CML response to CP14-20 Implementation of the Mortgage Credit Directive and the new regime for

second charge mortgages

Council of Mortgage Lenders

December 2014

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Contents
From the CML director general ......................................................................................................................... 3
Introduction and opening remarks ..................................................................................................................... 4
SECTION ONE .................................................................................................................................................. 5
Section 1.1 Managing applications in the pipeline ............................................................................................ 5
Section 1.2 Post-MCD sales process ................................................................................................................ 7
Section 1.3 Application of the MCD to new lending only................................................................................. 11
Section 1.4 Foreign currency loans ................................................................................................................. 13
SECTION TWO ............................................................................................................................................... 16
Section 2.1 Adequate explanations ................................................................................................................. 16
Section 2.2 APRCs .......................................................................................................................................... 16
2.3 Disclosure .................................................................................................................................................. 18
Section 2.4 Financial promotions .................................................................................................................... 20
Section 2.5 Knowledge and competence ........................................................................................................ 21
Section 2.6 MCD lending not secured on the home........................................................................................ 21
Section 2.7 MCOB 13 ...................................................................................................................................... 22
Section 2.8 Second charge mortgage regulation ............................................................................................ 24
Section 2.9 Tying and bundling ....................................................................................................................... 25
Section 2.10 Other aspects ............................................................................................................................. 25
Section 2.11 Cost-benefit analysis .................................................................................................................. 28
Contact information ......................................................................................................................................... 28
Annex one: example amended ESIS language for UK consumers ................................................................ 29
Annex two: suggested expansion to instructions to complete the ESIS ......................................................... 34

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From the CML director general

1. I enclose a lengthy and detailed response to your CP 14/20, Implementation of the Mortgage Credit
Directive and the new regime for second charge mortgages. This letter gives the context within which we
have drawn it up.

2. The Mortgage Credit Directive (MCD) provides little if any benefit to the UK mortgage market or UK
consumers. There is already a robust and effective regulatory regime, strengthened following MMR, which
has increased the protection available to borrowers and which will play its part in ensuring that they receive
the right mortgage for their circumstances and the right information to go with it.

3. We believe that both the government and the regulator also share this view and want to avoid
unnecessary disruption to the market in the course of implementing the Directive. The then Financial
Secretary, Sajid Javid, said to our annual lunch: "I'm not convinced of the benefits of these regulations to UK
consumers or to UK businesses. And that is why our approach to implementing these will be to, wherever
possible, minimise the disruption they cause, which will be very much in line with our wider priority of
reducing regulations on business." Linda Woodall also said that the FCA wants to rely on the existing
regulatory regime as much as possible, “minimising disruption and costs to firms”.

4. Many of the proposed amendments that we set out in our detailed submission are intended to help
achieve this aim.

5. We also seek to draw out the unintended consequences of what is proposed. We echo HM
Treasury’s view that the MCD does not address the main obstacles to the creation of a cross border
mortgage market and point out where it may actually reduce cross-border access to mortgage finance. This
especially applies to the provisions on foreign currency loans.

6. Whilst we accept that the UK has to implement the MCD, we hope that the FCA will introduce no
more change than is necessary to ensure the UK is compliant with the Directive. We indicate where we
believe that the current proposals (possibly inadvertently) go further.

7. Our response highlights those areas where we believe that the existing proposals do not reflect
these desired (and desirable) objectives; and our suggested amendments to achieve them.

8. We have identified four areas where we have significant concerns:

• The absence of sufficient measures to manage the transition to MCD rules

• Fundamental changes to the sales process that will confuse customers
• Ensuring the MCD applies to new lending only
• The disruptive definition of foreign currency loans

9. Our response suggests how to address these issues, in ways which do not cause disruption to the
UK mortgage market.

10. We are grateful for the FCA’s engagement before and during the consultation phase. We would
welcome the opportunity to continue these helpful discussions with the FCA after the end of the consultation
period. We will of course also be happy to help the FCA resolve any issues arising from the consultation.

Paul Smee
CML Director-General
22 December 2014

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Introduction and opening remarks

1. The CML is the representative trade body for the residential mortgage lender industry that includes
banks, building societies and specialist lenders. Our 125 members currently hold around 95% of the assets
of the UK mortgage market. In addition to lending for home-ownership, the CML members also lend to
support the social housing and private rental markets.

2. We are pleased to respond on behalf of our members to the Financial Conduct Authority’s (FCA)
consultation on implementing the Mortgage Credit Directive (MCD), CP14/20 Implementing the Mortgage
Credit Directive and the new regime for second charge mortgages.

Consultation process

3. CP14-20 is an extensive and detailed document which has the potential for significant impact on the
UK mortgage market We therefore welcome the FCA’s decision to consult for three months on the proposed
implementation: we have identified a number of issues during this time, which we have highlighted in this
response and hope that the FCA will continue to engage with the industry and stakeholders after this initial
consultation.

4. The FCA has helped firms to some degree by copying out the text of the MCD to give as much
notice as possible of the rule changes. However, we would welcome some non-prescriptive assistance in
the FCA’s policy statement to help further our understanding. Our response highlights the areas where this
would be most welcome.

5. We note the proposals to give firms at least 12 months to implement the MCD since firms need as
much time as possible to make sure implementing the MCD causes the least possible amount of disruption
to the market.

Supervisory approach

6. In addition to what we have said about the approach to implementation, a sensible and
proportionate supervisory approach to the MCD is an essential part of an overall FCA approach to help
ensure the MCD does not disrupt the market. The FCA should use its policy statement to make explicit the
institutional view of the MCD, which may help industry understand what might be the supervisory view. This
will help firms with their own approaches to implementation and interpretations of the rules.

Structure of our response

7. As indicated above we have identified four areas, which are likely to result in significant market
disruption, and we have set these out in section one of this response. Section two summarises our views on
the rest of the MCD consultation.

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SECTION ONE

Section 1.1 Managing applications in the pipeline

8. The MCD requires the UK to comply with its requirements by 21 March 2016. However, there is no
arrangement for cases open but not complete before this date. The absence of an arrangement to manage
these cases threatens significant disruption for the market and significant confusion for consumers. All
cases which had not completed before 21 March would have to be reassessed against MCD rules. Firms
issue mortgage offers that are typically valid for up to twelve months and so more than 250,000 cases could
be caught, affecting perhaps up to 500,000 individuals. This figure is especially high because March is a
peak period for UK mortgage activity.

9. The extent of consumer confusion and frustration should not be underestimated. Customers will be
at different stages of the process, with many close to completion. A pause to give them additional
disclosures and reflection periods will delay their house purchase. The impact may be disproportionate on
buyers of new build homes as lenders give extensions to mortgage offer periods to allow new homes to be
completed and there are likely to be more of these transactions in the pipeline around this time because
MCD implementation will happen around the end of the financial year. There is further uncertainty about
exactly what reassessment firms would be required to do from 21 March 2016 for customers who have not
completed by this date. Would customers have to be offered a reflection period which they would almost
invariably waive?

10. Many of these cases will be in property chains, magnifying the disruption if some choose to pause
and take advantage of a reflection period whilst others choose to waive it.

11. One possible consequence of having to manage all this alongside making changes to systems and
processes for the MCD is that firms simply manage their business around the end of 2015 and the start of
2016 to minimise the number of affected cases. This would have a significant market impact. As mortgage
offers are valid for up to twelve months, firms would have to manage the number of offers they make from
September 2015 to cope with the impact, with a consequent impact on the number of housing sales. This in
turn will have a macroeconomic impact given the importance of housing sales to economic activity.

12. How can market disruption be minimised?

Early compliance

13. One solution is to allow firms to comply with the rules before 21 March 2016. We agree with the
FCA’s proposal to enable the rules early. Indeed, there is a strong case for enablement earlier than the
FCA’s proposed date. The FCA could enable its rules one-quarter year or thirteen weeks from their
publication, for example or it could leave it to firms to comply as early as they like. This would give firms
longer to complete open mortgage transactions by 21 March 2016. It is important this is optional; the FCA
should not impose any MCD requirements on firms until 21 March 2016 and it should ensure any equivalent
MCOB requirements, such as those requiring the KFI for new mortgages, are disapplied where firms apply
MCD rules instead.

14. This flexibility is welcome but only a partial solution. Given firms have only one year to make the
necessary changes, early compliance would mean reducing an already challenging timetable for a
substantial number of changes to systems and processes. It will increase the already very high cost of
compliance. Early compliance also assumes quick identification and speedy resolution of any issues with the
final rules, especially in areas where the MCD is vague. Firms will need time once the FCA publishes the
final rules to understand what the MCD means and to identify suitable ways of complying with its
requirements. This will eat into the implementation period.

Application of existing rules to pipeline business

15. Cases that have commenced before 21 March 2016 should be allowed to complete under existing
rules. We believe the MCD is clear about what it intends to regulate – MCD article 43 (1) says the MCD
“shall not apply to credit agreements existing before 21 March 2016”. We believe this confirms that the MCD
should not apply to such mortgages and allows cases to complete under the existing rules.

16. Customers will not be disadvantaged relative because of the substantial protections of the existing
regulatory regime. These will ensure there is no customer
5 detriment from a pipeline arrangement.
Supervisory approach

17. The FCA should take a pragmatic supervisory approach to applications in the pipeline. This means
focusing on the customer outcome rather than how much firms have followed the process. This will ensure
the FCA’s supervisory and enforcement stances match its policy position on the MCD. It will also give firms
confidence that they can process applications in the pipeline to minimise customer detriment during the
transitional period. The FCA took a pragmatic approach to supervising cases in the pipeline for MMR and
this helped ensure very little overall market disruption.

18. Another major contributor to minimising disruption from the MMR was the arrangement for non-
advised applications made before 26 April 2014 to proceed under the previous rules if there had been no
material change in circumstances. As the FCA, said in its June 2013 Quarterly consultation, “[the FCA sees]
the case for allowing a transitional provision to ensure the consumer does not suffer from unnecessary
delays or costs”. We strongly believe the MCD presents exactly the same problem and that not giving firms
as much flexibility as possible could allow us to see the MMR counterfactual.

19. In the event that our proposals for transitionals are not accepted, we would need to discuss further
the implications with lenders (e.g., how the top-up disclosures are handled).

20. We recommend that the FCA should ensure firms have a range of options to mitigate the impact of
the lack of a pipeline arrangement in the MCD. We will continue working with the FCA and HM Treasury to
help mitigate the impact of the MCD.

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Section 1.2 Post-MCD sales process

21. The MCD effect on applications in the pipeline will be temporary one. The FCA’s proposals for the
post-MCD sales process could threaten continuing disruption to the UK mortgage and housing markets.

22. The MCD’s sales process requirements seem to have been imported from and are similar to those
of the Consumer Credit Directive (CCD). However, there are fundamental differences between the mortgage
market and other consumer credit markets. Mortgage loans have to fit in with the complex and lengthy
process of house purchase. Consumer credit by contrast often relates to a purchase of an item after the
credit has been obtained, with no added legal processes or complexity.

23. So these requirements should be implemented in a way which is compatible with the house buying
process. Our analysis of the FCA’s current proposals and our discussions with stakeholders representing
the legal and conveyancing professions lead us to believe that the proposed sales process under the MCD
may be incompatible with current legal processes.

24. But we – and the other stakeholders to whom we have spoken - do believe that these new
requirements can be made compatible with UK practice. The formal mortgage offer should be treated as the
binding offer. We believe this fully addresses the MCD’s requirements and ensures that the process for
purchasing a house is least disrupted.

Binding offers

25. The concept of a binding mortgage offer is not familiar to the UK. Under UK contract law a mortgage
offer is “a willingness to be bound to a contract on the terms either certain, or capable of being rendered
certain…with the intention (actual or apparent) that it is to become binding as soon as it is accepted by the
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person to whom it is addressed” .

26. Legally, then, the party making the offer is willing to be bound to it but it can only be binding when
accepted. The addressee is the customer and only the customer or his or her agent (e.g., a conveyancer)
can accept the offer.

27. We suggest that an offer capable of acceptance is equivalent to binding offer, even if it is subject to
certain conditions fulfilled later (e.g., proof of legal title to the property that will be security for the loan). We
argue this because a mortgage offer is the expression of a willingness of the offering party to be bound;
obligations imposed by regulation have the effect of making the offer binding in practice.

28. Our members believe their mortgage offers are binding when they make them. They expect the
customer to draw down the funds offered and make the necessary financial provision.

29. Before this, the firm has assessed the customer’s ability to afford the loan, valued the property and
has decided to make an offer to lend money. It may also have secured funds for the mortgage and could
face losses if the mortgage does not proceed.

30. Mortgage offers are not issued lightly. The information collected is designed to give the lender
confidence that its borrower is able to repay the mortgage using his financial resources and that, if he or she
is unable to do that, the property is worth enough to cover the lender’s advance if the borrower cannot meet
his or her repayments. The borrower will have already been through several stages in their application

• The customer will have requested a mortgage loan and given some preliminary information. Then
follows a decision-in-principle, which though not a contract to lend, is a regulated activity. Lenders
will not provide even decisions-in-principle without collecting information from the customer. Nor will
the borrower collect decisions-in-principle without due consideration, as their credit file will be
marked by the lender.

• Borrowers will then have made a formal application, with extensive information about the borrower’s
personal circumstances, particularly on affordability and plausibility; and they may have paid product
and valuation fees (though borrowers can sometimes add the product fee to the loan). The valuation
will also need to be complete before the lender will issue its mortgage offer. The lender will not grant

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Halsbury’s laws, vol 9, paragraph 632 7
 an offer until it is satisfied it is lending a mortgage on a security, which will allow it to recoup its
advance if the borrower cannot make his or her repayments.

