Topic 21 Flashcards
Conduct of business requirements II
1
Q
What is the primary FCA rulebook that governs mortgage advice?
A
The FCA’s rules on mortgage advice are detailed in the Mortgages and Home Finance: Conduct of Business (MCOB) sourcebook.
2
Q
What activities are covered under the MCOB rules?
A
The MCOB rules cover lending, administration, advice, and the arranging of loans.
3
Q
Who must be authorised to provide mortgage-related services?
A
Banks, building societies, specialist lenders, and mortgage intermediaries must be authorised to carry out mortgage-related activities.
4
Q
What qualification must mortgage sellers hold?
A
Mortgage sellers must hold a relevant mortgage qualification, such as CeMAP®.
5
Q
Which organisations oversee mortgage advisers, arrangers, and lenders?
A
The Financial Ombudsman Service and the Financial Services Compensation Scheme oversee mortgage advisers, arrangers, and lenders.
6
Q
How was the scope of MCOB extended in March 2016?
A
MCOB was extended to cover second-charge loans due to the implementation of the EU Mortgage Credit Directive (MCD).
7
Q
What are the three conditions that define a regulated mortgage contract?
A
- The lender provides credit to an individual or
trustees. - The contract is secured on land.
- At least 40% of the land is used or intended to be
used as a dwelling.
8
Q
How did the definition of “land” change after the UK left the EU?
A
For contracts before 1 January 2021, “land” referred to the UK or EEA.
For contracts after 1 January 2021, “land” refers only to the UK.
9
Q
What is a first charge mortgage?
A
A first charge mortgage gives the lender the first right to be repaid from the proceeds of a property sale if the borrower defaults.
10
Q
What is a second charge mortgage?
A
A second charge mortgage ranks behind the first charge lender, meaning repayment only occurs after the first charge loan is fully settled.
11
Q
What types of loans are covered under MCOB?
A
Home improvement loans
Debt consolidation loans
Equity release schemes (e.g., lifetime mortgages, home reversion schemes)
12
Q
What is Consumer Buy to Let (CBTL)?
A
A category of buy-to-let mortgages covered under the Mortgage Credit Directive (MCD) Order 2015, rather than MCOB rules.
13
Q
Who regulates Consumer Buy to Let (CBTL) activity?
A
The FCA regulates, supervises, and takes action against firms engaged in CBTL activity.
14
Q
What key rules apply to Consumer Buy to Let (CBTL) mortgages?
A
Pre-contract disclosure
Assessing creditworthiness
Arrears management
15
Q
What types of loans does MCOB apply to?
A
First-charge loans secured on residential property
Second-charge loans secured on residential property
16
Q
What is the key difference between Consumer Buy to Let (CBTL) and Business Buy to Let (BTL)?
A
Business BTL is carried out by professional landlords running a rental business for profit, whereas CBTL mortgages are taken out due to circumstances rather than a deliberate business decision.
17
Q
Why are Consumer Buy to Let (CBTL) mortgages regulated?
A
CBTL mortgages are regulated to protect individuals who become landlords due to circumstances, such as inheriting a property or needing to relocate without selling their home.
18
Q
Give an example of a situation where a mortgage would qualify as Consumer Buy to Let (CBTL).
A
A homeowner relocates for work and rents out their property instead of selling it, or someone inherits a property and rents it out because it is difficult to sell.
19
Q
How do lenders determine whether a borrower is a business landlord or a consumer landlord?
A
Lenders can use their own procedures or require the borrower to complete a declaration confirming whether they are a business borrower.
20
Q
What happens if a property is let out to a close relative?
A
Unless the mortgage qualifies as Business BTL, it is regulated under MCOB rules rather than the CBTL regime.
21
Q
Who is considered a “close relative” under MCOB rules?
A
A spouse, civil partner, parent, brother, sister, or grandparent of the borrower.
22
Q
Would Ella and Martin’s mortgage for a university house for their daughter Lydia qualify as a CBTL mortgage?
A
No, since the property is being let to a close relative (their daughter), it would be regulated under MCOB rules rather than CBTL.
23
Q
What does MCOB 1 cover?
A
It explains the scope of the rules, including to whom they apply and for what types of mortgages.
24
Q
What are the key elements of MCOB 2?
A
It includes correct terminology, clear and fair customer communication, rules on fees/commissions, and FCA record accessibility.
25
What does MCOB 2A cover under the Mortgage Credit Directive (MCD)?
It includes rules on remuneration, product tying, foreign currency loans, and early repayments.
26
What are the key rules under MCOB 3A regarding financial promotions?
