Related provisions for MCOB 7.6.6
An example of how the information required by MCOB 5.6.52 R (1), MCOB 5.6.52 R (3) and MCOB 5.6.52 R (5) may be presented is as follows:
Cost of repaying the capitalYou will still owe £Z at the end of the mortgage term. You will need to make separate arrangements to repay this. When comparing the payments on this mortgage with a repayment mortgage, remember to add any money that you may need to pay into a separate savings plan to build up a lump sum to repay this amount. |
|
Savings plan that you do not have to take out through [insert name of mortgage lender or mortgage intermediary] |
Monthly payments |
XYZ savings plan (see separate product disclosure document) |
£C |
What you will need to pay each month including the cost of a savings plan to repay the capital |
|
36 payments at a fixed rate currently x% followed by: |
£(A+C) |
264 payments at a variable rate currently y%. |
£(B+C) |
- (1)
The application of MIPRU 4.2F.33 R may be illustrated by an example. Where a first-charge mortgage exposure of £50,000 from another lender is secured on residential property in the United Kingdom that satisfies the criteria in MIPRU 4.2F.4 R to MIPRU 4.2F.29 R and the value of that property is £100,000, then a firm with a second-charge mortgage of £60,000 on the same property may treat £30,000 of that exposure as fully and completely secured and risk weight it at 35%, treat a further £20,000 as unsecured and risk weight it at 75%, and risk weight the remaining £10,000 at 100%. A diagrammatic illustration of this example is in (2).
- (2)
A diagrammatic illustration of the example in (1)
Property value
Exposure and risk weightings
Example
£10,000 of second-charge - risk weighted at 100%
• Remaining second-charge mortgage, i.e. £10,000
£100,000
£20,000 of second-charge - risk weighted at 75%
• Second-charge mortgage up to maximum of 100% of property value, i.e. £20,000
£30,000 of second-charge - risk weighted at 35%
• Second-charge mortgage up to maximum of 80% of property value, i.e. £30,000
First-charge mortgage (£50,000)
• Other lender has first-charge over property with outstanding loan balance of £50,000
The application of value adjustments to either the secured or the unsecured component of an exposure secured on residential property may be illustrated on the basis of a £110,000 loan on a property valued at £100,000, where £80,000 of the loan is secured, £30,000 of the exposure is unsecured and a value adjustment of £20,000 is taken.
- (1)
Value adjustment applied to unsecured component:
- (a)
Value adjustment of £20,000 taken on £30,000 unsecured exposure.
- (b)
Value adjustment exceeds 20%, so the firm should risk weight the remaining £10,000 unsecured exposure at 100% (as per MIPRU 4.2F.55 R).
- (c)
The risk weight to be applied to the secured exposure of £80,000 is 100% (as per MIPRU 4.2F.51 R).
- (a)
- (2)
Value adjustment applied to secured component:
- (a)
Value adjustment of £20,000 taken on £80,000 secured exposure.
- (b)
Value adjustment exceeds 20%, so the firm should risk weight the remaining £60,000 secured exposure at 50% (as per MIPRU 4.2F.51 R).
- (c)
The risk weight to be applied to the unsecured exposure of £30,000 is 150% (as per MIPRU 4.2F.55 R).
