MCOB 1.1 Application and purpose

Application

MCOB 1.1.1 G 31/10/2004

MCOB applies as described in this chapter.

Purpose

MCOB 1.1.2 G 31/10/2004

The purpose of this chapter is to set out to whom, for what activities, and within what territorial limits the rules, evidential provisions and guidance in MCOB apply. This chapter also provides guidance on the application of other parts of the Handbook to a firm that carries on regulated mortgage activities.

MCOB 1.2 General application: who? what?

MCOB 1.2.1 R 01/06/2005

(1)
MCOB applies to every firm that:1
1
1. (a)
  carries on regulated mortgage activities (subject to MCOB 1.2.3 R (1)1); or
2. (b)
  communicates or approves a qualifying credit promotion.
(2)
Where a firm has outsourced activities to a third party processor, any rule in MCOB which requires the third party processor, when acting as such, to disclose its identity to a customer must be read as requiring disclosure of the identity of the firm (or appointed representative, as appropriate) which is taking responsibility for the acts and omissions of the third party processor when carrying on the outsourced activities.1
1

MCOB 1.2.1A G 01/06/2005

1 Firms which outsource regulated activities are reminded of the guidance on outsourcing in SYSC 3.2.4 G .

Firm types and the regulated mortgageactivities

MCOB 1.2.2 G 01/07/2005

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

MCOB 1.2.3 R 31/10/2004

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:
1. (a)
  comply with MCOB in full (disregarding the tailored provisions for regulated mortgage contracts for a business purpose in the remainder of MCOB); or
2. (b)
  comply with MCOB taking account of those tailored provisions, including MCOB 1.2.7 R.

MCOB 1.2.4 G 31/10/2004

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.

MCOB 1.2.5 G 31/10/2004

(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.

MCOB 1.2.6 G 31/10/2004

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

MCOB 1.2.7 R 31/10/2004

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.

MCOB 1.2.8 G 31/10/2004

(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'.

MCOB 1.2.9 G 31/10/2004

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 1.2.10 R 31/10/2004

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

MCOB 1.2.11 G 31/10/2004

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

MCOB 1.2.12 R 31/10/2004

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.

MCOB 1.2.13 G 31/10/2004

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

MCOB 1.2.14 G 31/10/2004

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.

MCOB 1.3 General application: where?

Location of the customer

MCOB 1.3.1 R 31/10/2004

Except as set out in this section, MCOB applies if the customer of a firm carrying on regulated mortgage activities is resident in:

(1)
the United Kingdom; or
(2)
another EEA State, but in this case only if the activity is carried on from an establishment maintained by the firm (or its appointed representative) in the United Kingdom;

at the time that the regulated mortgage activity is carried on.

Financial Promotion

MCOB 1.3.2 R 31/10/2004

The territorial scope of MCOB 3 (Financial promotion) is set out in MCOB 3.3 (Application: where?) rather than in this section.

Electronic commerce activities and communications

MCOB 1.3.3 R 31/10/2004

The territorial scope of this sourcebook is modified by ECO in relation to electronic commerce activities and electronic commerce communications.

Distance contracts entered into from an establishment in another EEA State

MCOB 1.3.4 R 31/10/2004

(1)
The rules in (2) do not apply to a firm with respect to an activity exclusively concerning a distance contract if the following conditions are satisfied:
1. (a)
  the firm carries on the activity from an establishment maintained by the firm in an EEA State other than the United Kingdom; and
2. (b)
  either the EEA State:
  1. (i)
    has implemented the DMD; or
  2. (ii)
    has obligations in its domestic law corresponding to those provided for by the DMD;
  and, in either case, with the result that the obligations provided for by the DMD (or corresponding obligations) are applied by that State when the firm carries on that activity; and
3. (c)
  the firm is a national of an EEA State or a company or firm mentioned in article 48 of the Treaty.
(2)
The rules which do not apply are:
1. (a)
  MCOB 4.4 (Initial disclosure requirements);
2. (b)
  MCOB 4.5 (Additional disclosure for distance mortgage mediation contracts with retail customers);
3. (c)
  MCOB 4.6 (Cancellation of distance mortgage mediation contracts);
4. (d)
  MCOB 5 (Pre-application disclosure);
5. (e)
  MCOB 6 (Disclosure at offer stage);
6. (f)
  MCOB 7.6.7 R to MCOB 7.6.17 R (Further advances);
7. (g)
  MCOB 8.3 (Application of rules in MCOB 4) to the extent that it applies MCOB 4.4 to MCOB 4.6;
8. (h)
  MCOB 8.4 (Initial disclosure requirements: home reversion schemes);
9. (i)
  MCOB 9.3 (Pre-application disclosure);
10. (j)
  MCOB 9.4 (Content of illustrations); and
11. (k)
  MCOB 9.5 (Disclosure at offer stage for lifetime mortgages).