Unsolicited real-time promotions are not permitted, non-real-time promotions must be clear and fair, comparisons must be relevant, and promotions must state repossession risks.
27
What does MCOB 4 and 4A cover regarding advising and selling?
Advisers must clarify their market scope, ensure mortgage suitability, maintain records, disclose key service details, and follow special rules for debt consolidation.
28
What must be included in pre-application disclosure under MCOB 5 and 5A?
The APRC, monthly instalment amount, and impact of a 1% interest rate rise, all provided in a European Standardised Information Sheet (ESIS).
29
What must a mortgage offer document include under MCOB 6 and 6A?
Validity period, no withdrawal rights after completion, tariff of charges, and a minimum seven-day reflection period for the borrower.
30
What details must be confirmed before the first mortgage payment under MCOB 7 and 7A?
Payment details, related product information, borrower responsibilities (for interest-only), and arrears guidance.
31
What additional checks apply to interest-only mortgages under MCOB 7 and 7A?
Lenders must periodically confirm that a credible repayment strategy remains in place.
32
What does MCOB 8 and 9 cover regarding equity release?
It outlines FCA rules on lifetime mortgages and home reversion schemes, requiring advisers to hold a specialist qualification.
33
What do MCOB 10 and 10A cover?
The calculation of Annual Percentage Rate (APR) and Annual Percentage Rate of Charge (APRC).
34
What is the main requirement under MCOB 11 and 11A regarding responsible lending?
Lenders must have a written policy and assess a borrower’s ability to repay, including verifying repayment strategies for interest-only mortgages.
35
What restrictions does MCOB 12 place on charges?
Charges must be reasonable, early repayment charges must reflect actual costs, and arrears charges should only cover administrative costs.
36
How must lenders deal with customers in arrears under MCOB 13?
They must attempt to agree on repayments, liaise with advice services, avoid unreasonable pressure, and repossess only as a last resort.
37
What information must be given to customers in arrears under MCOB 13?
The MoneyHelper ‘Problems paying your mortgage’ sheet, missed payment details, total arrears, outstanding debt, and potential further charges.
38
What are the two levels of mortgage service under MCOB rules?
Advice and execution-only.
39
Is an information-only mortgage service allowed under MCOB rules?
No, borrowers cannot select their own mortgage based solely on provided information.
40
In which cases can execution-only mortgage services be provided?
For business borrowers, high-net-worth individuals, and mortgage professionals.
41
What must be done if a joint application involves a mortgage professional and a non-professional?
Advice must be given to the non-professional applicant.
42
What must a lender do if a customer opts for execution-only?
Make the customer aware of the consequences of proceeding on this basis.
43
Who does the FCA classify as vulnerable customers regarding mortgages?
Those buying under Right-to-Buy, those entering sale-and-rent-back agreements, and equity release applicants.
44
What is the FCA’s requirement for vulnerable customers in mortgage transactions?
They must initially receive advice before choosing execution-only.
45
What are the three stages in determining mortgage suitability?
1. Assess whether a mortgage is a suitable product for
the client.
2. Assess the type of mortgage needed (e.g.,
repayment, interest-only).
3. Select the best mortgage and provider for the client’s
needs.
46
What key factors should a mortgage adviser consider when recommending a mortgage?
Mortgage type (repayment, interest-only, or both).
Interest rate option (fixed, variable, capped, etc.).
Mortgage term duration.
Affordability and associated costs.
47
Is a suitability report required under MCOB?
No, but many lenders choose to issue one.
48
What must mortgage lenders do for every mortgage application?
Verify the borrower’s income from an independent source.
49
What must lenders demonstrate about the mortgage they propose?
That it is affordable, considering committed expenditure and basic essential expenditure.
50
Can lenders consider positive expected changes in a borrower’s income?
Yes, if they have evidence to support such changes.
51
What must a lender ensure for an interest-only mortgage?
There must be a clear and credible alternative source of capital repayment; otherwise, affordability must be assessed on a repayment basis.
52
How do lenders ensure a mortgage remains affordable over time?
By conducting a stress test to check affordability if interest rates rise.
53
What is committed expenditure in mortgage affordability assessment?
Repayments on credit agreements or other contractual financial obligations.
54
What is included in basic essential expenditure?
Food, housekeeping costs, utilities, telephone, council tax, buildings insurance, ground rent, service charges for leasehold properties, and essential travel to work and school.
55
What is ICOBS, and who does it apply to?
ICOBS (Insurance: Conduct of Business Sourcebook) sets rules for firms dealing with general insurance, protection, critical illness, long-term care, and income protection. It applies to firms selling, advising on, or administering insurance.