- (a)
- (3)
A diagrammatic illustration of how MIPRU 4.2F.56G (1) and MIPRU 4.2F.56G (2) operate is as follows:
Value adjustment applied to unsecured component (MIPRU 4.2F.51 R)
Risk weightings
Exposure
Risk weightings
Value adjustment to secured component (MIPRU 4.2F.55 R)
£20,000
Unsecured component of £30,000
£30,000 risk weighted at 150%
£10,000 risk weighted at 100%
£80,000 risk weighted at 100%
Secured component of £80,000
£20,000
£60,000 risk weighted at 50%
12Table of examples of typical redress calculations
Example 1 |
Capital shortfall and higher endowment outgoings |
Example 2 |
Capital shortfall partially offset by lower endowment mortgage outgoings |
Example 3 |
Capital shortfall more than offset by lower endowment mortgage outgoings |
Example 4 |
Capital surplus more than offset by higher endowment mortgage outgoings |
Example 5 |
Capital surplus partially offset by higher endowment mortgage outgoings |
Example 6 |
Capital surplus and lower endowment mortgage outgoings |
Example 7 |
Low start endowment mortgage |
Example 1 |
|
Capital shortfall and higher endowment mortgage outgoings |
|
Background |
|
Capital sum of £50,000 |
|
25 year endowment policy |
|
Duration to date: 5 years |
|
Established facts |
|
Endowment surrender value: |
£3,200 |
Capital repaid under equivalent repayment mortgage: |
£4,200 |
Surrender value less capital repaid: |
(£1,000) |
Cost of converting from endowment mortgage to repayment mortgage: |
(£200) |
Total outgoings to date |
|
Equivalent repayment mortgage (capital + interest + DTA life cover): |
£21,950 |
Endowment mortgage (endowment premium + interest): |
£22,250 |
Difference in outgoings (repayment - endowment): |
(£300) |
Basis of compensation |
|
In this example, the complainant has suffered loss because the surrender value of the endowment is less than the capital repaid and also because of the higher total outgoings to date of the endowment mortgage relative to the repayment mortgage. The two losses and the conversion cost are therefore added together in order to calculate the redress. |
|
Redress |
|
Loss from surrender value less capital repaid: |
(£1,000) |
Loss from total extra outgoings under endowment mortgage: |
(£300) |
Cost of converting to repayment mortgage: |
(£200) |
Total loss: |
(£1,500) |
Therefore total redress is: |
£1,500 |
Example 2 |
|
Capital shortfall partially offset by lower endowment mortgage outgoings |
|
Background |
|
Capital sum of £50,000 |
|
25 year endowment policy |
|
Duration to date: 5 years |
|
Established facts |
|
Endowment surrender value: |
£2,500 |
Capital repaid under equivalent repayment mortgage |
£4,200 |
Surrender value less capital repaid under equivalent repayment mortgage: |
(£1,700) |
Cost of converting from endowment mortgage to repayment mortgage |
(£300) |
Total outgoings to date: |
|
Repayment mortgage (capital + interest + DTA life cover): |
£21,950 |
Endowment mortgage (endowment premium + interest): |
£21,350 |
Difference in outgoings (repayment - endowment): |
£600 |
Basis of Compensation |
|
In this example, the complainant has suffered loss because the surrender value of the endowment is less than the capital repaid but has gained form the lower outgoings of the endowment mortgage to date. In calculating the redress the gain may be offset against the loss unless the complainant's particular circumstances are such that it would be unreasonable to take account of the gain. |
|
Redress if it is not unreasonable to take account of the whole of the gain from lower outgoings |
|
Loss from surrender value less capital repaid: |
(£1,700) |
Gain from total lower outgoings under endowment mortgage: |
£600 |
Cost of converting to repayment mortgage: |
(£300) |
Net loss: |
(£1,400) |
Therefore total redress is: |
£1,400 |
Redress if it is unreasonable to take account of gain from lower outgoings |
|
Loss from surrender value less capital repaid: |
(£1,700) |
Gain from total lower outgoings under endowment mortgage: |
Ignored* |
Cost of converting to repayment mortgage: |
(£300) |
Net loss taken into account: |
(£2,000) |
Therefore total redress is: |
£2,000 |
* In this example, and also in Examples 3, 7, 8 and 9, the complainant's circumstances are assumed to be such as to make it unreasonable to take account of any of the gain from lower outgoings. |
Example 3 |
|
Capital shortfall more than offset by lower endowment mortgage outgoings |
|
Background |
|
Capital sum of £50,000 |
|
25 year endowment policy |
|
Duration to date: 8 years |
|
Established facts |
|
Endowment surrender value: |
£7,300 |
Capital repaid under equivalent repayment mortgage: |
£7,600 |
Surrender value less capital repaid: |
(£300) |
Cost of converting from endowment mortgage to repayment mortgage: |
(£200) |
Total outgoings to date: |
|
Repayment mortgage (capital + interest + DTA life cover): |
£34,510 |
Endowment mortgage (endowment premium + interest): |
£33,990 |
Difference in outgoings (repayment - endowment): |
£520 |
Basis of Compensation |
|
