MCOB applies as described in this chapter.

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.

1 Firms which outsource regulated activities are reminded of the guidance on outsourcing in SYSC 3.2.4 G and SYSC 84.

1. (1)

   This sourcebook applies to activities carried out in respect of regulated mortgage contracts, equity release transactions, home purchase plans, and regulated sale and rent back agreements. Together, these products are referred to as home finance transactions.

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2. (2)

   Lifetime mortgages and home reversion plans are together referred to as equity release transactions.3

3. (3)

   The application of most of this sourcebook is expressed by reference to four types of firm: lenders/providers, administrators, arrangers, and advisers. Arrangers and advisers are together referred to as intermediaries. 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. PERG 4 contains detailed guidance on regulated mortgage activities and PERG 14 contains detailed guidance on home purchase activities,6reversion activities3and regulated sale and rent back activities.6

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8In relation to an MCD regulated mortgage contract with a high net worth mortgage customer, to comply in full with MCOB, a firm does not need to comply with those provisions in MCOB that are expressed not to apply to MCD regulated mortgage contracts.

The tailored provisions are those in the sections 'Business loans and loans to high net worth mortgage customers: tailored provisions’ set out in each relevant chapter.7

7Certain 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 1.2.4B G.

1. (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. (2)

   Whether a regulated mortgage contract is, or is solely,7 for a business purpose will be a matter of fact to be determined by a firm (in accordance with MCOB 1.2.9D R where applicable) 7depending on the individual circumstances of each case. In the FCA'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.

1. (1)

   Firms are reminded of the requirement in MCOB 3A.2.1R8 that any communication should be fair, clear8 and not misleading when substituting an alternative for the term 'mortgage' in accordance with MCOB 1.2.7 R(1).

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2. (2)

   Possible alternatives to the term 'mortgage' include, for example, 'secured overdraft', 'secured loan' or 'secured business credit'.

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The disclosure rules in MCOB place particular emphasis on the description of borrowing. Where the regulated mortgage contract is for a business purpose or with a high net worth mortgage customer7 who is not a consumer under an MCD regulated mortgage contract8, 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.

For detail of the tailored provisions applying to home purchase plans, see the section on 'home purchase plans' set out in each relevant chapter.

7Certain provisions of MCOB 4.7A and MCOB 4.8Aapply in respect of professional customers. Where they apply, they provide greater flexibility for firms.

10Where the regulated mortgage contract is a legacy CCA mortgage contract, the firm should not treat the customer as a high net worth mortgage customer for the purposes of MCOB unless it is aware from evidence in its possession that the customer satisfied the definition of high net worth mortgage customer at the time the contract was entered into.

Authorised professional firms should be aware of the following:

1. (1)

   PROF 5 (Non-mainstream regulated activities); and

2. (2)

   MCOB 3A.1.3R8 (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 financial promotion of qualifying credit or of a home reversion plan3 of authorised professional firms under MCOB 3A.1.9R(2)8 (Exemptions).

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The effect of article 28A of the Regulated Activities Order would normally mean that arrangements made by a party to a home finance transaction3 would not fall within the home finance activity3 of arranging. So in a direct sale, a home finance provider3 would not be carrying on the regulated activity of arranging but, where the transaction proceeds to completion, would instead be involved in a regulated activity comprising entering into a home finance transaction3. However, the provisions in MCOB on arranging home finance transactions3 are applied to pre-contractual arrangements by a home finance provider3.

8The purpose of MCOB 1.2.16 R is to allow a firm to apply provisions of MCOB which implement the MCD for an MCD regulated mortgage contract to regulated mortgage contracts that are not MCD regulated mortgage contracts, save in respect of MCD exempt lifetime mortgages (other than retirement interest-only mortgages)12 where the firm must continue to provide an illustration in accordance with the relevant requirements in MCOB, rather than an ESIS.

1. (1)

   8To meet the definition of an MCD credit agreement (including a foreign currency loan), a contract must come within the definition at the time it is entered into.

2. (2)

   The effect of (1) is that:

   1. (a)

      a contract which, at the time it is entered into, comes within the definition of an MCD regulated mortgage contract (and a foreign currency loan where applicable) remains an MCD regulated mortgage contract (and a foreign currency loan where applicable) throughout its remaining term, even if there are subsequent periods of time when some or all of the conditions set out in the definition are not satisfied; and

   2. (b)

      unless the contract is subsequently replaced with a new contract which meets the conditions in the definition, a contract which does not start out as an MCD regulated mortgage contract or a foreign currency loan cannot subsequently become one, even if the contract is subsequently amended so that it meets all the conditions set out in definition.

1. (1)

   10By virtue of amendments to articles 60B, 60C and 61 of the Regulated Activities Order which came into force on 21 March 2016, certain regulated credit agreements became regulated mortgage contracts (but see the transitional provisions described in (3) below). The provisions of MCOB that apply to these regulated mortgage contracts include:

   1. (a)

      MCOB 7 (Disclosure at start of contract and after sale);

   2. (b)

      MCOB 12 (Charges); and

   3. (c)

      MCOB 13 (Arrears, payment shortfalls and repossessions: regulated mortgage contracts and home purchase plans).

2. (2)

   Where a regulated mortgage contract is a second charge regulated mortgage contract which was entered into before 21 March 2016, MCOB applies to the contract from 21 March 2016.