56
What are the key customer categories under ICOBS?
Customers are categorised as:
Policyholders (those entitled to claim)
Customers (prospective policyholders)
Consumers (individuals buying insurance for personal use)
Commercial customers (non-consumers, e.g., businesses).
57
What are the key requirements for distance selling under ICOBS?
Firms must provide clear pre-contract information, including identity, contract terms, and rights, and must ensure pricing and communications are clear.
58
What information must a firm provide before selling insurance?
Firms must disclose their identity, services, FCA registration, any financial links to insurers, whether they offer personal recommendations, and details of fees/commissions.
59
What must firms do when advising on insurance?
They must ensure the customer only buys suitable policies, provide written demands and needs statements, explain key exclusions, and highlight the risks of misrepresentation.
60
What are the key product information requirements under ICOBS?
Firms must give clear policy details, terms, exclusions, and costs. Consumers must receive an Insurance Product Information Document (IPID) before purchase.
61
What is the cancellation policy under ICOBS?
Consumers can cancel:
Within 30 days for pure protection/payment protection policies
Within 14 days for other insurance policies
Some exclusions apply (e.g., short-term travel insurance). Refunds must be processed within 30 days.
62
What are the key claims handling rules under ICOBS?
Claims must be handled promptly and fairly. Firms must not unreasonably reject claims, including for non-negligent misrepresentation or minor breaches unrelated to the claim.
63
What does ICOBS 1 cover?
Application – Defines that ICOBS applies to firms dealing with non-investment insurance, including selling, advising, and promoting insurance products to retail and commercial customers.
64
What does ICOBS 2 cover?
General Matters – Covers customer categorisation (consumers vs commercial customers), clear and fair communications, managing conflicts of interest, record-keeping, and liability restrictions.
65
What does ICOBS 3 cover?
Distance Communications – Requires firms to provide pre-contract information for distance sales, disclose identity and contract terms clearly, and ensure e-commerce transparency, including pricing and company details.
66
What does ICOBS 4 cover?
Information About the Firm, Services, and Remuneration – Firms must disclose their identity, FCA registration, financial ties with insurers, whether they offer personal recommendations, and details of fees/commissions.
67
What does ICOBS 5 cover?
Identifying Client Needs and Advising – Firms must ensure customers only purchase suitable policies, provide a written statement of demands and needs, explain exclusions, and highlight the risks of misrepresentation.
68
What does ICOBS 6 cover?
Product Information – Firms must give clear details about policy terms, exclusions, costs, and ensure customers receive an Insurance Product Information Document (IPID) for informed decision-making.
69
What does ICOBS 6A cover?
Product-Specific Rules – Applies to Guaranteed Asset Protection (GAP) insurance, ensuring clear explanations of coverage, including the difference between a vehicle’s insured value and its outstanding finance.
70
What does ICOBS 7 cover?
Cancellation Rights – Consumers can cancel within 30 days for pure protection/payment protection policies and 14 days for other policies. Some exclusions apply, and refunds must be processed within 30 days.
71
What does ICOBS 8 cover?
Claims Handling – Claims must be processed fairly and promptly. Firms cannot reject claims unreasonably, including for non-negligent misrepresentation or minor breaches unrelated to the claim.
72
What are the Banking: Conduct of Business (BCOBS) rules?
The Banking: Conduct of Business Sourcebook (BCOBS) applies to firms accepting deposits from UK banking customers and aims to ensure communication is clear, fair, and not misleading. BCOBS has eight chapters covering various aspects such as communications, cancellation rights, customer information, and account services.
73
What is BCOBS 1?
Application. BCOBS 1 applies to firms that accept deposits from banking customers in the UK, outlining the activities connected with accepting deposits and providing retail banking services.
74
What is BCOBS 2?
Communications with banking customers and financial promotions. BCOBS 2 requires firms to communicate with banking customers in a way that is clear, fair, and not misleading, considering the information needs of customers when making financial promotions.
75
What is BCOBS 2A?
Restriction on marketing or providing an optional product for which a fee is payable. BCOBS 2A outlines the rules for marketing or providing an optional product linked to a current or savings account for which a fee is payable, ensuring fair practices.
76
What is BCOBS 3?
Distance communications and e-commerce. BCOBS 3 applies to firms that carry out distance marketing activities with or for consumers in the UK, ensuring compliance with regulations related to e-commerce and distance contracts.
77
What is BCOBS 4?
Information to be communicated to banking customers and statements of account. BCOBS 4 requires firms to provide banking customers with appropriate information about retail banking services and deposits, as well as ensuring statements of account are clear and accessible.