• The lender will have underwritten the application. This will comprise an assessment of the
borrower’s application and a credit check. It is only after a satisfactory outcome here that the lender
will issue a mortgage offer.

31. These steps ensure that lenders in practice are bound to their offer. Analysis of those cases where
mortgage offers do not lead to the advance of funds suggests this invariably happens because the borrower
either is unable to satisfy the terms of the offer or simply withdraws their application. Firms do not withdraw
offers simply because they no longer want to lend to a customer.

32. This is evident in firms’ explicit circumscription of the reasons they can withdraw their offers. There
is an emphasis on ‘objective criteria’, particularly regarding the condition of the property, which also means
they can be clearly measured by the customer.

33. Evidence of the extent to which the firm is bound to its mortgage offer is found in the terms and
conditions of the offer document, as they apply to the borrower. These conditions are typically that the
borrower:

• Is required to take possession or keep vacant the property when the mortgage completes
• Satisfies there is good title to the property (usually the conveyancer will do this)
• Becomes the owner of the property and granting the mortgage lender title over it
• Satisfies the price of the property is what the lender understands it to be and that this will be the
price in the disposition (usually the conveyancer will do this)
• Insures the property for a value equivalent to the cost of rebuilding it

34. We note a 2010 FSA undertaking on the terms of mortgage offers. Mortgage offer terms and
conditions are clearly specific and meaningful to the customer and they are not so broad that firms could
withdraw offers for a wide variety of other reasons: this is why the FSA published that particular undertaking.
Firms whose grounds for withdrawing an offer may not be having regard to the 2010 undertaking and might
well contravene other regulations governing contract terms, such as the Unfair Terms in Consumer Contract
Regulations 1999.

35. There are instances where firms may withdraw offers:

• Discovery of any element of fraud or material misrepresentation by customers (or inaccuracy of the
information they provided)
• Significant changes to the state of the property or to the customer’s circumstances, such as loss of
employment that affects their ability to repay the mortgage
• Inability to prove title to the property
• Failure to complete the transaction within a specified time limit (usually three to six months)

36. All these conditions will be explicit in the mortgage offer document sent to the customer.
Withdrawing the offer for a reason other than specified could leave the firm open to legal challenge from the
customer on grounds of estoppel or regulatory challenge. This would be particularly likely if the customer
had exchanged contracts for purchase of a property financed by a mortgage based on the lender’s offer. A
lender that then withdrew this mortgage for reasons outside those that specified in its offer would open itself
to a claim from the borrower for damages owing to misrepresentation.

37. So, we consider firms are bound to lend at the point at which they grant a mortgage offer.
Customers seem to agree; they go shopping for properties on the strength of a mortgage offer.

Reflection period

38. It follows that the UK can and should introduce the reflection period well before the transaction
completes. Even though the FCA says that it is leaving to firms the decision of where in the sales process to
introduce the reflection period, we believe that further change is needed if firms are to feel able to trigger the
reflection period at the most useful point in the process for customers.

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39. The FCA’s current approach to defining the binding offer effectively drives firms to introduce the
reflection period at the point shown in figure two of the consultation document. There is no need for the FCA
to do this. It can introduce the binding offer point at an earlier point in the process and trigger the reflection
period at the most useful point in the process for customers, when the offer document is issued The present
proposal allows the reflection period to commence only once the customer has satisfied the conditions of the
offer and the conveyancer submits his certificate of title. This in practice is shortly before practical
completion of the purchase and will inevitably delay the conveyancing process if it becomes necessary for
lenders to issue further documentation after receipt of the certificate of title.

40. This will impede the house-buying process and completion of the separate contract to purchase a
property. A decision not to proceed with the mortgage loan does not inherently allow the customer to
withdraw from the contract to purchase the property.

41. So delay in the purchase of the property after contracts have been exchanged will create difficulties
for the borrower and possible financial penalties.

42. In practice, of course, customers simply do not reflect at the proposed point on whether to proceed
with a mortgage. By the time funds are requested, customers may have for valuations and other fees and
charges, completed affordability assessments, commissioned solicitors and, if the mortgage is taken out for
home purchase rather than re-mortgage, are likely to have exchanged contracts in which case they are
already committed to the purchase of their new home and, where applicable, the sale of their current home.
This is not the behaviour of people who are unsure about whether to proceed.

43. By this stage, the conveyancer will:

• Receive contract papers

• Submit then receive results of searches to local authority and other relevant bodies
• Raise any enquiries in relation to the contract pack, search results and approve the contract
• Receive the mortgage offer and ensure that any conditions are met
• Arrange signature of contract and mortgage documentation
• Exchange contracts and submit certificate of title to request funds for completion

44. The mortgage offer will be the last piece of the jigsaw and the customer will be pushing for
exchange of contracts on receipt of the mortgage offer so a completion date can be fixed and put on the
certificate of title. The period between exchange and completion may be short; indeed, in a significant
number of transactions exchange and completion will be on the same day.

Recommended point to introduce reflection period

45. So we strongly believe the reflection period should be introduced as early as possible in the
application process so that it is meaningful for customers. Doing so greatly increases the likelihood it will
achieve its aims. The MCD says at article 14 (6) that a reflection period is “to allow customers to have
sufficient time to compare offers, assess their implications and make an informed decision”. We do not
believe this point can happen just before the drawdown of funds.

46. We recommend the FCA allows introduction of the reflection period when the offer is issued. Our
recommended amended sales process is shown below:

Decision in principle and/or request for illustration

The customer asks a firm how much he or she can borrow based on his or her circumstances.
The firm may respond with a guide about how much they will lend or a personalised
illustration in the form of a KFI or ESIS. There is no formal application at this stage.
Formal application
The customer submits an application fee and provides any relevant documentation.

The customer also typically pays product and valuation fees at this stage. The valuation fee is
non-refundable. The product fee can be paid here and will be refunded if the customer
decides not to proceed or it can be added to the loan.
Firm underwriting
Firm assesses customer’s application and supporting documentation and decides whether to
proceed with the customer’s application.
9
 Valuation happens at this stage. Formal offers will only be issued once the property has been
valued. Some applications proceed straight to offer because automated valuation models are
used.
Formal offer and reflection period
The firm tells the customer it is prepared to lend, subject to legal conditions, by issuing the
formal mortgage offer. These legal conditions include the completion of conveyancing checks
and repayment of any existing mortgage on the property. Importantly firms will generally only
withdraw offers if the checks reveal that the property will not be a suitable security for the firm
or if the customer has submitted a fraudulent application. A KFI/ESIS will be issued with the
formal offer and mortgage contract documentation.

We believe the reflection period should begin here. The formal offer has been issued and the
firm is effectively bound to grant the mortgage and it is now for the customer to satisfy the
conditions. Generally, the conveyancing process is sufficiently lengthy to allow a seven-day
period without stalling the process.
Certificate of Title and exchange of contracts
The conveyancer issues the Certificate of Title, which confirms that the customer wishes to
proceed, asks the lender for the mortgage funds and exchanges contracts. In many cases,
the Certificate of Title is submitted only a matter of a few days (i.e. less than seven) before
the completion date.
Completion
The mortgage funds are drawn and the property purchase or remortgage completes or, in the
case of additional borrowing, the funds would be released to the customer.

47. Our recommendation will minimise disruption to the market and will ensure the UK can genuinely
deliver the MCD’s aims for the reflection period. It is worth noting that a customer may be particularly
unlikely to take a decision not to proceed once contracts have been exchanged and there is a risk their
deposit will be lost. It is better to introduce it when the effect of a consumer’s decision not to proceed has
less serious financial consequences.

48. We recommend the FCA removes from its rules the proposed MCOB 6A.3.3. This will help firms to
implement the process described above.

49. We consider the approach described here entirely compatible with the text of the MCD.

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Section 1.3 Application of the MCD to new lending only

50. We strongly believe the FCA should ensure it applies the MCD to new lending only. This will greatly
simplify implementation for firms and it will help ensure good outcomes for customers.

51. The MCD itself does not intend to regulate these transactions (see MCD recital 15 and article 43
(1)). We believe therefore that the FCA should not extend the MCD to contract variations and apply its
requirements solely to new lending. This will help firms reduce the complexity of implementation and it will
limit disruption to the market.

52. However, the FCA could help firms by allowing them to apply some of the requirements, especially
around disclosure to contract variations at their discretion. For example, firms may decide to use the ESIS
for contract variations.

53. It may be that the FCA has in fact sought to do this. We note the FCA says at paragraph 5.37 that it
proposes to allow firms flexibility to give either the ESIS or the KFI for contract variations. The proposed new
MCOB 7 rules also appear to allow firms to decide whether to give customers either an ESIS or a KFI for
certain contract variation transactions.

54. We also note, and are pleased that, MCOB 11.6.3 will remain in place post-MCD and therefore
elements of the MCD will only apply if there is an affordability assessment.

55. In the case of foreign currency loans this will help prevent trapped borrowers and is therefore in
customers’ best interests. If customers who want to vary their contract face the prospect of being designated
foreign currency borrowers, they may have fewer firms to choose from as their mortgage lender. This would
be damaging and we urge the FCA to make sure it prevents such situations by making sure the MCD
applies to new lending only.

56. We would welcome explicit assurance that the FCA will only require firms to use the MCD for new
lending and that firms will not be required to apply the MCD to existing contracts. This will remove some of
the ambiguity that currently leaves us unsure of the FCA’s intention.

57. This FCA could do this by amending its proposed glossary definitions to make clearer that it will not
require firms to apply the MCD to contract variations. The FCA could add to its definition of an MCD
regulated mortgage that such contracts only exist after 21 March 2016. Alternatively, the FCA could
summarise what it believes its proposed rules mean in practice in a table. We have summarised our
understanding of how these rules work in practice for contract variations in the following table. We would
welcome the FCA confirming our understanding in its policy statement.

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 Binding
Foreign
Transaction MCD Adequate KFI- Second offer and
APRC APR KFI ESIS Offer currency
type applies? explanations plus APRC reflection
loans
period
For new lending
House
Yes  n/a  n/a      
purchase
Further
Yes  n/a  n/a      
advance
Remortgage Yes  n/a  n/a      
Porting
(additional Yes  n/a  n/a      
lending)
For existing customers
Porting (no
2
additional Yes  n/a  n/a      n/a
lending)
Switching No Either Optional Either Optional  Optional n/a
Change of
No Either Optional Either Optional  Optional n/a
borrower
(Note:  denotes a requirement for this transaction; n/a means this does not apply to this transaction; optional means firms can
choose to do this on this transaction if they want to but they are not required to do this; either means this is required but that they can
choose from the relevant columns)

58. We believe this table applies irrespective of when the mortgage was completed. For example,
lenders will do the same for each transaction type whether the mortgage was entered into on, say, 29
December 2014 or, say, 29 December 2017.

59. We note the FCA’s proposed MCOB 7 does not include term extensions, term reductions and
changes of repayment type. Our understanding is that this is because the MCD does not regulate these
transactions.

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No affordability assessment is required 12
Section 1.4 Foreign currency loans

60. We note the MCD’s requirements on foreign currency lending. The requirements aim to protect
consumers who enter into a foreign currency loan (as defined in the MCD) by mitigating the impact of
exchange rate variations.

61. We believe these requirements could have a substantial negative effect on the UK mortgage
market:

i. The MCD changes a foreign currency loan from a type of product to a designation according to the
customer’s circumstances. Firms are likely to find it complex and practically difficult to define a
foreign currency borrower.
ii. There is uncertainty over what the MCD requires firms to give customers to mitigate the impact of
variations.
iii. The post-sale disclosures required for these customers could require exchange rate tracking for
the duration of the mortgage.

62. Not all foreign currency loans amount to niche lending. The definition of foreign currency mortgages
gives rise to potentially unintended consequences. For example, mortgage loans to consumers working in
the Republic of Ireland whose salaries are in euros and who want to buy and live in property in Northern
Ireland would be classified as a foreign currency mortgage. Similarly, a mortgage loan to a customer
resident in the UK whose sterling income is enough on its own to meet the mortgage payments but who
receives a small proportion of income in another currency, such as those who let out their holiday homes,
would be classified as a foreign currency mortgage.

63. The nature of these obligations will lead to many firms considering whether to continue to serve this
type of customer. This will leave many customers whose circumstances identify them as foreign currency
borrowers (but who would not consider themselves as such) with reduced choice. Such a consequence
would be extremely unfortunate. It would certainly be an indictment of the MCD’s effect on its own aim of
improving access to mortgage finance across EEA borders.

64. We believe the FCA can mitigate the impact of the MCD’s foreign currency loan requirements if it
adopts a pragmatic approach to implementation.

Foreign currency borrower definition

65. The MCD defines as foreign currency loans those mortgages to customers whose income and
assets for repayment or currency of the EEA state of their residency is different from the currency of their
mortgage. It would be impossible for firms to track individuals as they move countries and as the currencies
of their incomes or assets change. Mortgages often last for decades and there could be many such changes
over their duration. The implications would have a particularly high impact on lenders serving the high net
worth market whose customers’ circumstances are especially likely to change.

66. The FCA can address this issue by specifying that it is the customer’s status at the point of
application only that determines whether the mortgage is a foreign currency mortgage and that this status is
fixed for the duration of the mortgage. This would prevent firms having to track customers over the entire
term of the mortgage or for customers to tell their lenders if their status has changed. This would simplify
matters for firms serving these customers, including temporary or itinerant workers.