Distance contracts with retail customers

MCOB 1.3.5 G 31/10/2004

Parts of MCOB relate to distance contracts (or distance mortgage mediation contracts) with retail customers. These expressions are derived from the Distance Marketing Directive, and the following paragraphs provide some guidance to firms on their meaning:

(1)
Retail customer
The Distance Marketing Directive applies for distance contracts with 'any natural person who is acting for purposes which are outside his trade, business or profession', for which the term 'retail customer' has been adopted. Examples of individuals who would be regarded as retail customers include:
1. (a)
  personal representatives, including executors, unless they are acting in a professional capacity, for example a solicitor acting as executor; or
2. (b)
  private individuals acting in personal or other family circumstances, for example, a trustee of a family trust.
(2)
Distance contract
To be a distance contract, a contract must be concluded under an 'organised distance sales or service-provision scheme' run by the contractual provider of the service who, for the purpose of the contract, makes exclusive use (directly or through an intermediary) of one or more means of distance communication up to and including the time at which the contract is concluded. So:
1. (a)
  the firm must have put in place facilities designed to enable a customer to deal with it exclusively at a distance, such as facilities for a customer to deal with it purely by post, telephone, fax or the Internet. If a firm normally operates face-to-face and has no facilities in place enabling a customer to deal with it customarily by distance means, the DMD will not apply. A one-off transaction effected exclusively by distance means to meet a particular contingency or emergency will not be a distance contract; and
2. (b)
  there must have been no simultaneous physical presence of the firm and the other party to the contract throughout the offer, negotiation and conclusion of the contract. So, for example, contracts offered, negotiated and concluded over the Internet, through a telemarketing operation, or by post will normally be distance contracts.

Use of intermediaries

MCOB 1.3.6 G 31/10/2004

The mere fact that an intermediary (acting for the supplier or for the retail customer) is involved, does not make the sale of a financial product or service a distance contract. There will not be a distance contract if there has been simultaneous physical presence of the intermediary and the retail customer at some stage in the offer, negotiation and conclusion of the contract.1

MCOB 1.4 Application of the Handbook in relation to mortgages

MCOB 1.4.1 G 31/10/2004

A table summarising the application of the Handbook to firms carrying on regulated mortgage activities is set out in MCOB 1 Annex 4. For the detailed application of each module, see the application provision at the start of the module, and each chapter or section.

MCOB 1.5 Application to appointed representatives

MCOB 1.5.1 G 31/10/2004

(1)
Although MCOB does not apply directly to a firm's appointed representatives, a firm will always be responsible for the acts and omissions of its appointed representatives in carrying on business for which the firm has accepted responsibility (section 39(3) of the Act). In determining whether a firm has complied with any provision of MCOB, anything done or omitted by a firm's appointed representative (when acting as such) will be treated as having been done or omitted by the firm (section 39(4) of the Act).
(2)
Firms should refer to SUP 12 (Appointed representatives), which sets out requirements which apply to firms using appointed representatives.

MCOB 1.6 Application in relation to the Consumer Credit Act 1974

MCOB 1.6.1 G 01/07/2005

MCOB applies to regulated mortgage contracts entered into on or after 31 October 2004. Variations made on or after that date to contracts entered into before that date are not subject to FSA regulation but may be subject to the Consumer Credit Act 1974. PERG 4.4.13G2 contains guidance on the variation of contracts entered into before 31 October 2004.1

MCOB 1.6.2 G 31/10/2004

Principle 2 requires a firm to conduct its business with due skill, care and diligence. The purpose of MCOB 1.6.3 R is to reinforce this. The FSA would expect firms to take appropriate steps to determine whether any mortgage it proposes to enter into is subject to FSA regulation.

MCOB 1.6.3 R 31/10/2004

Before a firm enters into a mortgage, it must take all reasonable steps to establish whether that mortgage will be a regulated mortgage contract and therefore subject to MCOB.