In this example, the complainant has suffered loss because the surrender value of the endowment is less than the capital repaid but has gained from the lower total outgoings of the endowment mortgage. In calculating redress the gain may be offset against the loss unless the complainant's particular circumstances are such that it would be unreasonable to take account of the gain. |
|
Redress if it is not unreasonable to take account of the whole of the gain from lower outgoings |
|
Loss from surrender value less capital repaid: |
(£300) |
Gain from total lower outgoings under endowment mortgage: |
£520 |
Cost of converting to repayment mortgage: |
(£200) |
Net gain: |
£20 |
Therefore, there has been no loss and no redress is payable. |
|
Redress if it is unreasonable to take account of gain from lower outgoings |
|
Loss from surrender value less capital repaid: |
(£300) |
Gain from total lower outgoings under endowment mortgage: |
Ignored |
Cost of converting to repayment mortgage: |
(£200) |
Net loss taken into account: |
(£500) |
Therefore total redress is: |
£500 |
Example 4 |
|
Capital surplus more than offset by higher endowment mortgage outgoings |
|
Background |
|
Capital sum of £50,000 |
|
25 year endowment policy |
|
Duration to date: 8 years |
|
Established facts |
|
Endowment surrender value: |
£7,800 |
Capital repaid under equivalent repayment mortgage: |
£7,600 |
Surrender value less capital repaid: |
£200 |
Cost of converting from endowment mortgage to repayment mortgage: |
(£250) |
Total outgoings to date: |
|
Repayment mortgage (capital + interest + DTA life cover): |
£34,510 |
Endowment mortgage (endowment premium + interest): |
£34,950 |
Difference in outgoings (repayment - endowment): |
(£440) |
Basis of Compensation |
|
In this example, the complainant has suffered loss because of the higher total outgoings to date of the endowment mortgage but has gained because the surrender value of the endowment is greater than the capital repaid. Since the sum of the loss and the conversion cost is greater than the gain, the redress is calculated as the difference between the two. |
|
Redress |
|
Gain from surrender value less capital repaid: |
£200 |
Loss from total extra outgoings under endowment mortgage: |
(£440) |
Cost of converting to repayment mortgage: |
(£250) |
Net loss: |
(£490) |
Therefore total redress is: |
£490 |
Example 5 |
|
Capital surplus partially offset by higher endowment mortgage outgoings |
|
Background |
|
Capital sum of £50,000 |
|
25 year endowment policy |
|
Duration to date: 10 years |
|
Established facts |
|
Endowment surrender value: |
£11,800 |
Capital repaid under equivalent repayment mortgage |
£9,700 |
Surrender value less capital repaid: |
£2,100 |
Cost of converting from endowment mortgage to repayment mortgage: |
(£300) |
Total outgoings to date: |
|
Repayment mortgage (capital + interest + DTA life cover): |
£46,800 |
Endowment mortgage (endowment premium + interest): |
£47,500 |
Difference in outgoings (repayment - endowment): |
(£700) |
Basis of Compensation |
|
In this example, the complainant has suffered loss because of the higher total outgoings to date of the endowment mortgage relative to the repayment mortgage. However the sum of this and the conversion cost is less than the complainant's gain from the difference between the surrender value of the endowment and the capital repaid. Thus no redress is payable. |
|
Redress |
|
Gain from surrender value less capital repaid: |
£2,100 |
Loss from total extra outgoings under endowment mortgage: |
(£700) |
Cost of converting to repayment mortgage: |
(£300) |
Net gain: |
£1,100 |
Therefore, there has been no loss and no redress is payable. |
Example 6 |
|
Capital surplus and lower endowment mortgage outgoings |
|
Background |
|
Capital sum of £50,000 |
|
25 year endowment policy |
|
Duration to date: 10 years |
|
Established facts |
|
Endowment surrender value: |
£10,100 |
Capital repaid under equivalent repayment mortgage |
£9,700 |
Surrender value less capital repaid: |
£400 |
Cost of converting from endowment mortgage to repayment mortgage: |
(£200) |
Total outgoings to date: |
|
Repayment mortgage (capital + interest + DTA life cover): |
£46,800 |
Endowment mortgage (endowment premium + interest): |
£46,300 |
Difference in outgoings (repayment - endowment): |
£500 |
Basis of Compensation |
|
In this example, the complainant has gained both because the surrender value of the endowment is greater than the capital repaid and because of the lower total outgoings of the endowment mortgage. These gains are larger than the cost of converting to a repayment mortgage. Thus no further action is necessary. |
|
Redress |
|
As there has been no loss, no redress is payable. |
Example 7 |
|
Low start endowment mortgage |
|
Background |
|
Capital sum of £50,000 |
|
25 year endowment policy |
|
Duration to date: 10 years |
|
Endowment premium per month: starting at £35 in first year, increasing by 20% simple on each policy anniversary, reaching £70 after five years and then remaining at that level. |
|
Established facts: |
|
Endowment surrender value: |