67. We also firms should have flexibility to go further with these requirements if they choose to. Firms
should be allowed, for example, to ask customers to notify them during the course of the mortgage if their
circumstances change and they are no longer foreign currency borrowers. This should be at the firm’s
discretion and we would welcome the FCA confirming this is the case.

68. We would appreciate it if the FCA would confirm that firms may assess affordability using only the
customer’s sterling income if that is sufficient to repay the mortgage, even if the borrower has additional
income in other currencies. Where a customer’s sterling income is enough to service the mortgage, firms
should not have to take into account any foreign currency income.

69. We recommend that the FCA does not prescribe a definition of residency and instead simply
confirms that it is for firms to decide how to satisfy themselves where a customer is resident. For example
the FCA’s existing definition of “normally resident” which13defines residency according to customer self-
definition unless the firm has cause to doubt this. However, in doing so it should make clear firms are not
required solely to use this definition.

70. Examples would help firms understand which customers are foreign currency borrowers and which
are not. It could also help reinforce confirmation that the customer’s status at application prevails throughout
the duration of the mortgage. The FCA could deliver this through reproduction of the table below in its policy
statement:

Resident in Income for repayment in Assets for repayment in Status

UK Sterling Sterling Not foreign currency loan
UAE Sterling - Not foreign currency loan
Spain Euro Sterling Foreign currency loan
Russia Sterling Sterling Not foreign currency loan
Japan Euro - Foreign currency loan
USA Sterling - Not foreign currency loan

71. We would be happy to provide the FCA with a further list of the circumstances on which we would
welcome a (non-prescriptive) view.

72. It is very important that Crown employees working overseas are unaffected by these foreign
currency loan requirements. We have consulted with relevant government departments and we believe
loans to members of the armed forces stationed overseas are not foreign currency loans. We understand
the same applies to certain members of the diplomatic service. We would welcome the FCA confirming our
understanding in its policy statement.

Exchange rate risk mitigation

73. Firms should be able to choose to which of the exchange rate risk mitigation strategies at MCD
article 23 (1) they offer customers. We therefore welcome the FCA’s proposed MCOB 2A.3 for providing this
flexibility.

74. We believe the FCA should also reassure firms that they can go on serving customers whose
circumstances make their mortgages foreign currency loans, by explicitly confirming that firms can use the
range of strategies given at MCD recital 30. This recital says foreign currency risks can be limited either
through giving the consumer “the right to convert the currency” or “other arrangements, such as caps or,
where they are sufficient to limit the exchange rate risk, warnings”. We believe such warnings will be
especially helpful to customers who may not consider their mortgages to be foreign currency loans and who
may lack the expertise to be able to understand currency conversion products. FCA should be prepared to
rely on these.

Foreign currency loan disclosures

75. The MCD also requires firms to tell customers who have foreign currency loans when exchange
rates vary by 20% or more. We agree it is sensible to warn customers about risks associated with foreign
currency loans but the disclosure obligations should be applied pragmatically and customers should be able
to choose the frequency of notifications. Regular notifications of a 20% variation in exchange rates are likely
to become less meaningful with each subsequent notification. Customers are unlikely to welcome, say,
twenty years of currency variation notices and should be able to agree the frequency of notification with their
borrower.

76. There should also be no requirement to disclose a movement that is in the customer’s favour.

77. The FCA should leave to firms the decision about what the frequency with which they issue these
disclosures. Our preferred option is for firms to include the notification in the customer’s annual statement
once the threshold is crossed and confirmation of its acceptability would be welcome.

78. The FCA should also leave to lenders the decision about how soon after the crossing of the
threshold they should notify customers. Firms would expect to notify only after they had formed a view that
after the changed position was not likely to be reversed in the short term.

79. One potential way for lenders to address issues that arise from currencies that fluctuate widely over
a short period is to take averages or finishing positions at the end of given periods. The lender could
14
calculate the position at, say, the anniversary of application. This will smooth the variation and again reduce
the likelihood of customer frustration and confusion. We would welcome the FCA’s view on this.

80. Generic disclosures (e.g., a statement of all the currencies a firm deals in and the relative position of
sterling to those currencies over a given period since the last disclosure) might be more appropriate,
especially to foreign currency customers who already have had disclosures about the risks, and are likely to
be monitoring the currency markets themselves. We would welcome the FCA confirming that this would be
compliant.

15
SECTION TWO

81. There are a number of areas in the MCD where we would welcome the FCA’s help in understanding
what these rules may mean in practice. This section is in alphabetical order of topic.

Section 2.1 Adequate explanations

82. In the case of advised sales, firms will be able to provide “adequate explanations” relatively easily
within existing processes so little, if any, change will be needed.

83. In the case of execution-only sales, however, this is more problematic since firms need to take care
not to stray into giving advice. We are therefore concerned this requirement will give rise to greater
uncertainty.

84. There are already difficulties associated with making execution-only sales online and any additional
requirements will increase these difficulties. It should be remembered, however, that the next generation of
borrowers will expect to be able to transact online.

85. We consider therefore that firms should be permitted to provide generic “adequate explanations” for
execution-only customers. Significantly, firms will give any generic adequate explanation alongside the
bespoke disclosure documents and we would like confirmation that firms may give generic adequate
explanations of customer-specific disclosure documents.

86. We note there is a requirement at MCOB 4A.2.2 to tailor adequate explanations for the customers to
whom the mortgage is offered, but neither the MCD nor the FCA’s draft Handbook text explain what this
might mean in practice. It should be for firms to decide how this works in practice but we would welcome
some non-prescriptive information about what this might mean.

87. The FCA’s proposed MCOB 4A.2.3, which includes reference to the Perimeter Guidance manual
(PERG) goes some way to addressing concerns over the boundary between advice and execution-only but
we would welcome confirmation that its supervisory and enforcement approaches will reflect this intention.
This would give firms confidence that their adequate explanations will not be deemed to be steering
customers in any particular direction.

Section 2.2 APRCs

88. Our comments on both the main and the second APRC are in this section.

Main APRC

89. We are satisfied the MCD’s APRC calculation is mathematically equivalent to the existing MCOB
calculation and that all other things being equal it will produce the same value. Despite this apparent
equivalence, we stress that this may still require firms to make system changes. We would have preferred
the FCA to retain its current calculation on the basis that it produces the same result.

90. We recommend firms be allowed to apply the same calculation to all lending rather than just that
covered by the MCD. However, we do not believe the FCA should mandate either equation but leave it to
firms to decide which equation they choose to use. Firms should also have the option to maintain two
systems if they wish. We would welcome the FCA confirming in its policy statement that it will allow this.

91. However, there is an issue about understanding the inputs of the MCD APRC, which contains less
detailed assumptions than the current MCOB APRC – such as how to treat the costs of the mortgage and
insurances. This may make firms less certain about how to interpret the MCD requirements compared to the
MCOB requirements.

92. We will work as an industry to consider what work we can do to arrive at a common understanding
of potential ways in which lenders could implement the MCD APRC. We would welcome the FCA being
open to our approaching it.

16
93. There are some points where we would welcome the FCA’s clarification:

• There appears to be some difference in the period to which the calculation refers. The existing
MCOB 10.3.5 (5) refers to a year being 365 days, 366 days or for the sake of simplicity 365.25 days.
The proposed MCOB 10A.2.3 (b) (ii) refers to a year being either 365 days or 366 days. We
consider lenders should have the flexibility to harmonise the calculation periods given the duration of
a mortgage is often more than four years and such a small difference will require a systems change
for firms that decide to retain the existing formula.

• The proposed MCOB 10A.3.1 (5) refers to an internal reference rate that “is not less than the fixed
borrowing rate”. It is not clear what this means. It may refer to practice in other European countries
where only the rate for the first few years of a mortgage is provided. UK practice is different and so
it may be that this rule is unlikely to apply here. However, we would welcome the FCA’s
confirmation of what this means in practice.

• The proposed MCOB 10A.3.1 (13) refers to shared equity agreements. We do not believe this
includes Help to Buy: shared equity, as HMT’s proposed implementation of the MCD excludes
loans made by government and other public authorities.

94. We welcome the EC’s decision to produce a calculator to help firms understand how the APRC will
work: the earlier this is published the easier it will be for firms. It should, however, only be an illustrative tool
rather than imposing any additional requirements on firms or mandating a specific approach.

Second APRC

95. We do not believe the MCD’s second APRC will be valuable to customers since they are unlikely to
find the cost of repayment based on an interest rate in, say, 1996 particularly meaningful. The existing KFI
illustration of repayments in the event of a one-percent increase in rates is much more valuable.

96. We are satisfied with the FCA’s proposed benchmark for the second ARPC. It is a relatively simple
formula. However, it will require firms to build a system that month-by-month calculates the highest rate over
the previous 20 years for limited practical value. This is likely to be costly and to yield little benefit for
customers.

97. We note 2 (a) in section four of the FCA’s proposed MCOB 5A annex II refers to the difference
between the Bank of England’s base rate (BBR) and the highest value of BBR over at least the last 20
years. We infer from paragraph 2.25 that this difference is to be calculated in percentage points. We
consider a difference in percentage point terms to be the most appropriate approach. However, we would
welcome the FCA confirming this is what its rule refers to.

98. Some firms link their rates to other indices, such as the London interbank offered rate (LIBOR). A
number of these indices will change more frequently than BBR; LIBOR changes daily, for example. This will
mean firms have to refer to around 20 times as many data points as they would under BBR. We consider
firms should be able to apply a smoothing approach when they are referring to rates published more
frequently than BBR to make easier the task of tracking the movement over this 20-year period.

99. We believe the FCA has provided a means of helping firms deal with calculation issues around the
point when the historic BBR changed but we would welcome confirmation that this is its intention. The
proposed 2 (c) (a) in section four of the proposed MCOB 5A Annex II appears to suggest firms have a three-
month period in which to calculate the second APRC. For example, lenders calculating the rate in, say,
August 2016 will be able to use the historic BBR from May 1996 if they choose to. We would welcome such
an approach if this is the intention.

100. We welcome the FCA’s decision to specify scenarios at the proposed 2 (d) of section four in the
proposed MCOB 5A Annex II. This will help firms calculate their second APRCs given their circumstances.
We also have some comments on the scenarios given in this table:

• Scenario 10 refers to an illustrative APRC. The introductory text at 2 (d) of section four of the
proposed MCOB 5A annex II and the other boxes in this column refer to an additional APRC. We
would welcome the FCA either confirming whether this difference is intended (and, if so, what the
illustrative APRC refers to) or harmonising the language.
17
 • We would welcome the FCA providing a twelfth scenario showing what a firm should do where it
has combinations of APRC. One is a composite ARPC of both a benchmarked rate and a managed
rate, such as a part-tracker and part-discount rate.

• We would also welcome a thirteenth scenario for more mainstream products. One option we would
be particularly interested in is what lenders are required to do with a product that is, say, a two-year
base rate tracker (e.g., 1.49% plus BBR) that reverts to a standard variable rate (e.g., 4.74%). We
expect a firm will be required to apply the benchmark formula to its standard variable rate rather
than to both its fixed-rate and its standard variable rate.

101. We reiterate that the FCA can reduce the burden on lenders of complying with this requirement and
the potential for customer confusion by giving lenders flexibility to replace the existing one-percentage point
increase with the second APRC in the KFI-plus if they choose to.

2.3 Disclosure

102. We welcome the FCA’s producing example ESIS documents in its consultation document. These
have been helpful in furthering our understanding of how firms can implement the documents.

103. We would welcome the FCA reproducing these documents in its policy statement. Their
reproduction in the policy statement will help firms understand what the FCA will consider compliant
documentation. We would welcome any further examples the FCA can provide for types of transactions not
already covered, such as those involving foreign currency loans.

104. There is a range of approaches in these examples to showing the costs payable for registering the
mortgage. We think this may be due to the vague language for completing this section given in the ESIS
instructions at section 4 (4) of the proposed MCOB 5A annex II. These examples are illustrative only but
they suggest firms can meet these requirements in a range of ways. We would welcome the FCA confirming
whether this is the case or whether it will leave it to firms to decide how to approach illustrating these costs.

ESIS template

105. We are concerned the language of the ESIS will not help customers understand their mortgage. We
say this for the following reasons.

• The ESIS uses unusual terms to refer to concepts that are familiar to UK consumers. For
example, section nine refers to an “early repayment charge” as an “exit charge”. This is
confusing and it is at variance with the rest of the MCD, which uses the term ‘early repayment
charge’ throughout. The FCA’s proposed MCOB 3A.2.6 also contradicts the ESIS template. This
restricts use of terms and permits firms only to refer to an early repayment charge using these
words.

• There is interchangeable use of some terms. “Loan”, “credit” and “mortgage” are all terms used
to refer to the money that mortgage lenders lend to customers secured on their homes (or
another asset). The document also uses “repay” and “reimburse” to refer to funds transferred by
the borrower to the firm to pay back the loan.

• Customers are likely to perceive that the firm has produced this document and its inconsistent
and vague wording might undermine their trust.

106. This is not the case with the UK’s existing KFI which the European Commission’s (EC) own
3
research found was more “deliberately centred on the client rather than the lender” than the ESIS .
Respondents said the KFI’s language was a strength but that its length might be a weakness. The ESIS may
end up being even longer, particularly where firms provide the illustrative repayment for a 30-year mortgage
in section seven.