MCOB 1.6.4 R 31/10/2004

If, notwithstanding the steps taken by a firm to comply with MCOB 1.6.3 R, it transpires that a mortgage which the firm has treated as unregulated is in fact a regulated mortgage contract, the firm must as soon as practicable after the correct status of the mortgage has been established:

(1)
contact the customer and provide him with the following information in a durable medium:
1. (a)
  a statement that the mortgage contract is a regulated mortgage contract subject to FSA regulation, stating in particular the position with regard to redress and compensation; and
2. (b)
  (where relevant) a statement that the Consumer Credit Act 1974 will not apply to the mortgage contract and that any Consumer Credit Act rights or requirements set out in previous communications will not apply;
(2)
apply to the regulated mortgage contract all relevant MCOB requirements, such as those on disclosure (in MCOB 7) or on the treatment of customers in arrears (in MCOB 13).

MCOB 1.6.5 G 31/10/2004

(1)
MCOB 1.6.4 R(2) means, for example, that if a firm discovered immediately after completion that a loan was a regulated mortgage contract, the firm would be required to comply with MCOB 7.4 (Disclosure at the start of the contract).
(2)
Although MCOB 1.6.4 R recognises that firms may become aware that a mortgage is a regulated mortgage contract at a late stage, the FSA expects this to be an extremely rare occurrence. It could arise, for example, if a firm has acted on the understanding, verified as far as was practicable, that in respect of a particular mortgage contract less than 40% of the land would be used in connection with a dwelling. If it was discovered later that more than 40% of the land was used in connection with the dwelling (and provided that all the other legal requirements were met) the mortgage will be a regulated mortgage contract to which MCOB applies.
(3)
MCOB 1.6.3 R and MCOB 1.6.4 R do not override the application of MCOB to any regulated mortgage contract. MCOB applies notwithstanding a firm's genuine belief that a mortgage is unregulated. In deciding whether to take disciplinary action as a result of a breach of MCOB, the FSA will take into account whether the action by the firm was reckless or deliberate (see ENF 11.4.1 G(1)(a)).

MCOB 1 Annex 1 Summary of firm types and of the regulated mortgage activities

G 01/07/2005

This annex belongs to MCOB 1.2.2 G and summarises the four firm types which are used in MCOB, the regulated mortgage activities which they carry on, what those activities cover and what is excluded. (See PERG 42 for detailed guidance on regulated mortgage activities). References to articles are to articles of the Regulated Activities Order.

The exclusions listed in this table are only a summary of the exclusions in the Regulated Activities Order. This summary is not a complete explanation of the exclusions and should not be relied on as if it were.

