferred as significant for

the purposes of BIPRU 9.4.1R and BIPRU 9.5.1R.

4.2C Credit risk mitigation

Application

4.2C.1 R This section applies to a firm to which MIPRU 4.2.23R applies where that

firm wishes to apply credit risk mitigation to the calculation of its risk

weighted exposure amounts under MIPRU 4.2A.

Purpose

4.2C.2 G The purpose of MIPRU 4.2C is to set out which provisions of BIPRU 5 a

firm should comply with in the recognition of credit risk mitigation in the

calculation of risk weighted exposure amounts for the purposes of the

calculation of the credit risk capital requirement under MIPRU 4.2.23R.

General

4.2C.3 R A firm that wishes to recognise credit risk mitigation in the calculation of

risk weighted exposure amounts, must comply with BIPRU 5 in the same

way that that section applies to a BIPRU firm, except to the extent that a

provision of BIPRU 5 is modified or excluded in the table in MIPRU

4.2C.4R.

4.2C.4 R This table belongs to MIPRU 4.2C.3R

BIPRU provision Adjustment

All provisions of BIPRU

A reference to a provision of BIPRU 3, BIPRU 5

or BIPRU 9 must be read in conjunction with

Page 15 of 20

FSA 2012/47

MIPRU 4.2A.8R, MIPRU 4.2B.4R and MIPRU

4.2C.4R

BIPRU 5.1 This section does not apply

BIPRU 5.3.2R The words “without prejudice to BIPRU 5.6.1R”

do not apply

BIPRU 5.4.1R This rule does not apply

BIPRU 5.4.8R This rule does not apply

BIPRU 5.4.16R This rule does not apply

BIPRU 5.4.18R The second sentence of this rule does not apply

The words “BIPRU 5.4.19R to BIPRU 5.4.21R”

are replaced by the words “BIPRU 5.4.21R”

BIPRU 5.4.19R This rule does not apply

BIPRU 5.4.20R This rule does not apply

BIPRU 5.4.22R The reference to BIPRU 5.4.20R does not apply

BIPRU 5.4.23R to

BIPRU 5.4.66R

These provisions do not apply. A firm must only

use the financial collateral simple method

BIPRU 5.6 This section does not apply

BIPRU 5.7.4R This rule does not apply

BIPRU 5.7.12R This rule does not apply

BIPRU 5.7.19R This rule does not apply

BIPRU 5.7.23R The words “BIPRU 3.2.20R to BIPRU 3.2.26R”

are replaced by the words “MIPRU 4.2A.8R to

MIPRU 4.2A.11R and MIPRU 4.2A.14R”

BIPRU 5.7.23R(3) The first clause of this rule is amended to read as

follows: “E is the exposure value according to

MIPRU 4.2A.5R and BIPRU 3.2.3R;”

The second clause of this rule does not apply

BIPRU 5.7.24R The words “BIPRU 3.2.20R to BIPRU 3.2.26R”

are replaced by the words “MIPRU 4.2A.8R to

MIPRU 4.2A.11R and MIPRU 4.2A.14R”.

BIPRU 5.7.24R(1) This rule is amended to read as follows: “E is the

exposure value according to MIPRU 4.2A.5R and

Page 16 of 20

FSA 2012/47

BIPRU 3.2.3R.”

BIPRU 5.7.27R The references to BIPRU 4.10R and the IRB

approach do not apply

BIPRU 5.8.8R and

BIPRU 5.8.9R

These rules do not apply

4.2D Liquidity resources requirements

Application

4.2D.1 R This section applies to a firm carrying on any home financing or home

finance administration connected to regulated mortgage contracts, unless as

at 26 April 2014 its Part IV permission was and continues to remain subject

to a restriction preventing it from undertaking new home financing or home

finance administration connected to regulated mortgage contracts.

Adequacy of liquidity resources

4.2D.2 R A firm must at all times maintain liquidity resources which are adequate,

both as to amount and quality, to ensure that there is no significant risk that

its liabilities cannot be met as they fall due.

4.2D.3 G In assessing the adequacy of liquidity resources, a firm should have regard to

the overall character of the resources available to it, which enable it to meet

its liabilities as they fall due. A firm should ensure that:

(1) it holds sufficient assets which are marketable, or otherwise

realisable;

(2) it is able to generate funds from those assets in a timely manner; and

(3) it maintains a prudent funding profile in which its assets are of

appropriate maturities, taking into account the expected timing of its

liabilities.

Systems and controls requirements

4.2D.4 R A firm must have in place robust strategies, policies, processes and systems

that enable it to identify, measure, manage and monitor liquidity risk over the

appropriate set of time horizons for its business activities, to ensure that it

maintains adequate levels of liquidity resources. These strategies, policies,

processes, and systems must be appropriate to the firm’s business lines,

currencies in which it operates, and its group companies and must include

adequate allocation mechanisms of liquidity costs, benefits and risks.