3
Optem, Pre-contractual information for financial services – qualitative study in the 27 member states
summary report (2008) accessed 3 November 2014 at
18
http://ec.europa.eu/consumers/archive/rights/docs/PCI_final_report_22Feb2008_en.pdf
107. We would welcome the FCA confirming in its policy statement that it will allow firms flexibility to
change the language of the ESIS to make it more meaningful to consumers. We believe the MCD permits
this. MCD recital 42 states:

Member states should be able, in their national languages, to use different vocabulary in the ESIS,
without changing its contents and the order in which the information is provided, when this is needed
in order to employ a language that might be more easily understandable for consumers.

108. Annex one of our response includes a track-changed version of the ESIS template. This is an
example of the kinds of changes we think recital 42 allows. Among the changes we have made in this
example is reference to mortgage loan. We have chosen to refer to mortgage loan because in the UK
mortgage market mortgage can mean more than just the loan; mortgage can mean the security or charge
over the property and also the overall arrangement between lender and borrower.

ESIS instructions

109. The FCA should include the ESIS instructions in its Handbook so that firms can cross-refer to the
terms within it. When introduced, the ESIS will be a new document to firms and staff and it will amount to a
significant departure from the KFI. The cross-references will help firms’ understanding.

110. We would also welcome the FCA considering what help it can give firms to understand what some
of the unfamiliar terms refer to and again Section nine is a good example. The FCA could replace exit
charge with early repayment charge, use parentheses to clarify that an exit charge relates to its early
repayment charge rules or cross-refer from exit charge to early repayment charge.

111. We would welcome the FCA confirming whether it intends the consequences of its proposed MCOB
5A Annex II section one (3) (5). This excludes from the credit intermediary’s explanation of how it is being
remunerated any remuneration paid to a third party. We note this is a change to the current MCOB 5.6.113
requirement and appears to reduce the transparency for the customer. It also appears to contradict MCD
article 15 (1) (g), which requires that credit intermediaries should disclose any compensation they are paid
by firms or third parties.

112. This also has practical implications for firms. An intermediary giving advice is directly authorised and
submits an application to the firm through a mortgage club. The firm will pay the procuration fee to the
mortgage club and the club will pay a proportion of the fee to the directly authorised intermediary giving the
advice. The FCA’s proposed rule suggests it will require the firm to identify how much of the fee the directly
authorised firm will receive and then disclose the payment of that fee but not disclose the amount paid to the
club.

113. Annex two of our response features some suggested expansions to the ESIS instructions. These
are in addition to ensuring there are links to the relevant terms in the FCA glossary.

KFI-plus

114. We agree with the FCA’s view that the KFI is sufficiently close to the ESIS to allow the UK to use the
MCD’s transitional provisions for disclosure. The FCA’s proposed MCOB TP 42 is therefore welcome.

115. We note this will mean different disclosure documents are issued during this process. This is
unavoidable. However, it will be more complicated than currently. Potentially customers could get three
documents – the ESIS, KFI-plus with additional disclosures and KFI-plus with embedded disclosures – and
intermediaries could have to explain each one. This could undermine the ability to compare documents.
There is also the possible use of different APRs.

116. The FCA can take steps help reduce the disruption to firms from the transition to the ESIS. We
would welcome the FCA confirming that its proposed MCOB TP 45 allows firms to include the top-up
disclosures within the existing KFI template. Firms may choose to do this so they can minimise any
customer confusion from additional separate disclosures.

117. We agree firms should have the flexibility to decide how and when they provide the top-up
disclosures. Creating systems to produce and then to provide these top-up disclosures will themselves
represent substantial interim investments and it is not necessarily the case that firms will be able to then use
the top-up disclosures as the basis for the ESIS later on.
19
118. The requirement to show two interest rates within the ESIS has the potential to cause confusion but
FCA can mitigate this by giving firms the flexibility to replace the KFI 1% interest rate increase with the top-
up 20-year high. We stress this should be optional and that firms should not be required to replace the KFI
figure if they prefer not to. We would welcome the FCA confirming that firms can do this and that doing so
will not contravene the existing MCOB 5.6.59.

119. A pragmatic FCA supervisory approach will be particularly important on disclosure between the date
the FCA enables its rules and March 2019. Firms will take a variety of approaches to complying with the
ESIS requirements – some will use the KFI-plus and implement the ESIS in 2019 or earlier and some may
use the ESIS immediately – and the FCA should keep this in mind during this period.

120. We also agree that firms should have the flexibility to choose whether they continue to use the KFI
on a top-up basis or whether they proceed immediately to using the ESIS. We also believe firms should be
able to move to the ESIS at any time during the transitional arrangement. We therefore welcome TP 42 and
TP 46.

Section 2.4 Financial promotions

121. We broadly welcome the FCA simplifying its rules on financial promotions at the same time as
implementing MCD requirements in this area. Not having to provide the lengthy risk statement may make it
easier for firms to promote products and services in certain communication methods, such as social media.

122. However, the MCD adds complexity to certain advertisements so, for example, lenders will be
required to quote representative examples if rates or prices are included in promotions. This will not help
firms advertise and inform customers when promoting their mortgages on character-limited social media and
firms may be reduced to simply informing consumers about the availability of mortgage loans. This may
even hinder price competition.

123. We would welcome the FCA’s help in furthering our understanding of what is a financial promotion.
Of particular interest is whether this rule extends to product lists on lender websites which we argue strongly
is not a financial promotion since it does not constitute an inducement to buy and it is a regulatory matter.
We would welcome the FCA’s confirmation that our understanding is correct and that representative
examples are therefore not required.

124. Where lenders are required to give a representative example on financial promotions on the
internet, it may be impractical to give the example in particular advertisements owing to space or character
constraints. We believe lenders should be able to give the representative example on a click-through basis,
with the representative example shown on a subsequent page.

125. We would welcome the FCA explaining on how it envisages the proposed MCOB 3A applying to
non-real time financial promotions. The proposed MCOB 3A does not appear to have an equivalent to the
existing MCOB 3.6, except for particular types of products, such as sale and rent back financial promotions
at the proposed MCOB 3A.8.3. We are unsure therefore how the representative example and other parts of
the MCD’s requirements on financial promotions will apply to television and radio advertisements, for
example. We would welcome the FCA explaining this in its policy statement.

126. One way for the FCA to help firms better understand the representative example is through some
examples. These could be similar to those in the recent FCA social media consultation, GC14/6 Social
media and customer communications: the FCA’s supervisory approach to financial promotions in social
media. However, we would be equally grateful for something much simpler that shows how these
requirements fit together and how each might be shown.

127. We would welcome the FCA confirming that it intends its proposed MCOB 3A to apply to new
lending. The FCA proposes to replace the existing MCOB 3 with the proposed MCOB 3A. The proposed
MCOB 3A.1.1 (1) says this section applies in relation to communication on home finance transactions. The
definition of a home finance transaction, which the FCA does not propose to change, includes regulated
mortgage contracts. We expect the FCA intends the regulated mortgage contract to be the means by which
the proposed MCOB 3A regulates MCD regulated mortgage contracts. However, MCD regulated mortgage
contracts are not included in this definition.

20
Section 2.5 Knowledge and competence

128. The MCD’s requirements on knowledge and competence are the latest in a series of requirements
introduced for staff and come in addition to the existing requirements and the extensive requirements of FCA
CP14/13, Strengthening accountability in banking: a new regulatory framework for individuals..

129. We accept firms will have to implement these requirements and welcome the fact that lenders will
have until 2017 to comply. In our view the FCA’s requirements on knowledge and competence are already
clear and, with their likely further strengthening from CP14/13, we believe firms should have flexibility in
implementing the requirements.

130. The knowledge and competence requirements for mortgage sellers can be met using existing
qualifications so we agree that the existing CeMAP level three qualifications for mortgage sellers are
sufficient. This minimises the impact on firms for implementing the requirements for mortgage sellers.

131. The MCD also requires that the knowledge and competence requirements apply to mortgage
manufacturers. We are concerned that these individuals are not defined in the MCD and this creates
uncertainty. It is not clear, for example, whether executive committee members, who oversee mortgage
production but without day-to-day involvement in mortgages are caught..

132. We agree that such individuals will not necessarily need to have specific qualifications and we
consider firms should be able to apply their own assessment of whether staff involved in mortgage
manufacture are appropriately qualified or need any qualifications. We would welcome the FCA’s
confirmation of this point.

133. We note the FCA’s proposed amendments to TC App 1.1.1 appear not to require individuals to have
qualifications if they are advising on a regulated mortgage contract or if they are a MCD credit adviser. This
seems at odds with the existing TC App 1.1.1, which requires these individuals to hold qualifications. The
difference may be because the FCA is leaving it to firms to decide whether to require these staff to hold
qualifications but we would welcome confirmation whether this is the intention and, if not, how the FCA
envisages lenders resolving this apparent conflict.

134. Figure three of the FCA’s consultation document is a useful illustration for firms considering how to
meet the knowledge and competence requirements. We would welcome the FCA reproducing this figure in
its feedback statement so that firms can refer to it in a document that is not a consultation paper.

Section 2.6 MCD lending not secured on the home

135. We note the MCD also regulates loans which are made for the purposes of acquiring or retaining
rights in land but which are not secured on land and that the FCA proposes simply to ‘copy out’ the MCD
requirements into MCOB. The FCA has indicated that such lending represents a small proportion of total UK
borrowing and this may be correct. These loans, however, are very important to certain niche customers
and the implications could be significant in these particular markets.

136. We are concerned that regulating this type of lending with an unduly onerous process could have a
damaging effect on this market. If lenders are required to undertake a lengthy sales process, customers will
not be able to borrow at short notice and firms’ ability to meet the needs of these customers will be severely
curtailed.

137. The regulations also seem unnecessary: high net worth customers are less likely to need an
advised sales process since they are likely to have access to a wide range of professional advice. In
addition, they are in less need of consumer protection. Affordability assessments also seem wholly
unnecessary – a fact which is already recognised under the Consumer Credit Act and in MCOB.

138. Bringing these loans under MCOB represents a substantial challenge to firms that offer them. Many
of our points elsewhere in this response will also apply here so, for example, the points made above in
relation to cases in the pipeline at 21 March 2016, changes to the sales process, the introduction of a
reflection period all apply here too. Disclosure documents will also be required, with all the language
difficulties we have previously mentioned.

139. One potential solution for these problems would be for the FCA to allow firms with CONC
permissions to be permitted to continue to the exemptions
21 in CONC for this type of loan. We recognise there
is no high net worth exemption in the MCD but we believe there is a case for the FCA not to apply these
rules to customers who do not need the protection the MCD aims to give.

140. Alternatively, the FCA can ensure implementation of these requirements takes account of the nature
of many of the customers in this market. For example, we note many of these customers will have
professional advisers; they are unlikely to need many of the wider MCD protections. Practically this means
ensuring proportionate and sensible approaches to applying MCD requirements to these loans.

141. This extends to supervision. It should also be possible for the FCA to take a pragmatic approach on
an ongoing basis to recognise that sales of these loans are viewed in the same way as other business with
high net worth customers.

142. We would welcome the FCA explaining how it sees the sales process for these customers working
in practice. Some customers may simply request a loan facility that they may then use for a variety of
purposes. This may mean the purpose is not declared or that it changes during the lifetime of the loan. We
suggest the FCA apply the same principle here as to foreign currency loans and suggest that any purpose
known at the time the loan was taken out is fixed from that point for the duration of the loan.

143. We also have some observations on the proposed rules.

144. We welcome the principle of the FCA giving firms the choice to apply MCOB or CONC rules.
However, we would welcome more explanation of how this choice would work. We note the proposed
MCOB 14.1.2 requires firms providing these loans to apply any rule that applies to an MCD mortgage lender
to itself. However, firms also have the choice to apply MCOB and CONC. We understand the choice only
relates to these parts of MCOB and any that are not in CONC still need to be complied with.

145. We note the FCA’s proposed MCOB 14.1.7 includes one column of CONC rules and one of MCOB
rules. We would welcome the FCA giving some explanation about the equivalence of these two columns.
For example the CONC column refers to unique rules but the FCA column repeats reference to MCOB 2.5A
(1). Firms probably do not need telling more than once to act in the customer’s best interests.

146. We note that if firms chose to apply column A at 14.1.7R, they must use chapter 5.5 of MCOB for
pre-contract disclosure, which requires the provision of an illustration. We would welcome the FCA’s
confirming that firms will also be able to apply MCOB 5A if they choose to. This would give firms flexibility to
provide either the ESIS or a KFI. We would welcome the FCA clarifying the disclosure arrangements in the
policy statement.

147. A final point regarding this table is that some rules appear together in the same cell but others but
others are shown in separate cells. We believe this does not imply a choice and that all the rules in this table
should be followed. It may be that the FCA has designed the table this way to ensure there is equivalence
between sections of MCOB and CONC but we would welcome explanation that this is the case.

148. Extending MCOB to this type of lending could clearly be a substantial change from existing practice.
We are concerned the 12-month timetable will be especially challenging here, since firms may be making
extensive systems changes. We would welcome working with the FCA following the consultation period to
help it understand the implications of this change and to ensure firms can further their understanding of the
FCA’s expectations.

Section 2.7 MCOB 13

149. We are reassured that the FCA considers the existing rules within MCOB 13 to be sufficient to meet
the requirements of the MCD on both foreclosure and consumer protection.

150. However, the FCA is using the implementation of the MCD as an opportunity to make some
additions to the MCOB 13 handbook in relation to vulnerable customers and data sharing with other charge
holders. These changes, if adopted as they are currently drafted, will not cause significant disruption for
first-charge mortgage lenders but the FCA should be mindful that costs may increase for consumers in order
for lenders to meet the data sharing requirements.