£8,200 |
Capital repaid under equivalent repayment mortgage: |
£9,700 |
Surrender value less capital repaid: |
(£1,500) |
Cost of converting from endowment mortgage to repayment mortgage: |
(£250) |
Total outgoings to date |
|
Repayment mortgage (capital + interest + DTA life cover): |
£46,800 |
Endowment mortgage (endowment premium + interest): |
£45,640 |
Difference in outgoings (repayment minus endowment): |
£1,160 |
Of this difference in outgoings, £800 arose in the five year period when the complainant was paying a low endowment premium. |
|
Basis of compensation |
|
In this example, the complainant has suffered loss because the surrender value of the endowment is less than the capital repaid but has gained from the lower total outgoings of the endowment mortgage. As in Example 3, in calculating redress the whole of the gain should be offset against the loss unless the complainant's particular circumstances are such that it would be unreasonable to do so. However, unlike Example 3, in a low start endowment mortgage the complainant may have chosen to pay a lower than usual premium in the early years (this would need to be established on the facts of the case). Where it has been established that the complainant chose to make lower payments, even if it is unreasonable to take account of the whole of the gain from total outgoings, the gain from paying a lower premium during the low start period is normally taken into account. In such cases the redress is calculated as the capital loss plus the conversion cost minus the total amount by which repayment mortgage outgoings would have exceeded the actual low start endowment mortgage outgoings during the five year low start period. |
|
Redress if it is not unreasonable to take account of the whole of the gain from lower outgoings |
|
Loss from surrender value less capital repaid: |
(£1,500) |
Gain from total lower outgoings under endowment mortgage: |
£1,160 |
Cost of converting to repayment mortgage: |
(£250) |
Net loss: |
(£590) |
Therefore total redress is: |
£590 |
Redress if it is unreasonable to take account of gain from lower outgoings |
|
Loss from surrender value less capital repaid: |
(£1,500) |
Gain from total lower outgoings during low start period of endowment mortgage: |
£800 |
Cost of converting to repayment mortgage: |
(£250) |
Net loss taken into account: |
(£950) |
Therefore total redress is: |
£950 |
Typical recommendations and whether they will be regulated as advice under article 53A of the Regulated Activities Order
This table belongs to PERG 4.6.5 G and PERG 4.6.6 G.
Recommendation |
Regulated or not? |
I recommend you take out the ABC Building Society 2 year fixed rate mortgage at 5%. |
Yes. This is advice which steers the borrower in the direction of a particular mortgage which the borrower could enter into. |
I recommend you do not take out the ABC Building Society 2 year fixed rate mortgage at 5%. |
Yes. This is advice which steers the borrower away from a particular mortgage which the borrower could have entered into. |
I recommend that you take out either the ABC Building Society 2 year fixed rate mortgage at 5% or the XYZ Bank standard variable rate mortgage. |
Yes. This is advice which steers the borrower in the direction of more than one particular mortgage which the borrower could enter into. |
I recommend you take out (or do not take out) an ABC Building Society fixed rate mortgage. |
Yes. See PERG 4.6.6 G.2 2 |
I suggest you take out (or do not take out) a mortgage with ABC Building Society. |
Yes. See PERG 4.6.6 G.2 2 |
I suggest you change (or do not change) your current mortgage from a variable rate to a fixed rate. |
No in respect of the advice about rate type, as this does not steer the borrower in the direction of a particular mortgage which the borrower could enter into. Yes in respect of the advice about varying the terms of the particular mortgage that the borrower had already entered into. |
I suggest you take out (or do not take out) a variable rate mortgage. |
No. This is not advice which steers the borrower in the direction of a particular mortgage which the borrower could enter into. |
I recommend you take out (or do not take out) a mortgage. |
No. This is not advice which steers the borrower in the direction of a particular mortgage which the borrower could enter into. |
I would always recommend buying a house and taking out a mortgage as opposed to renting a property. |
No. This is an example of generic advice which does not steer the borrower in the direction of a particular mortgage that he could enter into. |
I recommend you do not borrow more than you can comfortably afford. |
No. This is an example of generic advice. |
If you are looking for flexibility with your mortgage I would recommend you explore the possibilities of either a flexible mortgage or an off-set mortgage. There are a growing number of lenders offering both. |
No. This is an example of generic advice. |
2Further examples of what is and is not regulated advice
This table belongs to PERG 4.6.33 G.