3. (3)

   Where a regulated mortgage contract is a legacy CCA mortgage contract secured by a first charge legal mortgage, MCOB applies to the contract from the earliest of:

   1. (a)

      the date on which the lender first acts in compliance or purported compliance with rules in the FCAHandbook which apply to regulated mortgage contracts in respect of the contract;

   2. (b)

      the date from which the lender notifies the borrower in writing that it will act in compliance with such rules in respect of the contract; and

   3. (c)

      21 March 2017.

13 MCOB 15 contains rules and guidance that apply in relation to regulated mortgage contracts and other home finance transactions facilitated by P2P platform operators. It includes rules that disapply other parts of MCOB that would otherwise apply by virtue of MCOB 1.2.22R(1) or 1.2.22R(2), and rules that apply or modify the application of certain other MCOB provisions in such circumstances. MCOB 15 also includes guidance that will be relevant to such a P2P platform operator whether or not a lender or provider falls within the definition of a mortgage lender, home purchase provider, reversion provider or SRB agreement provider.

7Guidance on MCOB 1.3.1AR and MCOB 1.3.1BR is in MCOB 1 Annex 5. For applicable rules in relation to knowledge and competence requirements for staff, incoming EEA firms should also refer to TC 2.1.5AR to TC 2.1.5FG and to the territorial application rules in TC Appendices 1 and 2.

Parts of MCOB relate to distance contracts (or distance mortgage mediation contracts and distance home purchase mediation contracts2) with consumers3. These expressions are derived from the Distance Marketing Directive, and the following paragraphs provide some guidance to firms on their meaning:

1. (1)

   consumer3

   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 'consumer' has been adopted. Examples of individuals who would be regarded as consumers3include:

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   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. (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 3up to and including the time at which the contract is concluded. So:

   3
   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 Distance Marketing Directive3 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

      3
   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.

The mere fact that an intermediary (acting for the supplier or for the consumer3) 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 consumer3 at some stage in the offer, negotiation and conclusion of the contract.1

1. (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. (2)

   Firms should refer to SUP 12 (Appointed representatives), which sets out requirements which apply to firms using appointed representatives.

MCOB applies to regulated mortgage contracts. For certain categories of regulated mortgage contract, MCOB applies from the dates mentioned in MCOB 1.2.21G. A credit agreement secured on land5 that is not a regulated mortgage contract, for example because the borrower is not an individual or a trustee,5 may be a regulated credit agreement to which the CCA and CONC apply (see CONC 1.2.7G).5

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 FCA would expect firms to take appropriate steps to determine whether any mortgage it proposes to enter into is subject to FCA regulation and, if so, whether it is a regulated mortgage contract or a regulated credit agreement4.

1. (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. (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 FCA 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. (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 or is a regulated credit agreement4. In deciding whether to take disciplinary action as a result of a breach of MCOB, the FCA will take into account whether the action by the firm was reckless or deliberate (see DEPP 6.2.1G (1)(a)). 3

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1Under article 34(1) of the MCD, the Home State is responsible for supervising the activities of MCD credit intermediaries providing cross border services. If a UK firm provides services into another EEA State, the rules applying to MCD credit intermediation activities therefore apply to it. For an incoming EEA firm providing cross border services, rules do not apply to the firm where the rule covers a matter dealt with by the MCD. Instead the Home State’s rules will apply.

Under article 34(2) of the MCD, ensuring compliance with the obligations in articles 7(1), 8, 9, 10, 11, 13, 14, 15, 16, 17, 20, 22 and 39 of the MCD by incoming EEA firms doing business through branches is the responsibility of the Host State. These articles contain most of the conduct requirements imposed on credit intermediaries under the MCD, for example advisory standards and the obligation to provide an ESIS. Responsibility for ensuring compliance with all other obligations in the MCD is the responsibility of the Home State. This means that, in so far as a rule imposes obligations on MCD credit intermediaries that are contained in the articles listed above, that rule applies to incoming EEA firms doing business through branches. A rule that imposes obligations contained in any other article of the MCD does not apply in relation to such an incoming EEA firm, and its equivalent Home State rule applies instead. Conversely, such a rule would apply in relation to an EEA branch of a UK firm.

For all incoming EEA firms, where MCOB imposes obligations that go beyond what is required by the MCD (as permitted under article 2 of the MCD), the firm is required to comply with those additional obligations.

The tables in MCOB 1 Annex 5.1.6G provide non-exhaustive guidance as to how the obligations imposed under the MCD relate to MCOB provisions. In general, MCOB applies as follows:

1. (1)

   In relation to an incoming EEA firm acting as an MCD credit intermediary on a branch basis, all provisions of MCOB that apply to MCD credit intermediaries may apply, except for the provisions in Table 2.

2. (2)

   In relation to an incoming EEA firm acting as an MCD credit intermediary on a cross-border services basis, all provisions of MCOB that apply to MCD credit intermediaries may apply, except for the provisions in Tables 1 and 2.

3. (3)

   In relation to an EEA branch of a UK firm acting as an MCD credit intermediary, the provisions in Table 2 (and only those provisions) may apply in relation to the firm’s MCD credit intermediation activity in that EEA State.

Incoming EEA firms should also refer to the general application provisions in MCOB 1.3 and the application provisions in each chapter of MCOB, which set out how MCOB applies to MCD credit intermediaries in general.