Application and purpose

Part

MCOB Mortgages and Home Finance: Conduct of Business sourcebook

Chapter

Application and purpose

Printed on: 23/11/2024

Rulebook at: 01/07/2007

MCOB 1

Application and purpose

MCOB 1.1

Application and purpose

01/12/2004

Application

MCOB 1.1.1

MCOB applies as described in this chapter.

31/10/2004

Purpose

MCOB 1.1.2

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.

06/04/2007

MCOB 1.2

General application: who? what?

01/12/2004

MCOB 1.2.1

(1) This sourcebook applies to every firm that:

(a) carries on a home finance activity (subject to the business loan application provisions); or
(b) communicates or approves a financial promotion of qualifying credit, of a home purchase plan or of a home reversion plan.

(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.

06/04/2007

MCOB 1.2.1A

Firms which outsource regulated activities are reminded of the guidance on outsourcing in SYSC 3.2.4 G and SYSC 8.

01/01/2007

Firm types and the home finance activities

MCOB 1.2.2

(1) This sourcebook applies to activities carried out in respect of three types of product: regulated mortgage contracts (which includes lifetime mortgages), home purchase plans, and home reversion plans. Together, these products are referred to as home finance transactions.
(2) Lifetime mortgages and home reversion plans are together referred to as equity release transactions.
(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 and reversion activities.

06/04/2007

Business loans: application of MCOB

MCOB 1.2.3

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.

31/10/2004

MCOB 1.2.4

For detail of the tailored provisions applying, see the section on 'business loans' set out in each relevant chapter.

06/04/2007

MCOB 1.2.5

(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.

31/10/2004

MCOB 1.2.6

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.

31/10/2004

Business loans: additional requirements if tailored route is used

MCOB 1.2.7

In relation to a regulated mortgage contract for a business purpose, if a firm has opted for the tailored route, it must adopt the following modifications to the sourcebook:

(1) (except in relation to sections 6 and 8 of any initial disclosure document or sections 5 and 8 of any combined initial disclosure document) 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.

06/04/2007

MCOB 1.2.8

(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'.

31/10/2004

MCOB 1.2.9

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.

31/10/2004

Home purchase plans

MCOB 1.2.9A

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

06/04/2007

Authorised professional firms

MCOB 1.2.10

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) 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 an initial disclosure document or combined initial disclosure document (see MCOB 4.4 and MCOB 4.10).

06/04/2007

MCOB 1.2.11

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 financial promotion of qualifying credit or of a home reversion plan of authorised professional firms under MCOB 3.2.5 R(3) (Exemptions).

06/04/2007

Pre-contractual arrangements by a home finance provider

MCOB 1.2.12

In MCOB the activities of a home finance provider which would be arranging but for article 28A of the Regulated Activities Order (Arranging contracts or plans to which the arranger is a party), are to be treated as arranging and therefore also as home finance activities.

06/04/2007

MCOB 1.2.13

The effect of article 28A of the Regulated Activities Order would normally mean that arrangements made by a party to a home finance transaction would not fall within the home finance activity of arranging. So in a direct sale, a home finance provider 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 transaction. However, the provisions in MCOB on arranging home finance transactions are applied to pre-contractual arrangements by a home finance provider.

06/04/2007

MCOB 1.3

General application: where?

01/12/2004

Location of the customer

MCOB 1.3.1

Except as set out in this section, MCOB applies if the customer of a firm carrying on home finance 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 home finance activity is carried on.

06/04/2007

Financial Promotion

MCOB 1.3.2

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

31/10/2004

Electronic commerce activities and communications

MCOB 1.3.3

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

31/10/2004

Distance contracts entered into from an establishment in another EEA State

MCOB 1.3.4

(1) The rules in (2) do not apply to a firm with respect to a regulated mortgage activity or a home purchase activity exclusively concerning a distance contract if the following conditions are satisfied:

(a) the firm carries on the activity from an establishment maintained by the firm in an EEA State other than the United Kingdom; and
(b) either the EEA State:

(i) has implemented the DMD; or
(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
(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:

(a) initial disclosure requirements in MCOB 4.4 (in respect of regulated mortgage contracts) and MCOB 4.10 (in respect of home purchase plans);
(b) MCOB 4.5 (Additional disclosure for distance mortgage mediation contracts and distance home purchase mediation contracts with retail customers);
(c) MCOB 4.6 (Cancellation of distance mortgage mediation contracts) and distance home purchase mediation contracts);
(d) MCOB 5 (Pre-application disclosure);
(e) MCOB 6 (Disclosure at offer stage);
(f) MCOB 7.6.7 R to MCOB 7.6.17 R (Further advances);
(g) MCOB 8.3 (Application of rules in MCOB 4) to the extent that it applies MCOB 4.4 to MCOB 4.6;
(h) [deleted]
(i) MCOB 9.3 (Pre-application disclosure);
(j) MCOB 9.4 (Content of illustrations); and
(k) MCOB 9.5 (Disclosure at offer stage for equity release transactions).

06/04/2007

Distance contracts with retail customers

MCOB 1.3.5

Parts of MCOB relate to distance contracts (or distance mortgage mediation contracts and distance home purchase 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:

(a) personal representatives, including executors, unless they are acting in a professional capacity, for example a solicitor acting as executor; or
(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:

(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
(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.

06/04/2007

Use of intermediaries

MCOB 1.3.6

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.

31/10/2004

MCOB 1.5

Application to appointed representatives

01/12/2004

MCOB 1.5.1

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

31/10/2004

MCOB 1.6

Application to mortgages in relation to the Consumer Credit Act 1974

06/04/2007

MCOB 1.6.1

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 4.4.13G contains guidance on the variation of contracts entered into before 31 October 2004.

01/07/2005

MCOB 1.6.2

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.

31/10/2004

MCOB 1.6.3

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.

31/10/2004

MCOB 1.6.4

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:

(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
(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).

31/10/2004

MCOB 1.6.5

(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)).

31/10/2004