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Vulnerable customers

151. Many lenders already have policies in place to ensure the fair and consistent treatment of customers
who exhibit vulnerability. As vulnerability was identified as an area where standards could be improved in
TR14/3 and as the FCA has confirmed that it is going to report more widely on vulnerability in early 2015
lenders have given this significant attention throughout this year.

152. There is unlikely to be any resistance to the inclusion of a policy requirement within MCOB 13 for
vulnerable customers. We question, however, whether the FCA has given the proposed rule sufficient
consideration.

153. As drafted, the guidance wording accompanying the proposed rule suggests that lenders should pay
particular attention to those with mental health or mental capacity limitations. We believe that vulnerability
extends wider than this and can include those who are temporarily vulnerable, through for example, loss of
employment, as well as those who are long-term vulnerable.

154. While it is in the gift of lenders to develop policies which go beyond the minimum requirements
outlined in the consultation, by focussing on mental health the FCA may create an environment where other
vulnerabilities are insufficiently recognised. The transposition of the existing CONC7 wording may not
deliver the outcomes the FCA would expect.

155. Our preference would be for the FCA to introduce a more generalist rule which is tied to the FCA’s
own definition of vulnerability and is informed by its examination of the treatment of vulnerable customers
across financial services.

Data sharing with other charge holders

156. We are yet to be persuaded that the introduction of data sharing requirements between charge
holders will bring about any material consumer benefits. These rules, as proposed, are likely to increase the
cost of the repossession process for consumers in all cases in order to mitigate a risk which is present for
the few.

157. As the notification process required by Civil Procedure Rule 55.10(2)(c) is late in the repossession
process we agree with the FCA’s assertion that this is ineffective at reducing the likelihood of action by more
than one lender.

158. However, we believe that the FCA’s proposed requirements amount to ‘gold-plating’ and the risk
outlined in the paragraph above could be removed with less rigorous rule drafting. There does not appear to
be any consumer benefit for introducing 13.4A.1R (1) (b), (c) and (d).

159. Nor is there any consumer benefit identified with the introduction of proposed rule 13.4A.1R (3) (a)
and (b).

160. The FCA should seek to introduce only the following parts of proposed rule 13.4A.1R; (1) (a), (2)
and (4). This would ensure that other charge holders are notified of the commencement of litigation,
voluntary surrender and assisted voluntary sale of property.

161. Should the FCA seek to introduce the rules as they are drafted it should take into account the
following points:

i. The notice period to be provided by charge holders at all stages would be better set at ten
working days. As currently drafted there is a degree of variation which adds unnecessary
complexity.
ii. There is a proposed requirement to notify the date upon which the property will be repossessed
(MCOB 13.4A.1 R (1)(d)), however, there is no subsequent requirement to confirm whether or
not the eviction was carried out.
iii. The points at which notification would be required is likely to differ between lenders and so more
explicit expectation on the timing would be helpful.

162. The FCA should be mindful that by introducing these rules they will extend the litigation to eviction
timeline and therefore consumers are likely to incur additional interest as well as higher fees.
23
Section 2.8 Second charge mortgage regulation

163. We are pleased that the FCA has given the industry considerable notice of the proposed changes to
regulatory regime for this kind of mortgage lending. We believe that the move to a single regulatory system
for mortgages will reduce complexity and confusion for consumers.

164. There are other trade associations that represent second charge mortgage lenders. The views
expressed in this submission relate only to lenders within CML’s membership who have second-charge
mortgage books. These views may not be aligned to those of other second charge lenders or their
representative bodies.

Authorisation

165. The FCA should be aware that second-charge lenders are currently delivering changes brought
about by the transfer of regulatory oversight from the Office of Fair Trading (OFT) to the FCA. This means
that a significant number of firms will have ‘interim’ FCA permissions to carry on their business. The FCA
should seek to ensure that no firm is disadvantaged by this process and can continue to trade normally.

166. While it is the FCA’s intention, as outlined in the consultation paper, to “ensure that as many firms
as possible are able to have their applications determined in time”, the FCA should also ensure that no firm
is forced, at the extreme, to stop trading because of inefficiencies in the authorisation process.

Costs

167. The costs associated with ‘interim’ permission, at a firm level, are not insignificant. These costs,
coupled with the substantial costs associated with becoming MCOB compliant should be taken into
consideration when levying charges for full FCA authorisation. It would be unfortunate if some lenders are
forced to exit the market because of the costs associated with continued participation.

Customer impacts

168. Some customers will be excluded from the market entirely or, as for a larger group, the amount they
are able to borrow will be reduced once this process is complete. The FCA’s own analysis also shows this.
We do not believe that this is an equitable outcome as it is likely to result in those customers obtaining the
same level of credit from an unsecured lender at a higher cost.

169. This feels counter-intuitive. Concessions should be made for those who have already obtained
second-charge mortgages and need to refinance or change the terms of their mortgage. This could be
achieved through the adoption of a similar approach as was taken in the delivery of ‘transitional’ rules for the
MMR. At the very least the FCA should allow those who wish to insulate themselves against a possible
change in interest rate to do so simply and in a way which avoids an affordability assessment.

Data collection

170. We agree with the proposed data collection regimes for second charge mortgages. Harmonising the
regime with first charge will minimise the burden for firms offering both first and second charge mortgages.
We therefore also agree with the proposed timetables for reporting, including the reduced frequency for
firms reporting data manually and the FCA is right larger second charge firms are unlikely to have perverse
incentives to report at lower frequencies.

171. We have reviewed the proposed template for second charge data reporting and we are mostly
content with it. However, we are concerned the FCA’s proposal to collect the purpose of a second charge
mortgage will add a new field to product sales data returns. This field will necessarily only be used by
second charge lenders. However, all firms will need to change their systems to ensure they can use a new
form. This is disproportionate and we are not persuaded there is justification for changing the product sales
data return form.

172. Firms have just completed a lengthy and expensive process for a range of other changes. We
consider that making further changes so soon after this and doing so for a change that will not be used by
the substantial majority of firms is excessive. We would welcome the FCA clarifying in its policy statement
how it proposes firms report this data and confirming that it will make no change to the existing XML
structure of the form. 24
173. If the FCA’s consultation proposal does require change to the PSD form, we believe this data can
instead be collected using the existing structure. We recommend the FCA allows recording of the purpose of
a second charge loan using PSD item 79 A to C (remortgage purpose) (PSD001) as per the existing data
reference guide. The FCA can add to the items for this field its proposed codes for type of second charge
mortgage and for mortgage characteristics.

Section 2.9 Tying and bundling

174. We note the FCA’s proposed MCOB 2A.2 refers only to tying practices and not to bundling
practices. This is in contrast to MCD article 12, which refers to both tying and bundling practices. We believe
this is because the FCA does not intend to regulate bundling but we would welcome confirmation of our
understanding, perhaps using some examples of bundled products.

175. We welcome the FCA’s listing in its consultation document the types of tying practices that will be
permitted under the new rules. Our understanding is that current account-contingent mortgages, offset
mortgages and guarantor mortgages are also permitted. We would welcome the FCA confirming these
product types are permitted and including them in an updated list of permitted products in its policy
statement.

176. We would also welcome the FCA’s confirmation of what the proposed MCOB 2A.2.3 means in
practice. Our analysis is that it refers to transactions where there is a two-year processing period. This is not
common practice in the UK and we expect that it is unlikely to have much impact. However, we would
welcome the FCA’s confirmation of our understanding.

Section 2.10 Other aspects

177. The FCA makes proposals in a number of other areas. We make our comments on these areas
here in alphabetical order of topic.

Alternative finance options

178. We do not consider that it will always be helpful for firms to tell customers about alternative finance
options. It could be confusing to customers. Further, telling a customer that a second charge loan may be an
appropriate alternative to a remortgage with additional borrowing does not appear to be the right information,
since the overall cost of the second charge loan may be higher.

179. The FCA should continue allowing firms to disclose alternative finance based on the customer’s
needs and circumstances. This can be achieved by replacing the compulsion for firms to tell the customer
about alternative finance with some requirement to consider whether it is appropriate. This option will help
ensure greater consistency between the existing MCOB 4.7A and the proposed MCOB 4.4A.8A.
Alternatively, the FCA could leave MCOB 4.7A unchanged.

180. We note the FCA’s intention at the proposed MCOB 4.4A.8A to apply the alternative finance options
only to those mortgages where a customer is looking to increase his or her borrowing may not be compatible
with the proposed MCOB 4.4A.1 (3), which appears to require lenders to give customers the availability of
alternative finance options in all cases. We believe only customers who are looking to increase their
borrowing are likely to value information about alternative finance options. We would welcome the FCA
confirming in its policy statement that it will require firms to give information about alternative finance options
only to customers who want to increase their borrowing and to make the distinction between these two rules
clearer in the final rules.

Creditworthiness assessment

181. MMR has introduced strict new requirements, including an affordability assessment for mortgage
sales where a firm or a mortgage intermediary advises a customer. These requirements help ensure that
customers are able to ask questions of lenders and that the lender can obtain information about the
customer’s current and future circumstances. These MMR provisions enable us to meet the MCD’s
requirements on creditworthiness assessments.

182. The proposed amendments to the existing affordability assessment are unlikely to have a significant
impact; lenders are already doing these things in practice. We believe the requirement to specify only the
information the firm will need to assess affordability still 25
allows firms to ask customers to provide any other
information they consider the lender should take into account in assessing their affordability. We would
welcome the FCA’s confirmation in its feedback statement.

Early repayment charges

183. We agree with the FCA’s proposed changes to MCOB 12.3.

Exemptions for commercial loans

184. The scope of the MCD does not extend to lending for commercial borrowers. We therefore welcome
the principle of the FCA making this explicit in its proposed PERG changes. This will help reduce the
potential for ambiguity over whether or not commercial-type lending is covered by the MCD.

185. We have reviewed the FCA’s proposed guidance at PERG 4.4.17. We are broadly satisfied that this
exempts the right transactions and matches the intention that there should be no regulatory change for first
charge business lending. Neither the MCD nor existing MCOB rules intend to regulate transactions where
the mortgage is for a business purpose. However, we would welcome the FCA explaining in its policy
statement how it arrived at this guidance.

186. The FCA could do this using non-prescriptive guidance to show how it believes it has met this
intention. However, it would be helpful if FCA could provide greater clarity on how best to interpret the
commercial borrower exclusion as well as how the exclusion will apply in practice so firms can identify the
circumstances when the MCOB rules will apply post-MCD. Some illustrative examples would also help here.
These might include examples of where the property is used, or use is intended, in whole or in part, either by
the borrower or related person or both or by an unrelated person.

187. We would also welcome the FCA’s assistance in understanding where there is dual purpose
lending, particularly around whether there is a threshold for lending considered to be wholly or
predominantly for business purposes, and how to determine in these circumstances whether a customer is
acting as a "consumer" under the FCA's glossary and the MCD. This would assist firms in developing tools
during implementation to help staff in identifying consistently those circumstances where the rules will apply
post-MCD.

188. The FCA’s proposed guidance at PERG 4.4.21 also appears effective in removing from MCOB
second charge business loans. Again, though, we would welcome the FCA explaining both its intention and
how it has arrived at this guidance. The FCA should use the same approach here that it uses to demonstrate
its thinking on exemptions for investment property loans.

Handbook cross-references to the MCD

189. The proposed handbook changes in the FCA’s consultation include cross-references to articles and
recitals in the MCD. The consultation does not explain the status of these references. However, we expect
the FCA intends to retain them as cross-references to the MCD text and that they will be hyperlinks in the
final MCOB text.

190. We would welcome their retention as hyperlinks, as this will help firms understand the rules without
having to refer to two separate sources – the FCA for MCOB and the EC for the MCD.

Jurisdictional reach

191. We note the FCA proposes to change the jurisdiction of its regulation from the United Kingdom to
the EEA. This is likely to reflect the changes to the scope of FCA regulation that HMT proposed in its
consultation. However, there appears to be inconsistency in the draft Handbook rules regarding the
jurisdiction of the FCA’s regulation. In separate places, the FCA’s proposed definition of a regulated
mortgage contract refers to the United Kingdom and the EEA. We would welcome the FCA clarifying
whether this is intended or ensuring the definitions are consistent both in the FCA rules and with the
legislation.

192. We are concerned extending the scope of FCA regulation could create overlapping jurisdictions.
This would apply to firms that have branches of their UK institutions in EEA countries lending mortgages to
customers in those same EEA countries. Under this definition the Spanish regulator could regulate a UK-
authorised bank with a branch in, say, Spain lending for26
a property in Spain could potentially be regulated by
both the FCA as home regulator and by the Spanish regulator as the host regulator. Whose rules would
apply for example to a transaction in an EEA state made by a branch of a UK firm if the regulator in that EEA
state introduces the reflection period after the mortgage transaction or only the requirement to convert
foreign currencies, in contrast to the UK’s approach?

193. We are unclear to which regulator firms in these situations should turn if they are unclear about rules
or, if there are any conflicting regulations, which regulator’s rules prevail. Our view is that this places a
strong emphasis on the home and host regulations of the country the branch is operating in. We expect the
regulators of each member state are implementing the MCD to the same extent as the FCA and that each
will supervise compliance in the same way as the FCA. We would welcome the FCA’s assurance other
European states are matching the extent of the UK’s implementation and what effects any differing
approaches to UK MCD implementation would have for UK firms lending to those states.