78
What is BCOBS 5?
Post-sale requirements. BCOBS 5 requires firms to provide efficient, fair, and prompt service after a sale, addressing customer needs, including financial difficulties, account transfers, and handling dormant accounts.
79
What is BCOBS 6?
Cancellation. BCOBS 6 sets out the customer’s right to cancel in certain circumstances, as well as when cancellation rights do not apply, ensuring transparency in contract terms.
80
What is BCOBS 7?
Information about current account services. BCOBS 7 mandates that firms provide clear information about the provision of personal and business current accounts, enhancing transparency for customers.
81
What is BCOBS 8?
Tools for personal current account customers. BCOBS 8 requires firms to provide tools for personal current account customers, such as cost calculators and overdraft eligibility tools, and to send alerts about account usage.
82
What are the Payment Services Regulations (PSRs)?
The PSRs govern most payment services, including the operation of payment accounts, and outline provisions for payment transactions, information to be provided before payments, and remedial actions when payments go wrong. They apply to services in euros and sterling.
83
What are payment accounts under the PSRs?
Payment accounts are accounts where payment transactions can be made, and access to funds is not restricted. An example of a restricted account is a fixed-term deposit.
84
Who does the PSRs apply to?
The PSRs apply to payment service providers (PSPs) such as banks, building societies, e-money issuers, and payment institutions (PIs), as well as their customers.
85
What is a Payment Institution (PI) under the PSRs?
A Payment Institution (PI) is a regulated firm authorised to process payments by card, credit transfer, or direct debit, issue or acquire payment instruments, and remit money. PIs must be authorised or registered by the regulator unless exempt.
86
What are the conduct of business requirements under the PSRs?
Conduct of business requirements under the PSRs apply to all payment service providers, including banks, building societies, e-money issuers, and PIs, ensuring fair and transparent handling of payment services.
87
Who are money remitters under the PSRs?
Money remitters are payment service providers that accept funds for payment but do not necessarily hold an account with either the payee or payer. They enable the transfer of funds between parties to the required destination.
88
What are non-bank merchant acquirers under the PSRs?
Non-bank merchant acquirers are financial institutions, other than banks, that process credit or debit card payments, allowing merchants to accept card payments.
89
What is the Payment Services Directive (PSD2)?
PSD2, effective from 13 January 2018, is a major evolution of payments regulation, aimed at increasing competition, enhancing customer protection and security, and expanding the reach of payments services. It continues to apply in the UK despite Brexit.
90
What are the four main themes of PSD2?
The four main themes of PSD2 are:
1. Market efficiency and integration
2. Consumer protection
3. Competition and choice
4. Security
91
How does PSD2 improve consumer rights?
PSD2 improves consumer rights by:
Extending coverage to payments outside the EEA and in non-EEA currencies
Reducing the amount payable in unauthorized payment cases from €150 to €50 (unless fraud or negligence occurs)
Banning surcharges on certain payments
Requiring PSPs to resolve payment complaints within 15 business days (35 days in exceptional cases)
92
What are Third-Party Providers (TPPs) under PSD2?
TPPs are external organizations that can access payment accounts to provide services:
Account Information Service Providers (AISPs) provide consolidated information on payment accounts.
Payment Initiation Service Providers (PISPs) initiate payments or transfers from the customer’s account.
93
What is an Account Servicing Payment Service Provider (AS PSP)?
An AS PSP is a provider where the customer’s payment account is held. PSD2 ensures that customers have the right to use AISPs and PISPs where the account is accessible online and with explicit consent.
94
What are the technical standards introduced by PSD2?
PSD2 introduces technical standards for:
Strong customer authentication (SCA)
Common and secure communication between payment service providers
95
What is the role of the Payment Systems Regulator (PSR)?
The PSR, a subsidiary of the FCA, oversees domestic payment systems, ensuring fair operation and compliance with system rules, and has authority to direct and regulate payment system participants.
96
What powers does the PSR have?
The PSR has powers to:
Set system rules for designated payment systems
Direct participants in designated payment systems
Require access to designated payment systems for PSPs
Vary agreements related to designated payment systems
Require owners to dispose of interests in payment systems (with HM Treasury approval)
97
What is the role of the Lending Standards Board (LSB)?
The LSB publishes standards for firms registered with it, ensuring that firms comply with best practices in lending, especially in areas not covered by BCOBS, like personal lending.
98
What are the key principles covered by the Standards of Lending Practice for personal customers?
