MCOB 1.2 General application: who? what?
MCOB applies to every firm that:
- (1)
carries on regulated mortgage activities (subject to MCOB 1.2.3 R); or
- (2)
Firm types and the regulated mortgageactivities
The application of most of MCOB is expressed by reference to four types of firm: mortgage lenders, mortgage administrators, mortgage arrangers and mortgage advisers. This includes those firms that provide business loans to customers under a regulated mortgage contracts (see MCOB 1.2.3 R to MCOB 1.2.9 G). A single firm may fall into more than one of these types. Guidance on these firm types, the regulated mortgage activities which they carry on, a description of what those activities cover and what is excluded is set out in MCOB 1 Annex 1. PERG 4contains detailed guidance on those activities.
Business loans: application of MCOB
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 taking account of those tailored provisions, including MCOB 1.2.7 R.
- (a)
MCOB 1 Annex 2 contains a table summarising the provisions of MCOB that apply to regulated mortgage contracts that are for a business purpose. For detail of the tailored provisions applying, see the section on 'business loans' set out in each relevant chapter.
- (1)
In order for a loan to fall within the definition of a regulated mortgage contract, at least 40% of the total of the land to be given as security must be used as or in connection with a dwelling. Therefore, the variation in approach provided for in MCOB 1.2.3 R(2) can only apply where the loan being used for a business purpose is secured against a property at least 40 per cent of which is used as a dwelling. It cannot apply to a loan secured on property that is used solely for a business purpose.
- (2)
Whether a regulated mortgage contract is for a business purpose will be a matter of fact to be determined by a firm depending on the individual circumstances of each case. In the FSA's opinion, a regulated mortgage contract secured, for example, on the borrower's own home, but used to finance the purchase of a single buy-to-let property will not be for a business purpose.
In determining whether a customer is a large business customer for the purposes of MCOB 1.2.3 R(1), a firm will need to have regard to the figure given for the customer's annual turnover in the customer's annual report and accounts or business plan. In addition, a firm may rely on information provided by the customer about the annual turnover, unless, taking a common-sense view of this information, it has reason to doubt it.
Business loans: additional requirements if tailored route is used
In relation to a regulated mortgage contract for a business purpose, if a firm has opted for the tailored route inMCOB 1.2.3 R(2), it must adopt the following modifications to the provisions in MCOB:
- (1)
(except in relation to sections 6 and 8 of any initial disclosure document provided in accordance with MCOB 4.4.1 R(1)(c)(i) or sections 5 and 8 of any initial disclosure document provided in accordance with MCOB 4.4.1 R(1)(c)(ii)) 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 facts illustration' when opting to use the tailored business loans rules in MCOB 4.9, MCOB 5.7, MCOB 6.7 or MCOB 7.7; and
- (3)
limit disclosure to facilities provided under the regulated mortgage contract.
- (1)
Firms are reminded of the requirement in MCOB 2.2.6 R that any communication should be clear, fair and not misleading when substituting an alternative for the term 'mortgage' in accordance with MCOB 1.2.7 R(1).
- (2)
Possible alternatives to the term 'mortgage' include, for example, 'secured business overdraft', 'secured loan' or 'secured business credit'.
The disclosure rules in MCOB place particular emphasis on the description of borrowing. Where the regulated mortgage contract is for a business purpose, 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.
Authorised professional firms
MCOB does not apply to an authorised professional firm with respect to its non-mainstream regulated activities except for:
- (1)
MCOB 2.2 (Communications);
- (2)
MCOB 3 (Financial promotion); and
- (3)
MCOB 4.4 (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 MCOB 4 Annex 1 or MCOB 4 Annex 2, and MCOB 8 Annex 1 or MCOB 8 Annex 2
Authorised professional firms should be aware of the following:
- (1)
PROF 5 (Non-mainstream regulated activities); and
- (2)
MCOB 3.1.9 R (Authorised professional firms) and the exception in article 55 of the Financial Promotion Order (Communications by members of the professions) which applies in relation to qualifying credit promotions of authorised professional firms under MCOB 3.2.5 R(3) (Exemptions).
Pre-contractual arrangements by a mortgage lender
In MCOB the activities of a mortgage lender which would be arranging but for article 28A of the Regulated Activities Order (Arranging contracts to which the arranger is a party), are to be treated as arranging and therefore also as regulated mortgage activities.
The effect of article 28A of the Regulated Activities Order would normally mean that arrangements made by a party to a regulated mortgage contract would not fall within the regulated mortgage activity of arranging. So in a direct sale, a mortgage lender would not be carrying on the regulated activity of arranging but, where the transaction proceeds to completion, would instead be involved in the regulated activity of entering into a regulated mortgage contract. However, the provisions in MCOB on arranging regulated mortgage contracts are applied to pre-contractual arrangements by a mortgage lender.
Summary of the application of the chapters of MCOB
A table summarising the application of the various chapters of MCOB to firms that carry on regulated mortgage activities is set out in MCOB 1 Annex 3. For the detailed application of each chapter, see the application rule at the start of that chapter.