194. It would be helpful for the FCA to give some examples of which regulator’s rules would apply in
certain transactions. One such helpful example would be which of the home and host regulators’ rules would
have primacy where a UK firm has a branch in another EEA state, particularly where the FCA has
implemented the MCD differently to the FCA.

Lifetime mortgage definition

212. We welcome the FCA’s decision to remove the age limit for lifetime mortgages. This should prompt
more competition and more innovation in a market where demand for mortgages is likely to grow.

213. We would welcome the FCA’s view on what impact this change will have on the market. Of
particular interest would be whether the FCA expects a particular product type to emerge from this change
and what it expects the market outcomes will be.

214. We would welcome further discussions with the FCA on the implications for the UK mortgage
market of this rule change.

Other consultations

215. We acknowledge both government and the regulators have much to do to prepare the UK to be
compliant with the MCD. However, the industry will do the practical work to implement the requirements. We
reiterate this will be extensive both in scale and in financial cost and the impact magnified by the short
period in which firms have to implement the rules.

216. We ask that the FCA makes sure it considers the publication of any remaining MCD-related
consultations on firms’ MCD implementation projects. Any consultations on rules changes should be
published sufficiently early to allow firms to consider the impacts and to respond. The industry is particularly
interested in the FCA’s consultation on consumer buy-to-let and the FCA should ensure this is available as
early as possible in 2015.

217. The FCA of course has no power over what other organisations do with their consultations.
However, we would welcome the FCA doing as much as it can to ensure other organisations that will publish
consultations on the MCD, such as the PRA, do so soon.

218. We note the European authorities have published consultations relating to the MCD during the
FCA’s consultation period. The European Banking Authority has published consultations on arrears and
possessions and on creditworthiness assessment guidelines. This is unhelpful, since it suggests we will
soon be implementing an already-published directive the text for which is finalised but that is already being
supplemented.

Property valuations

219. The MCD sets standards for property valuations. The FCA proposes to introduce these standards in
its Prudential sourcebook for Mortgage and Home Finance Firms, and Insurance Intermediaries (MIPRU) for
the firms it prudentially regulates. We expect the Prudential Regulation Authority (PRA) will propose the
same rules for the firms it prudentially regulates and await the PRA’s consultation.

220. The FCA proposes to introduce the MCD’s property valuation standards in a new MIPRU 1.3. The
standards referred to at the proposed MCOB 1.1.3 are the
27 same that the Financial Stability Board referred to
in its April 2012 publication, FSB principles for sound residential mortgage underwriting practices. We agree
these standards are sensible ones.

221. The FSB’s Principle four on collateral management does not assume a site visit will always be
carried out to value a property, which ensures firms can use automated valuation models if they choose to:

Jurisdictions should ensure that lenders adopt and adhere to adequate internal risk management
and collateral management processes, which include sound appraisal processes. Proper collateral
management should include onsite inspections by lenders or appraisers; but onsite inspections
could be exempted if the lender or appraiser is able to demonstrate that the risk posed has been
adequately assessed through the overall collateral management process.

222. We believe this clearly allows the use of automated valuation models and we would welcome the
FCA explicitly recognising this in its policy statement.

Shared equity

223. We would welcome the FCA reviewing its proposed rules on shared equity to ensure that they do
not make less attractive partnering with government on schemes like Help to Buy. This will be all the more
important given any role the private sector may play in the future of Help to Buy.

224. Of particular importance is the reference at the proposed MCOB 4.7A.14 (1) to the need for firms to
take into account the term of the customer’s associated first charge mortgage. We believe this should only
extend to any associated second charge mortgage.

Section 2.11 Cost-benefit analysis

225. The cost-benefit analysis should include analysis of the impact on the UK mortgage market of the
MCD’s absence of a pipeline arrangement. We invoke our earlier points about the disruption to the market
from this. The FCA might have benefited from seeing them for itself.

226. We broadly agree with the FCA’s decision not to do a detailed cost-benefit analysis of the impact of
MCD on first charge lenders. A cost-benefit analysis is unnecessary so soon after MMR and for
implementation of compulsory rules.

227. The FCA’s analysis of the benefits would have been more useful because its focus is on the gains to
UK consumers. The FCA’s consultation analysis of the benefits of the MCD often restate what the EC says
are the benefits of the requirements. We expect the EC, which is responsible for the MCD, to say this.

228. We would have welcomed a UK-focused analysis of the costs to UK first charge lenders. There is
limited value to the UK market in reference to costs to mortgage lenders across Europe from compliance
with the ESIS requirements. Europe-wide costs are not the costs to UK firms and we would have liked to
have been able to calculate the net result of the costs of implementation and ongoing compliance and the
benefits.

Contact information

229. Our response has been prepared with our members. Please contact Andrew MacLachlan
(andrew.maclachlan@cml.org.uk) or Matt Burgum (matt.burgum@cml.org.uk) if you have comments or
questions.

28
Annex one: example amended ESIS language for UK consumers

(Introductory text)
This document was produced for [name of consumer] on [current date].

This document was produced on the basis of the information that you have provided so far and
on the current financial market conditions.

The information below remains valid until [validity date], (where applicable) apart from the interest
rate and other costs. After that date, it may change in line with market conditions.

(Where applicable) This document does not constitute an obligation for [name of creditor] to grant you
a mortgage loan.

1. Lender

[Name]

[Telephone number]

[Geographical address]

(Optional) [E-mail address]

(Optional) [Fax number]

(Optional) [Web address]

(Optional) [Contact person/point]

(Where applicable information as to whether advisory services are being provided:) [(We recommend,
having assessed your needs and circumstances, that you take out this mortgage loan. / We are not
recommending a particular mortgage loan for you. However, based on your answers to some
questions, we are giving you information about this mortgage loan so that you can make
your own choice.)]

2. (Where applicable) Credit Mortgage intermediary

[Name]

[Telephone number]

[Geographical address]

(Optional) [E-mail address]

(Optional) [Fax number]

(Optional) [Web address]

(Optional) [Contact person/point]

(Where applicable [information as to whether advisory services are being provided]) [(We
recommend, having assessed your needs and circumstances, that you take out this mortgage
loan./We are not recommending a particular mortgage loan for you. However, based on your answers
to some questions, we are giving you information about this mortgage loan so that you can make your
own choice.)]

[Remuneration]

3. Main features of the loanmortgage loan

Amount and currency of the loan mortgage loan to be granted: [value][currency]

(Where applicable) This loan mortgage loan is not in [national currency of the borrower].

(Where applicable) The value of your loan mortgage loan in [national currency of the borrower] could
change.

(Where applicable) For example, if the value of [national

29 currency of the borrower] fell by 20 %
relative to [credit currency], the value of your loan mortgage loan would increase to [insert amount in
national currency of the borrower]. However, it could be more than this if the value of [national
currency of the borrower] falls by more than 20 %.

(Where applicable) The maximum value of your loan mortgage loan will be [insert amount in national
currency of the borrower]. (Where applicable) You will receive a warning if the loan mortgage loan
amount reaches [insert amount in national currency of the borrower]. (Where applicable) You will
have the opportunity option to [insert right to renegotiate foreign currency or right to convert loan into
[relevant currency] and conditions].

Duration of the loanmortgage loan: [duration]

[Type of loan]

[Type of applicable interest rate]

Total amount to be reimbursedrepaid:

This means that you will pay back [amount] for every [unit of the currency] borrowed.

(Where applicable) [This/Part of this] is an interest-only loanmortgage. You will still owe [insert amount
of loan on an interest- only basis] at the end of the mortgage term.

(Where applicable) Value of the property assumed to prepare this information sheet: [insert amount]

(Where applicable) Maximum available loan mortgage loan amount relative to the value of the
property [insert ratio] or Minimum value of the property required to borrow the illustrated amount
[insert amount]

(Where applicable) [Security]

4. Interest rate and other costs

The annual percentage rate of charge (APRC) is the total cost of the mortgage mortgage loan
expressed as an annual percentage. The APRC is provided to help you to compare different offers.

The APRC applicable to your loan mortgage loan is [APRC].

It comprises:

Interest rate [value in percentage or, where applicable, indication of a reference rate and
percentage value of creditor’s spread]

[Other components of the APRC]

Costs to be paid on a one-off basis

(Where applicable) You will need to pay a fee to register the mortgage. [Insert amount of fee where
known or basis for calculation.]

Costs to be paid regularly

(Where applicable) This APRC is calculated using assumptions regarding the interest rate.

(Where applicable) Because [part of] your loan mortgage loan is a variable interest rate loanmortgage
loan, the actual APRC could be different from this APRC if the interest rate for of your loan mortgage
loan changes.

For example, if the interest rate rose to [scenario as described in Part B], the APRC could increase to
[insert illustrative APRC corresponding to the scenario].

(Where applicable) Please note that this APRC is calculated on the basis that the interest rate
remains at the level fixed for the initial period throughout
30 the duration of the contractthis mortgage
loan.

(Where applicable) The following costs are not known to the lender and are therefore not included in
the APRC: [Costs]

(Where applicable) You will need to pay a fee to register the mortgage.

Please make sure that you are aware of all other taxes and costs associated with your loanmortgage
loan.

5. Frequency and number of payments

Repayment frequency: [frequency]

Number of payments: [number]

6. Amount of each instalment

[Amount] [currency]

Your income may change. Please consider whether you will still be able to afford your
[frequency] repayment instalments if your income falls.

(Where applicable) Because [this/part of this] is an interest-only loan mortgage loan you will need to
make separate arrangements to repay the [insert amount of loan on an interest-only basis] you will
owe at the end of the mortgage term. Remember to add any extra payments you will need to make to
the instalment amount shown here.

(Where applicable) The interest rate on [part of] this loan mortgage loan can change. This means the
amount of your instalments could increase or decrease. For example, if the interest rate rose to
[scenario as described in Part B] your payments could increase to [insert instalment amount
corresponding to the scenario].

(Where applicable) The value of the amount you have to pay in [national currency of the borrower]
each [frequency of instalment] could change. (Where applicable) Your payments could increase to
[insert maximum amount in national currency of the borrower] each [insert period]. (Where applicable)
For example, if the value of [national currency of the borrower] fell by 20 % relative to [credit currency]
you would have to pay an extra [insert amount in national currency of the borrower] each [insert
period]. Your payments could increase by more than this.

(Where applicable) The exchange rate used for converting your repayment in [credit currency] to
[national currency of the borrower] will be the rate published by [name of institution publishing
exchange rate] on [date] or will be calculated on [date] using [insert name of benchmark or method of
calculation].

(Where applicable) [Details on tied savings products, deferred-interest loans]

7. (Where applicable) Illustrative repayment table

This table shows the amount to be paid every [frequency].

The instalments (column [relevant no.relevant no. or name]) are the sum of interest to be paid (column
[relevant no.relevant no. or name]), where applicable, capital paid (column [relevant no.relevant no. or
name]) and, where applicable, other costs (column [relevant no.relevant no. or name]). (Where
applicable) The costs in the other costs column relate to [list of costs]. Outstanding capital (column
[relevant no.relevant no. or name]) is the amount of the mortgage that remains to be repaid after each
instalment.

[Table]

8. Additional obligations
The borrowerYou must comply with the following obligations in order to benefit from the lending
conditions described in this document.

[Obligations]
31
(Where applicable) Please note that the lending conditions described in this document
(including the interest rate) may change if these obligations are not complied with.

(Where applicable) Please note the possible consequences of terminating at a later stage any of
the ancillary services relating to the loanmortgage loan:

[Consequences]

9. Early repayment
You have the possibility right to repay this loan early, either fully or partially.

(Where applicable) [Conditions]

(Where applicable) What you will have to pay if you choose to repay your mortgage earlyExit charge:
[insert amount or, where not possible, the method of calculation]

(Where applicable) Should you decide to repay this loan early, please contact us to ascertain the
exact level of the exit charge at that moment.

10. Flexible features

(Where applicable) [Information on portability/subrogation] You have the possibility option to transfer
this loan mortgage loan to another [lender][or] [property]. [Insert conditions]

(Where applicable) You do not have the possibility option to transfer this loan mortgage to another
[lender] [or] [property].

(Where applicable) Additional features: [insert explanation of additional features listed in

Part B and, optionally, any other features offered by the lender as part of the loan mortgage
agreement not referred to in previous sections].

11. Other rights of the borrowerYour other rights

You have [length of reflection period] after [point in time when the reflection period begins] to reflect
consider whether to go ahead withbefore committing yourself to taking out this loanmortgage loan.

12. Complaints
If you have a complaint, please contact [insert internal contact point and source of information on
procedure].

(Where applicable) Maximum time for handling the complaint [period of time]

(Where applicable) [If we do not resolve the complaint to your satisfaction internally,] you can also
contact: [insert name of external body for out-of-court complaints and redress]

(Where applicable) or you can contact FIN-NET for details of the equivalent body in your own country.

13. Non-compliance with the commitments linked to the loanmortgage: consequences for the
borroweryou
[Types of non-compliance]

[Financial and/or legal consequences]

Should you encounter difficulties in making your [frequency] payments, please contact us straight
away to explore possible solutions.

(Where applicable) As a last resort, your home may be repossessed if you do not keep up with
payments.

(Where applicable) 14. Additional information

(Where applicable) [Indication of the law applicable to the credit contractmortgage offer].

(Where the lender intends to use a language different from the language of the ESIS) Information
32
and contractual terms will be supplied in [language]. With your consent, we intend to
communicate in [language/s] during the duration of the loan mortgageagreement.