Example of what the firm3 says and does 3 |
Regulated or not? |
(1) The firm says “We have a wide range of mortgages, including fixed and variable rates. Here are some leaflets which set out the main features.” |
No. Leaflets that just explain the terms and conditions of a lender’s products are not advice (see PERG 4.6.15G (1)). Even if the leaflet contains promotional material, merely handing over the leaflet does not mean that the firm is giving advice. |
(2) The firm says “We have a wide range of mortgages, our best rates are two-year fixed rates, you might want to look at those.” |
Yes. The firm has identified specific products that it offers and is steering the customer to those products. Identifying which products have the lowest rates is not advice on its own, only facts. However, “best” involves a value judgment, particularly when a comparison is made with other products that have different periods for which interest is fixed or that have variable interest rates. |
(3) The firm says “In order to provide you with an illustration, I need to know how much you want to borrow, the term and the property value. Which product or products would you like an illustration for?” |
No. The firm is collecting factual information to provide the customer with an illustration of costs. |
(4) The firm says “Based on what you’ve told me I think you would be best to look at two-year fixed rates. Here is some information about our products.” |
Yes. The firm has made a judgment on what type of product is best for the customer and has identified specific products of that type that it offers. |
(5) The firm says “Our fixed rates start at 4.99% for two years with a £900 fee. Our variable rates start at 4.50% with a £800 fee. Depending on how much you want to borrow and your circumstances, this may affect the rate available to you.” |
No. The firm is comparing two products without recommending either, nor is the firm steering the customer to one over the other. |
(6) A lender with just one mortgage product advises a customer to take out that mortgage. The lender makes it clear that it does not give advice about products other than its own. |
Yes. The lender may argue that this is not regulated advice because it is not recommending one product over another as it only has one product itself and does not give advice about the products of other lenders. However, in the FCA's view this is still regulated advice. For advice to be regulated it must be advice on the merits of entering into a particular regulated mortgage contract (or varying one). It is possible to give advice about the merits of a product without comparing that product with another. |
Note: Unless otherwise specified, the firm might be the lender or an advisory or intermediary firm. |
12Example of assessment set out at 1.3.10
The following example illustrates the position: |
|||
Surrender value |
£10,000 |
TEP value |
£16,000 |
Loss calculated by standard approach |
£5,000 |
||
Remortgaging costs |
£300 |
||
Total |
£15,300 |
||
Complainant receives £16,000 all ultimately funded from the TEP sale. |
|||
Surrender value |
£10,000 |
TEP value |
£13,000 |
Redress calculated by standard approach |
£5,000 |
||
Remortgaging costs |
£300 |
||
Total |
£15,300 |
||
Complainant receives £15,300, £13,000 ultimately funded from the TEP sale and £2,300 ultimately funded from the firm. |
Example 8 |
|
Term extends beyond retirement age and policy reconstruction |
|
Background |
|
45 year old male non-smoker, having taken out a £50,000 loan in 1998 for a term of 25 years. Unsuitable sale identified on the grounds of affordability and complaint raised on 12th policy anniversary. |
|
It has always been the intention of the complainant to retire at State retirement age 65. |
|
Term from date of sale to retirement is 20 years and the maturity date of the mortgage is 5 years after retirement. |
|
Established facts |
|
Established premium paid by investor on policy of original term (25 years): |
£81.20 |
Premium that would have been payable on policy with term from sale to retirement (20 years): |
£111.20 |
Actual policy value at time complaint assessed: |
£12,500 |
Value of an equivalent 20-year policy at time complaint assessed: |
£21,300 |
Difference in policy values at time complaint assessed: |
£8,800 |
£4,320 |
|
Basis of compensation |
|