The key principles include:
Product and service design
Product sale
Account management and servicing
Money management
Financial difficulty
Consumer vulnerability
Governance and oversight
99
What products are covered by the Standards of Lending Practice?
The Standards apply to products such as:
Credit cards and charge cards
Current account overdrafts
Unsecured loans
100
What legislation must registered firms comply with under the Standards of Lending Practice?
Firms must comply with:
Consumer Credit Act 1974
Consumer Credit (EU Directive) Regulations 2010
FCA's Consumer Credit Sourcebook (CONC)
Equality Act 2010
Other relevant legislation
101
What are the key requirements for firms under the Standards of Lending Practice?
Key requirements include:
Providing products that meet customer needs and circumstances
Ensuring products are affordable
Dealing with customer requests accurately and timely
Helping customers manage finances and avoid financial difficulties
Offering support to customers in financial difficulty
Providing inclusive products for vulnerable customers
Ensuring fairness throughout the customer journey
102
What should firms do for customers in financial difficulty?
Firms must provide appropriate support and fair treatment to customers experiencing financial difficulty.
103
How should firms address consumer vulnerability?
Firms are expected to have formal strategies for dealing with vulnerable customers and to provide flexible products and services that meet their needs.
104
What type of oversight is required under the Standards of Lending Practice?
Firms are expected to have governance and oversight procedures in place to ensure fair treatment of customers and compliance with the standards.
105
What are the other categories of advice, in addition to advice on regulated products like mortgages and insurance?
The other categories of advice include:
Basic advice
Generic advice
Focused advice
Simplified advice
Robo advice
106
What was the Financial Advice Market Review (FAMR) of 2016, and what did it aim to achieve?
The FAMR, launched by HM Treasury and the FCA, aimed to make financial advice more affordable and accessible to consumers. It led to the publication of guidance on providing “streamlined advice,” which is a personal recommendation for specific needs without analyzing irrelevant circumstances.
107
What is 'streamlined advice' according to the FCA?
Streamlined advice is a personal recommendation that is limited to specific needs, not involving an analysis of the client's circumstances that are not directly relevant to those needs.
108
What is basic advice?
Basic advice is a limited form of advice for stakeholder products, focusing on specific client needs without analyzing circumstances unrelated to those needs. It uses scripted questions to determine the suitability of a stakeholder product.
109
What are stakeholder products, and why were they introduced?
Stakeholder products, such as stakeholder pensions, were introduced to provide simple, low-risk, and cost-transparent products to encourage customers who lack confidence or understanding to save. They have capped charges and were designed to be easy to sell with less complex regulation.
110
When is basic advice appropriate?
Basic advice is appropriate for clients who:
Have priority needs met
Have disposable income or capital for investment
Do not need a holistic financial assessment, just advice on a specific need.
111
What must be done when giving basic advice on a stakeholder product?
The firm must:
Use scripted questions to assess the client’s needs
Ensure the stakeholder product is suitable
Provide the client with information about the product's nature, aims, and risks
Retain a record of the advice given for five years.
112
What is the requirement for a stakeholder product recommendation under basic advice?
The recommendation can only be made if:
The client’s answers to scripted questions and other disclosed facts are assessed
There are reasonable grounds to believe the product is suitable
The client understands the basis of the advice.
113
What is the key difference between focused and simplified advice?
The key difference is that with focused advice, the customer determines the boundaries within which the advice is to be focused, while with simplified advice, the firm sets the parameters of the advice it provides.
114
What is the distinction between guidance and advice?
Guidance involves providing information about a product or explaining technical terms, whereas advice involves making a recommendation to take or avoid a specific course of action.
115
What is generic advice?
Generic advice is advice or information that does not relate to a particular product or investment and does not meet the characteristics of regulated advice. An example is advising that it is sensible to have adequate financial protection in place.
116
What is focused advice?
Focused advice relates to a customer’s specific needs or investments, at the request of the customer. It is also known as limited advice and does not involve analysis of circumstances unrelated to the specific needs.
117
What is simplified advice?
Simplified advice is advice that is limited by the firm to one or more of a customer’s needs, without analyzing circumstances unrelated to those needs. It can be provided face-to-face, over the phone, or online.
118
What is robo advice?
Robo advice refers to financial advice or portfolio management provided online with minimal human intervention, based on algorithms. It offers a low-cost alternative to traditional face-to-face advice.
119
What was the FCA’s 2017 guidance on robo-advisers offering streamlined advice?
The guidance clarified that any funds offered by robo-advisers must be suitable for customers' risk tolerance and investment objectives. The FCA also emphasized the need for clear risk questionnaires and monitoring customer interactions via analytics.