[Insert statement on right to be provided with or offered, as applicable, a draft credit agreement]

15. SupervisorRegulator
This lender is supervised authorised and regulated by [Name(s), and web address(es) of supervisory
authority/ies]

(Where applicable) This credit mortgage intermediary is supervised authorised and regulated by
[Name and web address of supervisory authority].

33
Annex two: suggested expansion to instructions to complete the ESIS

Instructions to complete the ESIS

1. This Annex belongs to MCOB 5A.5.3 R(3).

2. Unless italicised the definitions used in the MCD apply.

3. Where the number of an instruction listed below is followed by a G that instruction is

guidance rather than a rule.

4. Where the MCD regulated mortgage contract is divided into more than one part the
required ESIS content must be set out in respect of each part.

Section ‘Introductory text’

(1) The validity date shall be properly highlighted. For the purpose of this section, the ‘validity date’
means the length of time the information, e.g. the borrowing rate, contained in the ESIS will remain
unchanged and will apply should the creditor decide to grant the credit within this period of time.
Where the determination of the applicable borrowing rate and other costs depends on the results of
the selling of underlying bonds, the eventual borrowing rate and other costs may be different from
those stated. In those circumstances only, it shall be stipulated that the validity date does not apply
to the borrowing rate and other costs by adding the words: ‘apart from the interest rate and other
costs’.

Section ‘1. Lender’

(1) Name, telephone number, and geographical address of the creditor shall refer to the contact
information that the consumer may use for future correspondence.

(2) Information on the e-mail address, fax number, web address and contact person/point is
optional.

(3) In line with Article 3 of Directive 2002/65/EC, where the transaction is being offered at a distance, the
creditor shall indicate, where applicable, the name and geographical address of its representative in
the Member State of residence of the consumer. Indication of the telephone number, e-mail address
and web address of the representative of the credit provider is optional.

(4) Where Section 2 is not applicable, the creditor shall inform the consumer whether advisory
services are being provided and on what basis using the wording in MCOB 5A Annex 1 R.

(Where applicable) Section ‘2. Credit intermediary’

Where the product information is being provided to the consumer by a credit intermediary, that
intermediary shall include the following information:

(1) Name, telephone number and geographical address of the credit intermediary shall refer to the
contact information that the consumer may use for future correspondence.

(2) Information on the e-mail address, fax number, web address and contact person/point is
optional.

(3) The credit intermediary shall inform the consumer whether advisory services are being
provided and on what basis using the wording in MCOB 5A Annex 1 R.

(3A) G In the event that the creditor provides the consumer with a binding offer and the
characteristics of the offer are different from the information in the ESIS previously provided by the
credit intermediary , if the credit intermediary confirms to the creditor that the revised transaction can
proceed, the creditor may complete section 2 and update the wording referred to at (3) to say
“[Name of credit intermediary] recommends … / [Name of credit intermediary] is not
recommending…” instead of “We recommend …/We are not recommending”.
34
 (4) An explanation of how the credit intermediary is being remunerated. Where it is receiving
commission from a creditor, the amount and, where different from the name in Section 1, the
name of the creditor shall be provided.

(5) The explanation of how the credit intermediary is being remunerated shall not include
remuneration paid to a third party.

(6) The explanation of how the credit intermediary is being remunerated shall include a range or
representative examples where the amount is unknown at the time of providing the ESIS.

Section ‘3. Main features of the loan’

(1) This section shall clearly explain the main characteristics of the credit, including the value and
currency and the potential risks associated with the borrowing rate, including the ones referred to
in point (8), and amortisation structure. Firms can indicate the currency using either its common
trading abbreviation (GBP, EUR, USD etc.) or its symbol (£, €, $) and so on.

(2) Where the credit currency is different from the national currency of the consumer, the creditor shall
indicate that the consumer will receive a regular warning at least when the exchange rate fluctuates
by more than 20 %, where applicable the right to convert the currency of the credit agreement or to
the possibility to renegotiate the conditions and any other arrangements available to the consumer
to limit their exposure to exchange rate risk. Where there is a provision in the credit agreement to
limit the exchange rate risk, the creditor shall indicate the maximum amount the consumer could
have to pay back. Where there is no provision in the credit agreement to limit the exchange rate risk
to which the consumer is exposed to a fluctuation in the exchange rate of less than 20 %, the
creditor shall indicate an illustration of the effect of a 20 % fall in the value of consumer’s national
currency relative to the credit currency on the value of the credit.

(3) The duration of the credit shall be expressed in years or months (or a combination of the two),
whichever is the most relevant. Where the duration of the credit can vary during the lifetime of the
contract, the creditor shall explain when and under which conditions this can occur. Where the
credit is open-ended, for example, for a secured credit card, the creditor shall clearly state that
fact.

(4) The type of credit shall be clearly indicated (e.g. mortgage credit, home loan, secured credit card).
The description of the type of credit shall clearly indicate how the capital and the interest shall be
reimbursed during the life of the credit (i.e. the amortisation structure), specifying clearly whether the
credit agreement is on capital repayment or interest-only basis, or a mixture of the two.

(5) Where all or part of the credit is an interest-only credit, a statement clearly indicating that fact shall be
inserted prominently at the end of this section using the wording in MCOB 5A Annex 1 R.

(6) This section shall explain whether the borrowing rate is fixed or variable and, where applicable, the
periods during which it will remain fixed; the frequency of subsequent revisions and the existence
of limits to the borrowing rate variability, such as caps or floors.

The formula used to revise the borrowing rate and its different components (e.g. reference rate,
interest rate spread) shall be explained. The creditor shall indicate, e.g. by means of a web
address, where further information on the indices or rates used in the formula can be found, e.g.
Euribor or central bank reference rate.

(7) If different borrowing rates apply in different circumstances, the information shall be
provided on all applicable rates.

(8) The ‘total amount to be reimbursed’ corresponds to the total amount payable by the consumer. It
shall be shown as the sum of the credit amount and the total cost of the credit to the consumer.
Where the borrowing rate is not fixed for the duration of the contract, it shall be highlighted that this
amount is illustrative and may vary in particular in relation with the variation in the borrowing rate.

(9) Where the credit will be secured by a mortgage on the immovable property or another comparable
security or by a right related to immovable property, the creditor shall draw the consumer’s
attention to this. Where applicable the creditor shall indicate the assumed value of the immovable
property or other security used for the purpose of35 preparing this information sheet.
 (9A) G In order for the firm to comply with the principle of 'fair, clear and not misleading' in MCOB
3A.2.1R(1) an estimated valuation, where the estimated valuation is not that provided by the
consumer, must be a reasonable assessment based on all the facts available at the time. For
example, an overstated valuation could enable a more attractive MCD regulated
mortgage contract to be illustrated on the basis of a lower ratio of the loan amount to the
property value - for example, one with a lower rate of interest, or without a higher lending
charge.

(10) The creditor shall indicate, where applicable, either:

a) ‘maximum available loan amount relative to the value of the property’, indicating the loan-to-
value ratio. This ratio is to be accompanied by an example in absolute terms of the maximum
amount that can be borrowed for a given property value; or

b) the ‘minimum value of the property required by the creditor to lend the illustrated
amount’.

(11) Where credits are multi-part credits (e.g. concurrently part fixed rate, part variable rate), this
shall be reflected in the indication of the type of credit and the required information shall be given for
each part of the credit.

(12) The amount of the loan to be granted is:

a) in cases where on the basis of the information obtained from the consumer before providing the
ESIS it is clear that the consumer would not be eligible to borrow the amount he requested, an
estimate of the amount that the consumer could borrow based on the information obtained from the
consumer, this does not require information to be obtained from the consumer before providing an
ESIS in order to ascertain the amount the customer is eligible to borrow, instead, this means that a
firm does not have to provide a consumer with an ESIS for an amount it knows the customer would
not be eligible for, based on whatever information it has obtained from the customer before
providing the ESIS; or

b) where the MCD regulated mortgage contract is a revolving credit agreement such as a
secured overdraft or mortgage credit card, the total borrowing that the firm is willing to provide
under the MCD regulated mortgage contract; or

c) where it is known that the loan will be released in instalments, for example in the case of a self-
build mortgage:

i) where the lender has made a binding offer for the full amount , the total amount of the loan
required and not the amount of the initial instalment;

ii) where the lender has made a binding offer for an initial amount, the initial amount; and

iii) where the lender’s binding offer for an initial amount has been replaced by a binding offer for a
larger amount , the larger amount.

Section ‘4. Interest rate’ and other costs

(1) The reference to ‘interest rate’ corresponds to the borrowing rate or rates.

(2) The borrowing rate shall be mentioned as a percentage value. Where the borrowing rate is variable
and based on a reference rate the creditor may indicate the borrowing rate by stating a reference
rate and a percentage value of creditor’s spread. The creditor shall however indicate the value of
the reference rate valid on the day of issuing the ESIS.

Where the borrowing rate is variable the information shall include: (a) the assumptions used to
calculate the APRC; (b) where relevant, the applicable caps and floors and (c) a warning that the
variability could affect the actual level of the APRC. In order to attract the consumer’s attention the
font size used for the warning shall be bigger and shall figure prominently in the main body of the
ESIS. The warning shall be accompanied by an illustrative example on the APRC. Where there is
a cap on the borrowing rate, the example shall assume
36 that the borrowing rate rises at the earliest
 possible opportunity to the highest level foreseen in the credit agreement. Where there is no cap
the example shall illustrate the APRC at the highest borrowing rate in at least the last 20 years, or
where the underlying data for the calculation of the borrowing rate is available for a period of less
than 20 years the longest period for which such data is available, based on the highest value of
any external reference rate used in calculating the borrowing rate where applicable or the highest
value of a benchmark rate specified by the FCA or another competent authority or EBA where the
creditor does not use an external reference rate. Such requirement shall not apply to credit
agreements where the borrowing rate is fixed for a material initial period of several years and may
then be fixed for a further period following negotiation between the creditor and the consumer. For
credit agreements where the borrowing rate is fixed for a material initial period of several years and
may then be fixed for a further period following negotiation between the creditor and the consumer,
the information shall include a warning that the APRC is calculated on the basis of the borrowing
rate for the initial period. The warning shall be accompanied by an additional, illustrative APRC
calculated in accordance with MCOB 10A.1.4 R. Where credits are multi-part credits (e.g.
concurrently part fixed rate, part variable rate), the information shall be given for each part of the
credit. However, the additional illustrative APRC shall be calculated and stated once in respect of
the entire credit agreement.

(2A) The FCA’s benchmark rate is the difference between the Bank of England’s base rate on the
date the ESIS is issued and the highest value of the Bank of England’s base rate over at least the
last 20 years, added to the borrowing rate shown in the ESIS.

(2B) When more than one interest rate applies during the term of the loan, for example, because
there is an initial fixed or discounted interest rate period, the FCA’s benchmark rate shall be
calculated by reference to the reversionary borrowing rate shown in the ESIS.

(2C) G When calculating the FCA’s benchmark rate:

(a) the last 20 years may be calculated from up to three months prior to the date the
ESIS is issued; and

(b) the period for calculating the FCA’s benchmark rate may be extended beyond the
last 20 years to any period longer than 20 years.

(2D) In the event of a scenario in column (1) in the table below, the illustrative example of the
APRC (the additional APRC) shall be calculated in accordance with column (2) of that table.

Scenario Calculation of additional APRC

N.B. A creditor’s standard variable rate is not to be used

as an external reference rate (ERR)

1. Mortgage with an Calculate the APRC based on the borrowing rate rising at the
interest rate cap earliest possible opportunity to the level of the cap.

2. Where the product is not Use the FCA’s benchmark rate.

linked to an ERR

3. Creditor uses an ERR and Use the highest ERR in the previous 20 years, and apply the
has 20 years of data highest margin over that or lowest margin under it, to produce the
relating to the margin highest additional APRC.
applied by the creditor

37
4. Creditor uses an ERR and Use the highest ERR in the previous 20 years, and apply the
has less than 20 years of highest margin over that or lowest margin under it, used in the
data relating to the margin period of data available, to produce the highest additional APRC.
applied by the creditor

5. Creditor comprises a Use the highest ERR in the previous 20 years with respect to the
group which contains pricing approach for the specific legal entity or product brand and
separate legal entities or apply the highest margin over that or lowest margin under it to
produce the highest additional APRC
comprises distinct product
brands and has
20 years of data relating to
the margin applied by that
legal entity or product
brand. It may have similar
products across entities or
brands within the same
group or company with
different margins above or
below the ERR.

6. Creditor comprises a group Use the highest ERR in the previous 20 years with respect to the
which contains separate pricing approach for the specific legal entity or product brand and
legal entities or comprises apply the highest margin over that or lowest margin under it used
distinct product brands and in the period of data available to produce the highest additional
has less than 20 years of APRC.
data relating to the margin
applied by that legal entity
or product brand.
It may have similar products
across entities
or brands within the same
group or company with
different margins above or
below the ERR.

7. Creditor has previously Where the purchaser is carrying on new lending under the
purchased a brand that purchased brand - same as above, using previous firm’s data
uses an ERR and has 20 where relevant and where it may be reasonably obtained.
years of data relating to
the margin applied by the
creditor for same product

38
8. Creditor has previously Where the purchaser is carrying on new lending under the
purchased a brand that purchased brand - same as above, using previous firm’s data
uses an ERR and has less where relevant and where it may be reasonably obtained.
than 20 years of data Otherwise use the FCA’s benchmark rate.
relating to the margin
applied by the creditor
for same product

9. Creditor has different Calculate using the method which produces the highest
ERR calculation methods additional APRC
that apply over time (e.g.
0.5% over
Bank of England rate for
the first two years and then
2% over Bank of England
rate for the rest of the
mortgage lifetime)

10. Creditor has different Calculate using the ERR where applicable and the FCA’s
methods that apply to benchmark rate where applicable, and use both to calculate the
different proportions of the illustrative APRC.
principal (e.g. ERR + x%
applies to 50% principal
and SVR applies to the
other 50%)

11. Creditor uses an ERR
where its basis has
changed in the past 20
years
Consider whether there was an equivalent predecessor
ERR, and use the ERR (and its equivalent predecessor(s)
if any) provided that it (or they) have existed at least 20
years, otherwise use the FCA’s benchmark rate.