The policy is reconstructed as if it had been set up originally on a term to mature at retirement age, in this example, a term of 20 years. The difference in the current value of the policy actually sold to the complainant and the current value of the reconstructed policy, as if the premium on the reconstructed policy had been paid from outset, is calculated. The complainant has gained from lower outgoings (lower premiums) of the actual endowment policy to date. In calculating the redress, the gain may be offset against the loss unless the complainant's particular circumstances are such that it would be unreasonable to take account of the gain. |
|
Redress generally if it is not unreasonable to take account of the whole of the gain from lower outgoings |
|
Loss from current value of reconstructed policy less current value of actual policy: |
(£8,800) |
Gain from total lower outgoings under actual policy: |
£4,320 |
Net loss: |
(£4,480) |
Therefore total redress is: |
£4,480 |
Redress if it is unreasonable to take account of gain from lower outgoings |
|
Loss from current value of reconstructed policy less current value of actual policy: |
(£8,800) |
Gain from total lower outgoings under actual policy: |
Ignored |
Therefore total redress is: |
£8,800 |
Additional Information |
|
If the policy is capable of reconstruction, the complainant must now fund the higher premiums himself for the remainder of the term of the shortened policy until maturity. In this example the higher premium could be £111.20. However the firm should provide the complainant with a reprojection letter based on the reconstructed policy such that the actual monthly payment required to achieve the target sum could be even higher, say £130. The reprojection letter should set out the range of options facing the complainant to deal with the projected shortfall, if any. |
Example 9 |
|
Term extends beyond retirement age: example of failure to explain investment risks |
|
Background |
|
45 year old male non-smoker, having taken out a £50,000 loan in 1998 for a term of 25 years. Unsuitable sale identified on the grounds of affordability and complaint raised on 12th anniversary. |
|
It has always been the intention of the complainant to retire at state retirement age 65. |
|
Term from date of sale to retirement is 20 years and the maturity date of the mortgage is five years after retirement. |
|
In addition, an endowment does not meet the complainant's attitude to investment risk and a repayment mortgage would have been taken out if properly advised. |
|
Established facts |
|
Surrender value (on the 25 year policy) at time complaint assessed: |
£12,500 |
Capital repaid under repayment mortgage of term to retirement date (20 years): |
£21,000 |
Surrender value less capital repaid: |
(£8.500) |
Difference in outgoings (repayment - endowment): |
£5,400 |
Cost of converting from endowment mortgage to repayment mortgage: |
£200 |
Basis of compensation: |
|
The surrender value of the (25 year term) endowment policy is compared to the capital that would have been repaid to date under a repayment mortgage arranged to repay the loan at retirement age, in this example, a repayment mortgage for a term of 20 years. The complainant has gained from lower outgoings of the endowment mortgage to date. In calculating the redress, the gain may be offset against the loss unless the complainant's particular circumstances are such that it would be unreasonable to take account of the gain. The conversion costs are also taken into account in calculating the redress. |
|
Redress generally |
|
Loss from surrender value less capital repaid: |
(£8,500) |
Gain from total lower outgoings under endowment mortgage: |
£5,400 |
Cost of converting to a repayment mortgage: |
(£200) |
Net loss: |
(£3,300) |
Therefore total redress is: |
£3,300 |
Redress if it is unreasonable to take account of gain from lower outgoings |
|
Loss from surrender value less capital repaid: |
(£8,500) |
Gain from total lower outgoings under endowment mortgage: |
Ignored |
Cost of converting to a repayment mortgage: |
(£8,700) |
Therefore total redress is: |
£8,700 |
IPRU-INV 5.7.1R can be illustrated as follows:
Current market value |
£200,000 |
Net book value |
£100,000 |
Mortgage |
£70,000, including £5,000 payable within one year |
Qualifying amount is the lowest of: |
|
(a) 85% x £200,000 = |
£170,000 |
(b) 85% x £100,000 = |
£85,000 |
(c) £70,000 - £5,000 = |
£65,000 |
i.e. £65,000 |