PERG 4.8 Administering a regulated mortgage contract

Article 61(2) of the Regulated Activities Order makes administering a regulated mortgage contract a regulated activity 'where the contract was entered into by way of business' on or after 31 October 2004 or the contract was entered into ‘by way of business’ before that date and is a legacy CCA mortgage contract5.

The definition does not include administration of a regulated mortgage contract which was not entered into by way of business. See PERG 4.3.3 G for a discussion of the 'by way of business' test. The definition also does not include administration of a mortgage which was entered into before 31 October 2004 unless the contract is a legacy CCA mortgage contract5. See, however, PERG 4.4.4 G for a discussion of how a variation of a mortgage contract entered into before 31 October 2004 could amount to the entry into a new regulated mortgage contract on or after 31 October 2004.

Under article 61(3)(b) of the Regulated Activities Order, administering a regulated mortgage contract is defined as either or both of:

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; and

2. (2)

   taking any necessary steps for the purposes of collecting or recovering payments due under the contract from the borrower;

but does not include merely having or exercising a right to take action to enforce the regulated mortgage contract, or to require that action is or is not taken.

Article 62 of the Regulated Activities Order provides that a person who is not an authorised person does not administer a regulated mortgage contract if he:

1. (1)

   arranges for a firm with permission to administer a regulated mortgage contract (a 'mortgage administrator') to administer the contract; or

2. (2)

   administers the regulated mortgage contract itself, provided that the period of administration is no more than one month after the arrangement in (1) has come to an end.

This exclusion may be of a particular interest to a special purpose vehicle which administers regulated mortgage contracts transferred to it as part of a securitisation transaction.

If an unauthorised administrator makes arrangements for a mortgage administrator to administer its regulated mortgage contracts, the exclusion may cease to be available because the mortgage administrator ceases to have the required permission, or because the arrangement is terminated. The exclusion gives the unauthorised administrator a one-month grace period during which it may administer the contracts itself. If the period of administration exceeds one month, the unauthorised administrator will be in breach of the general prohibition, and the FCA may take proceedings in respect of the breach. However:

1. (1)

   under section 23(3) of the Act, it is a defence in such proceedings for a person to show that 'he took all reasonable precautions and exercised all due diligence to avoid committing the offence';

2. (2)

   the FCA would consider whether a person had taken 'all reasonable precautions and exercised all due diligence' on a case-by-case basis; what is reasonable is a matter for the senior management of the unauthorised administrator to decide in each case, taking account of, for example, the financial standing of the mortgage administrator and its ability to perform its obligations under the administration contract;

3. (3)

   factors that the FCA would take into account in assessing whether an unauthorised administrator has taken 'all reasonable precautions and exercised all due diligence' would include:

   1. (a)

      the level of the person's preparedness for a mortgage administrator to cease providing administration services; and

   2. (b)

      the reasons for, and the circumstances of, the termination of arrangements with a mortgage administrator;

4. (4)

   whether any agreement made by an unauthorised administrator would be enforceable under section 26 of the Act (Agreements made by unauthorised persons) depends on whether the court is satisfied that this would be just and equitable; in this context, the court may have regard to the extent to which the administrator has complied with the FCA's guidance.

Under article 63 of the Regulated Activities Order, a person who is not an authorised person does not administer a regulated mortgage contract if he administers the contract under an agreement with a firm with permission to administer a regulated mortgage contract. A firm with permission to administer a regulated mortgage contract may thus outsource or delegate the administration function to an unauthorised third party. A firm that proposes to do this should however note, as set out in SYSC 8.1.6 R and 8.1.8 R,1 that the FCA will continue to hold it responsible for the way in which the administration is carried on.

The Regulated Activities Order contains an exclusion which has the effect of preventing certain activities of trustees, nominees and personal representatives from amounting to administering regulated mortgage contracts. There is also an exclusion for local authorities and their wholly-owned subsidiaries.32 These are2 referred to in PERG 4.10 (Exclusions applying to more than one regulated activity). In addition, there2are exclusions 4where both the administrator and borrower are overseas, which is referred to in PERG 4.11 (Link between activities and the United Kingdom) and related to consumer buy-to-let lending, which is described in PERG 4.10B4.