39
 (3) In the section on ‘other components of the APRC’ all the other costs contained in the APRC
shall be listed, including one-off costs such as administration fees, and regular costs, such as
annual administration fees. The creditor shall list each of the costs by category (costs to be
paid on a one-off basis, costs to be paid regularly and included in the instalments, costs to be
paid regularly but not included in the instalments), indicating their amount, to whom they are to
be paid and when. This does not have to include costs incurred for breaches of contractual
obligations. Where the amount is not known, the creditor shall provide an indication of the
amount if possible, or if not possible, how the amount will be calculated and specify that the
amount provided is indicative only. Where certain costs are not included in the APRC because
they are unknown to the creditor, this shall be highlighted.

Where the consumer has informed the creditor of one or more components of his preferred
credit, such as the duration of the credit agreement and the total amount of credit, the creditor
shall, where possible, use those components; if a credit agreement provides different ways of
drawdown with different charges or borrowing rates and the creditor uses the assumptions set
out in MCOB 10.3.1 R, it shall indicate that other drawdown mechanisms for this type of credit
agreement may result in a higher APRC. Where the conditions for drawdown are used for
calculating the APRC, the creditor shall highlight the charges associated with other drawdown
mechanisms that are not necessarily the ones used in calculating the APRC.

(4) Where a fee is payable for registration of the mortgage or comparable security that shall be
disclosed in this section with the amount, where known, or where this is not possible the basis
for determining the amount. Where the fees are known and included in the APRC the existence
and amount of the fee shall be listed under ‘Costs to be paid on a one-off basis’. Where the fees
are not known to the creditor and therefore not included in the APRC the existence of the fee
shall be clearly mentioned in the list of costs which are not known to the creditor. In either case
the standardised wording in MCOB 5A Annex 1 R shall be used under the appropriate heading.

Section ‘5. Frequency and number of payments’

(1) Where payments are to be made on a regular basis, the frequency of payments shall be
indicated (e.g. monthly). Where the frequency of payments will be irregular, this shall be
clearly explained to the consumer.

(2) The number of payments indicated shall cover the whole duration of the credit.

Section ‘6. Amount of each instalment’

(1) The credit currency and currency of the instalments shall be clearly indicated.

(2) Where the amount of the instalments may change during the life of the credit, the creditor
shall specify the period during which that initial instalment amount will remain unchanged
and when and how frequently afterwards it will change.

(3) Where all or part of the credit is an interest-only credit, a statement clearly indicating that fact,
shall be inserted prominently at the end of this section using the wording in MCOB 5A Annex
1 R.

If there is a requirement for the consumer to take out a tied savings product as a condition for
being granted an interest-only credit secured by a mortgage or another comparable security,
the amount and frequency of any payments for this product shall be provided.

(4) Where the borrowing rate is variable the information shall include a statement indicating that
fact, using the wording in MCOB 5A Annex 1 R and an illustration of a maximum instalment
amount. Where there is a cap, the illustration shall show the amount of the instalments if the
borrowing rate rises to the level of the cap. Where there is no cap, the worst case scenario shall
illustrate the level of instalments at the highest borrowing rate in the last 20 years, or where the
underlying data for the calculation of the borrowing rate is available for a period of less than 20
years the longest period for which such data is available, based on the highest value of any
external reference rate used in calculating the borrowing rate where applicable, or the highest
value of a benchmark rate specified by a competent authority or EBA where
the creditor does not use an external reference rate. The requirement to provide an illustrative
example shall not apply to credit agreements40 where the borrowing rate is fixed for a material
 initial period of several years and may then be fixed for a further period following negotiation
between the creditor and the consumer. Where credits are multi-part credits (e.g. concurrently
part fixed rate, part variable rate), the information shall be given for each part of the credit, and
in total.

(5) (Where applicable) Where the credit currency is different from the consumer’s national currency
or where the credit is indexed to a currency which is different from the consumer’s national
currency, the creditor shall include a numerical example clearly showing how changes to the
relevant exchange rate may affect the amount of the instalments using the wording in MCOB
5A Annex 1 R. That example shall be based on a 20 % reduction in the value of the
consumer’s national currency together with a prominent statement that the instalments could
increase by more than the amount assumed in that example. Where there is a cap which limits
that increase to less than 20 %, the maximum value of the payments in the consumer’s
currency shall be given instead and the statement on the possibility of further increases
omitted.

(6) Where the credit is fully or partly a variable rate credit and point 3 applies, the illustration in
point 5 shall be given on the basis of the instalment amount referred to in point 1.

(7) Where the currency used for the payment of instalments is different from the credit currency or
where the amount of each instalment expressed in the consumer’s national currency depends
on the corresponding amount in a different currency, this section shall indicate the date at
which the applicable exchange rate is calculated and either the exchange rate or the basis on
which it will be calculated and the frequency of their adjustment. Where applicable such
indication shall include the name of institution publishing the exchange rate.

(8) Where the credit is a deferred-interest credit under which interest due is not fully repaid by the
instalments and is added to the total amount of credit outstanding, there shall be an
explanation of: how and when deferred interest is added to the credit as a cash amount; and
what the implications are for the consumer in terms of their remaining debt.

Section ‘7. Illustrative repayment table’

(1) This section shall be included where the credit is a deferred interest credit under which
interest due is not fully repaid by the instalments and is added to the total amount of credit
outstanding or where the borrowing rate is fixed for the duration of the credit agreement.
Where the consumer has the right to receive a revised amortisation table, this shall be
indicated along with the conditions under which the consumer has that right.

(2) The table to be included in this section shall contain the following columns: ‘repayment
schedule’ (e.g. month 1, month 2, month 3), ‘amount of the instalment’, ‘interest to be paid per
instalment’, ‘other costs included in the instalment’ (where relevant), ‘capital repaid per
instalment’ and ‘outstanding capital after each instalment’.

(3) For the first repayment year the information shall be given for each instalment and a subtotal
shall be indicated for each of the columns at the end of that first year. For the following years,
the detail can be provided on an annual basis. An overall total row shall be added at the end
of the table and shall provide the total amounts for each column. The total cost of the credit
paid by the consumer (i.e. the overall sum of the ‘amount of the instalment’ column) shall be
clearly highlighted and presented as such.

(4) Where the borrowing rate is subject to revision and the amount of the instalment after each
revision is unknown, the creditor may indicate in the amortisation table the same instalment
amount for the whole credit duration. In such a case, the creditor shall draw that fact to the
attention of the consumer by visually differentiating the amounts which are known from the
hypothetical ones (e.g. using a different font, borders or shading). In addition, a clearly
legible text shall explain for which periods the amounts represented in the table may vary and
why.

Section ‘8. Additional obligations’

(1) The creditor shall refer in this section to obligations such as the obligation to insure the
immovable property, to purchase life insurance, 41 to have a salary paid into an account with the
 creditor or to buy any other product or service. For each obligation, the creditor shall specify
towards whom and by when the obligation needs to be fulfilled.

(2) The creditor shall specify the duration of the obligation, e.g. until the end of the credit
agreement. The creditor shall specify for each obligation any costs to be paid by the
consumer, which are not included in the APRC.

(3) The creditor shall state whether it is compulsory for the consumer to hold any ancillary services
to obtain the credit on the stated terms, and if so whether the consumer is obliged to purchase
them from the creditor’s preferred supplier or whether they may be purchased from a provider
of consumer’s choice. Where such possibility is conditional on the ancillary services meeting
certain minimum characteristics, such characteristics shall be described in this section.

Where the credit agreement is bundled with other products the creditor shall state the key
features of those other products and clearly state whether the consumer has a right to
terminate the credit agreement or the bundled products separately, the conditions for and
implications of doing so, and, where applicable, of the possible consequences of terminating
the ancillary services required in connection with the credit agreement.

Section ‘9. Early repayment’

(1) The creditor shall indicate under what conditions the consumer can repay the credit early,
either fully or partially.

(2) In the section on exit charges the creditor shall draw the consumer’s attention to any exit
charge or other costs payable on early repayment in order to compensate the creditor and
where possible indicate their amount. In cases where the amount of compensation would
depend on different factors, such as the amount repaid or the prevailing interest rate at the
moment of the early repayment, the creditor shall indicate how the compensation will be
calculated and provide the maximum amount that the charge might be, or where this is not
possible, an illustrative example in order to demonstrate to the consumer the level of
compensation under different possible scenarios.

Section ‘10. Flexible features’

(1) Where applicable, the creditor shall explain the possibility to and conditions for transferring the
credit to another creditor or immovable property.

(2) (Where appropriate) Additional features: Where the product contains any of the features listed
in point 5, this section must list these features and provide a brief explanation of: the
circumstances in which the consumer can use the feature; any conditions attached to the
feature; if the feature being part of the credit secured by a mortgage or comparable security
means that the consumer loses any statutory or other protections usually associated with the
feature; and the firm providing the feature (if not the creditor).

(3) If the feature contains any additional credit, then this section must explain to the consumer:
the total amount of credit (including the credit secured by the mortgage or comparable
security); whether the additional credit is secured or not; the relevant borrowing rates; and
whether it is regulated or not. Such additional credit amount shall either be included in the
original creditworthiness assessment or, if it is not, this section shall make clear that the
availability of the additional amount is dependent on a further assessment of the consumer’s
ability to repay.

(4) If the feature involves a savings vehicle, the relevant interest rate must be explained.

(5) The possible additional features are: ‘Overpayments/Underpayments’ [paying more or less
than the instalment ordinarily required by the amortisation structure]; ‘Payment holidays’
[periods where the consumer is not required to make payments]; ‘Borrow back’ [ability for the
consumer to borrow again funds already drawn down and repaid];‘Additional borrowing
available without further approval’; ‘Additional secured or unsecured borrowing’ [in
accordance with point 3 above]; ‘Credit card’; ‘Linked current account’; and ‘Linked savings
account’.
42
(6) The creditor may include any other features offered by the creditor as part of the credit
agreement not mentioned in previous sections.

Section ‘11. Other rights of the borrower’

(1) The creditor shall clarify the right of withdrawal and where applicable other rights such as,
portability (including subrogation) that exist, specify the conditions to which this/these right(s) is
subject, the procedure that the consumer will need to follow in order to exercise this/these right(s),
inter alia, the address to which the notification of withdrawal shall be sent, and the corresponding
fees (where applicable).

(2) Where a reflection period for the consumer applies this shall be clearly mentioned.

(3) In line with Article 3 of Directive 2002/65/EC, where the transaction is being offered at a distance,
the consumer shall be informed of the absence of a right of withdrawal.

Section ‘12. Complaints’

(1) This Section shall indicate the internal contact point [name of the relevant department] and a
means of contacting them to complain [Geographical address] or [Telephone number] or
[Contact person:] [contact details] and a link to the complaints procedure on the relevant page
of a website or similar information source.

(1A) The information required by (1) is in respect of the firm providing the ESIS.

(2) It shall indicate the name of the relevant external body for out-of-court complaints and redress
and where using the internal complaint procedure is a precondition for access to that body,
indicate that fact using the wording in MCOB 5A Annex 1 R.

(3) In the case of credit agreements with a consumer who is resident in another Member State,
the creditor shall refer to the existence of FIN-NET (http://ec.europa.eu/internal_market/fin-
net/).

Section ‘13. Non-compliance with the commitments linked to the credit: consequences for the
borrower’

(1) Where non-observance of any of the consumer’s obligations linked to the credit may have
financial or legal consequences for the consumer, the creditor shall describe in this section the
different main cases (e.g. late payments/ default, failure to respect the obligations set out in
Section 8 ‘Additional obligations’) and indicate where further information could be obtained.

(1A) The disclosure required by (1) relates to “main cases” rather than every case.

(2) (For each of those cases, the creditor shall specify, in clear, easy comprehensible terms, the
sanctions or consequences to which they may give rise. Reference to serious consequences
shall be highlighted.

(2A) The description required by (2) must be a summary which can be read and understood on
its own. The detail can be provided separately in the terms and conditions.

(3) Where the immovable property used to secure the credit may be returned or transferred to the
creditor, if the consumer does not comply with the obligations, this section shall include a
statement indicating that fact, using the wording in MCOB 5A Annex 1 R.

Section ‘14. Additional information’

(1) In the case of distance marketing, this section will include any clause stipulating the law
applicable to the credit agreement or the competent court.

(2) Where the creditor intends to communicate with the consumer during the life of the contract in a
language different from the language of the ESIS that fact shall be included and the language of
communication named. This is without prejudice to point (g) of point
43
3 of paragraph 1 of Article 3 of Directive 2002/65/EC.
(3) The creditor or credit intermediary shall state the consumer’s right to be provided with or offered,
as applicable, a copy of the draft credit agreement at least once an offer binding on the creditor
has been made.

Section ‘15. Supervisor’Regulator’

(1) The relevant authority or authorities for the supervision of the pre-contractual stage of lending
shall be indicated. Firms should use the standard text regarding authorisation and
supervision by the FCA and, where applicable, the PRA.

44