MCOB 12 Charges

The FCA will expect a firm to ensure that charges made to a customer arising from the sale of a repossessed property and charges arising in relation to a sale shortfall are not excessive and are subject to the same considerations as apply with respect to payment shortfall charges under this chapter.

1. (1)

   Principle 6 requires a firm to pay due regard to the interests of its customers and treat them fairly. A firm is also under an obligation, as a consequence of this sourcebook's disclosure requirements, to make charges transparent to customers. This chapter reinforces these requirements by preventing a firm from imposing unfair and excessive charges.

2. (2)

   The level of charges under a regulated mortgage contract, home reversion plan or regulated sale and rent back agreement is not typically a matter for regulation. However, in certain limited circumstances, the FCA believes that customers should be protected from unfair and excessive charging practices. This chapter considers four specific circumstances, where:

   1. (a)

      the charges imposed upon a customer seeking to terminate a regulated mortgage contract before the end of the term of the contract do not reflect the cost of termination to the firm;

   2. (b)

      the charges imposed on a customer in payment difficulties are not based upon the costs incurred by the firm;

   3. (c)

      the charges (including rates of interest) imposed on a customer under a regulated mortgage contract, home reversion plan or regulated sale and rent back agreement are excessive and contrary to the customer's interests; and

   4. (d)

      the charges made to a customer in connection with a firm entering into, making a further advance on, administering, arranging or advising on a regulated mortgage contract, home reversion plan or regulated sale and rent back agreement, or arranging or advising on a variation to the terms of a regulated mortgage contract, home reversion plan or regulated sale and rent back agreement are excessive.

A firm can choose the method it employs for calculating early repayment charges in accordance with MCOB 12.3.1 R. A firm should not use the 'Rule of 78', which is not appropriate as it effectively overstates the cost to the mortgage lender.

A firm may calculate the same level of early repayment charge for all regulated mortgage contracts of a similar type (for example a tranche of regulated mortgage contracts offering a particular fixed rate of interest), rather than on the basis of the individual regulated mortgage contract with the particular customer.

The effect of article 29 of the MCD Order is that various provisions of, or made under, the CCA continue to apply to “consumer credit back book mortgage contracts” (as defined in article 2 of the MCD Order). These include the Consumer Credit (Early Settlement) Regulations 2004, which continue to apply to a second charge regulated mortgage contract entered into before 21 March 2016 and to a legacy CCA mortgage contract.

MCOB 12.4.1BR does not preclude a firm applying part or all of a payment received to fees and charges not resulting from the payment shortfall (such as ground rent settled on behalf of the customer).

A firm may recalculate the periodic instalment of capital or interest (or both), provided that any such recalculation is consistent with the firm’s obligations under the Handbook.

If a firm exercises a power under the terms of a mortgage contract to recalculate periodic instalments of capital or interest (or both) using a mortgage balance that includes charges (such as arrears management charges) or interest arising because one or more monthly instalments were missed, the firm does not have to keep a record of the amount of each periodic instalment of capital or interest (or both) omitting any element of such charges or interest to comply with MCOB 12.4.1BR.

For each type of payment shortfall charge (for example, a monthly arrears management charge), a firm may calculate the same level of additional administration costs and payment shortfall charges for all regulated mortgage contracts where the customer is in payment shortfall, rather than performing a calculation on the basis of the individual regulated mortgage contract with the particular customer.

Firms are also subject to requirements on information provision and standards relating to payment shortfalls and repossessions (see MCOB 13 (Payment difficulties and repossessions)).

1. (1)

   For some firms, their executive staff will be the executive board members.

2. (2)

   Executive staff costs relating to company strategy, including payment shortfall strategy, should not be included as costs relating to the day-to-day management of customers in payment shortfall.

3. (3)

   General financial reporting costs, including all legal and regulatory reporting costs, should not be included as costs relating solely to the analysis and management of accounts in payment shortfall.

In calculating the cost of the additional administration required as a result of a customer having a payment shortfall, the firm:

1. (1)

   may, where appropriate, take into account the following types of costs:

   1. (a)

      providing information or documents;

   2. (b)

      non-executive staff costs;

   3. (c)

      premises costs;

   4. (d)

      human resources costs; and

   5. (e)

      information technology costs;

2. (2)

   should consider the extent to which the cost of the additional administration is shared with the rest of its business; and

3. (3)

   should, where a type of cost is absent from the lists in (1) and at MCOB 12.4.4R (1), before taking it into account, consider whether it is appropriate to do so.

When determining whether a charge is excessive, a firm should consider:

1. (1)

   the amount of its charges for the services or products in question compared with charges for similar products or services on the market;

2. (2)

   the degree to which the charges are an abuse of the trust that the customer has placed in the firm; and

3. (3)

   the nature and extent of the disclosure of the charges to the customer.

Mortgage lenders are also subject to requirements relating to responsible lending (see MCOB 11).

Firms are reminded that, in relation to a regulated mortgage contract which is solely for a business purpose or is with a high net worth mortgage customer, who is not a consumer under an MCD regulated mortgage contract, in circumstances where MCOB 7.7.1 R applies, if there is a new early repayment charge or a change to the existing early repayment charge, MCOB 7.7.1 R(2) requires a firm to notify the customer within five business days of the maximum amount payable as an early repayment charge.

Firms are also reminded that in accordance with MCOB 1.2.3 R, they should comply in full with MCOB, but in doing so may opt to take account of all tailored provisions in MCOB that relate to loans solely for a business purpose or loans to high net worth mortgage customers.

The FCA believes that Principle 7 requires charges imposed by a firm on customers to be transparent and that imposing unfair or excessive charges is inconsistent with Principle 6.

Note: A firm should also have regard to its obligations under the Unfair Terms Regulations (for contracts entered into before 1 October 2015) or the CRA and may find material on the FCA website concerning the FCA consumer protection powers useful.