Type of firm	Regulated activity	Description of activity	Summary of exclusions
mortgage lender	entering into a regulated mortgage contract as lender (article 61(1) (Regulated mortgage contracts))	the provision of credit (which includes a cash loan or any other form of financial accommodation) to an individual or trustee under a regulated mortgage contract	unless:(1) the person providing credit is acting in the capacity of trustee or personal representative (article 66). See PERG 4.10.5G to PERG 4.10.8G2; or (2) both the lender and borrower are overseas (PERG 4.112 (Link between activities and the United Kingdom)). 2 2
mortgage administrator	administering a regulated mortgage contract where that contract is entered into on or after 31 October 2004 (article 61(2) (Regulated mortgage contracts))1	(1) notifying the borrower of changes in interest rates or payments due under the contract, or of other matters of which the contract requires him to be notified; or (2) taking any necessary steps for the purposes of collecting or receiving payments due under the contract from the borrower.	unless:(1) the person arranges for a mortgage administrator to administer the contract (article 62); or (2) the person administers the contract for a period of not more than one month after the arrangement in (1) has come to an end (article 62); or (3) the person administers the contract under an agreement with a mortgage administrator (article 63); or (4) the person administering the contract is acting in the capacity of trustee or personal representative (article 66). See PERG 4.10.5G to PERG 4.10.8G2; or (5) both the administrator and borrower are overseas (PERG 4.112 (Link between activities and the United Kingdom)). 2 2
mortgage adviser	advising on regulated mortgage contracts (article 53A (Advising on regulated mortgage contracts))	giving advice to a person in his capacity as borrower or potential borrower on the merits of doing any of the following: (1) entering into a particular regulated mortgage contract; or (2) varying the terms of a regulated mortgage contract entered into on or after 31 October 2004 in such a way as to vary the borrower's obligations under the contract (see PERG 4.62 (Advising on regulated mortgage contracts)).1 2	unless: (1) the advice is given in a periodical publication, regularly updated news and information service or broadcast (article 54); see AUTH 7 (Periodical publications, news services and broadcasts: applications for certification); or (2) the advice is given in the course of administration of the contract by an authorised person (article 54A); or (3) the advice is given by a person carrying on a profession or business (other than a regulated activity) (article 67). See PERG 4.102 (Exclusions applying to more than one regulated activity); or (4) the person giving the advice is acting in the capacity of trustee or personal representative (article 66). See PERG 4.10.5G to PERG 4.10.8G.2 2 2
mortgage arranger	(1) making arrangements for another person to (a) enter into a regulated mortgage contract as borrower; or (b) vary the terms of a regulated mortgage contract entered into by him as borrower after 31 October 2004 in such a way as to vary his obligations under the contract (article 25A(1)).	(1) making arrangements which bring about, or would bring about: (a) the entering into of a regulated mortgage contract; or (b) the variation of the terms of a regulated mortgage contract entered into after 31 October 2004, for example brokers making arrangements on behalf of a borrower which go beyond merely introducing. See PERG 4.5.2G2. 2	unless: (1) the person making the arrangements is to be a party to the regulated mortgage contract (article 28A) (but a mortgage lender is treated as a mortgage arranger for the purposes of MCOB: see MCOB 1.2.12R); or (2) the arrangements do not bring about or would not bring about the regulated mortgage contract in question (article 26); or (3) the arrangements are made between a borrower and an authorised person by an unauthorised person if specified conditions as to advice and remuneration are satisfied (article 29) (see PERG 4.5.8G2); or (4) the arrangements are made in the course of administration by an authorised person (article 29A); or (5) the arrangements are made by a person in the course of carrying on a profession or business (other than a regulated activity) (see PERG 4.102) (Exclusions applying to more than one regulated activity); or (6) where the arranger and borrower are overseas (PERG 4.112 (Link between activities and the United Kingdom)). 2 2 2
	(2) making arrangements with a view to a person who participates in the arrangements entering into a regulated mortgage contract as borrower (article 25A(2)).	(2) making arrangements with a view to a person participating in those arrangements entering into a regulated mortgage contract (for example introducing potential borrowers to brokers or lenders). See PERG 4.5.3G2. 2	(2) - (6) also apply and, in addition: (1) arrangements under which a borrower is introduced to a mortgage arranger, a mortgage adviser or mortgage lender (which will include overseas firms) or an appointed representative who is appointed to arrange or advise on a regulated mortgage contract (article 33A). (See PERG 4.5.10G to PERG 4.5.18G2); or (2) where the arrangements simply enable the parties to communicate with one another (for example internet service providers or telecommunication networks) (article 27). 2

MCOB 1 Annex 2 Summary of the tailored provisions in MCOB that apply to regulated mortgage contracts that are for a business purpose and are not with large business customers

G 31/10/2004

This annex belongs to MCOB 1.2.4G

Chapter	Tailored provisions of MCOB that apply to regulated mortgage contracts that are for a business purpose
MCOB 1 (Application and purpose)	MCOB 1.2.3R to MCOB 1.2.9G (Business loans: application of MCOB)
MCOB 2 (Conduct of business standards: general)	None
MCOB 3 (Financial promotion)	None
MCOB 4 (Advising and selling standards)	MCOB 4.9 (Business loans)
MCOB 5 (Pre-application disclosure)	MCOB 5.7 (Business loans)
MCOB 6 (Disclosure at the offer stage)	MCOB 6.7 (Business loans)
MCOB 7 (Disclosure at start of contract and after sale)	MCOB 7.7 (Business loans)
MCOB 8 (Lifetime mortgages: advising and selling standards)	None
MCOB 9 (Lifetime mortgages: product disclosure)	None
MCOB 10 (Annual percentage rate)	None
MCOB 11 (Responsible lending)	None
MCOB 12 (Charges)	MCOB 12.6 (Business loans)
MCOB 13 (Arrears and repossessions)	MCOB 13.7 (Business loans)

MCOB 1 Annex 3 Summary of the application of the chapters of MCOB