4.2D.5 R The strategies, policies, processes and systems referred to in MIPRU

4.2D.4R must be proportionate to the nature, scale and complexity of the

Page 17 of 20

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firm’s activities and the risk profile of the firm.

4.2D.6 R A firm must have in place reliable management information systems to

provide its governing body, senior managers and other appropriate personnel

with timely and forward-looking information on the liquidity position of the

firm.

4.2D.7 R A firm must ensure that its governing body reviews regularly (and not less

frequently than annually) the continued adequacy of any strategies, policies,

processes and systems in place in accordance with MIPRU 4.2D.4R

Stress testing and contingency funding plans

4.2D.8 R A firm must consider alternative scenarios in which its liquidity position

could be impacted. The consideration of alternative scenarios must include

and deal with off-balance sheet items and other contingent liabilities,

including those of securitisation special purpose entities (SSPEs) or other

special purpose entities, in relation to which the firm acts as sponsor or

provides material liquidity support. These scenarios must be incorporated

into the stress testing under MIPRU 4.2D.9R.

4.2D.9 R In order to ensure compliance with MIPRU 4.2D.2R, a firm must:

(1) conduct on a regular basis appropriate stress tests so as to:

(a) identify sources of potential liquidity strain; and

(b) ensure that the risks of current liquidity exposures can be

adequately managed; and

(2) analyse the separate and combined impact of possible future liquidity

stresses on its:

(a) cash flows;

(b) liquidity position; and

(3) make, as soon as is practicable after a test has been performed, and

maintain a written record of all stress tests and their results

4.2D.10 R A firm must ensure that its governing body reviews regularly the stresses and

scenarios tested and the assumptions underlying the funding position of the

firm to ensure that their nature and severity remain appropriate and relevant

to it.

4.2D.11 G For the purpose of MIPRU 4.2D.10R a review should take into account:

(1) changes in market conditions;

(2) changes in funding sources and inflows;

Page 18 of 20

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(3) changes in the nature, scale or complexity of the firm’s business

model and activities; and

(4) the firm’s practical experience in periods of stress.

4.2D.12 R A firm must adjust its strategies, internal policies and limits on liquidity risk,

taking into account the outcome of the alternative scenarios referred to in

MIPRU 4.2D.8R.

4.2D.13 R (1) A firm must have in place contingency funding plans setting out

adequate strategies and proper implementation measures in order to

address potential liquidity shortfalls.

(2) The contingency funding plans must be:

(a) in writing;

(b) approved by the firm’s governing body;

(d) updated on the basis of the outcome of the stress tests, testing

alternative scenarios set out in MIPRU 4.2D.8R.

4.2D.14 G A contingency funding plan sets out a firm’s strategies for managing

liquidity shortfalls in emergency situations. Its aim should be to ensure that,

in each of the stresses set out in MIPRU 4.2D.11R, it would have sufficient

liquidity resources to ensure that it can meet its liabilities as they fall due.

Amend the following as shown.

4.4 Calculation of capital resources

The calculation of a firm’s capital resources

…

4.4.8 R (1) This rule applies to a firm which:

(a) carries on:

(i) insurance mediation activity; or

(ii) home finance mediation activity (or both); and

(b) in relation to those activities, holds client money or other

client assets; or

but is not carrying on home financing or home finance

administration.

Page 19 of 20

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(b) carries on home financing or home finance administration

connected to regulated mortgage contracts (or both) unless as

at 26 April 2014 its Part IV permission was and continues to

remain subject to a restriction preventing it from undertaking

new home financing or home finance administration

connected to regulated mortgage contracts.

…

Schedule 1 Record keeping requirements

G There are no record keeping requirements in MIPRU.

1 The aim of the guidance in the following table is to give the reader an overview

of the relevant record keeping requirements.

2 It is not a complete statement of those requirements and should not be relied on

as if it were.

Handbook

reference

Subject of record Contents of

record

When record

must be made

Retention period

MIPRU 4.2D.9R

(3)

Stress tests All stress tests

performed by a

firm to which

MIPRU 4.2D.1R

applies, and the

results of those

tests

As soon as

practicable after

a test has been

performed

Not specified

Page 20 of 20

The Financial Services Authority

25 The North Colonnade Canary Wharf London E14 5HS

Telephone: +44 (0)20 7066 1000 Fax: +44 (0)20 7066 1099

Website: www.fsa.gov.uk

Registered as a Limited Company in England and Wales No. 1920623. Registered Office as above.

PUB REF: 003036