Regulatory Compliance

Regulatory Compliance

This part looks at some of the main the statutory and regulatory provisions affecting mortgages
Information Sheet

Sources

  • FCA Handbook

o   MCOB

o   CONC

o   DISP

o   PERG

  • FOS website
  • Atkin’s Court Forms, Vol 28(1) Mortgages
  • Retail Mortgages: Law, Regulation and Procedure 


Overview


1. What do we mean by regulation?

2. What does it involve?

3. The need for authorisation.

4. Redress.



1. What do we mean by regulation?

There has been a progressive shift in statutory and regulatory compliance away from the Consumer Credit Act 1974 (OFT) towards the Financial Services and Markets Act 2000 and secondary legislation/rules (FCA).

Now there is little scope for statutory and regulatory compliance under the CCA.

Most High Street residential owner-occupied mortgages are likely to be regulated mortgage contracts (ART 61 RAO) and fall within the statutory and regulatory regime of the FSMA and MCOB.

What are regulated mortgage contracts?

With effect from 21 March 2016: A contract under which a lender provides credit to a borrower which provides for the obligation of the borrower to repay to be secured on land in the EEA, and at least 40% of that land is used or intended to be used as or in connection with a dwelling.

Exemptions
There are some exemptions (Art 60C etc RAO). A common example is lending more than £25,000 for business purposes (Art 60C(3)) and there are particular provisions about how the exemption works.
  
For those mortgages that fall outside the definition of regulated mortgage contracts, or if they fall within one of the exemptions, there is limited residual regulation as regulated credit agreements under FSMA and CONC.

Unfair relationships – s 140A etc CCA 1974 
Although the unfair relationship provisions in s 140A etc CCA extend to all credit agreements, no order can be made (after 21 March 2016) under s 140B in respect of a regulated mortgage contract, it is an exempt credit agreement under Art 60C(2) (S 140A(5) CCA).
  
This reflects the policy shift towards regulation under the FSMA/MCOB.

The FSMA is subject to extensive secondary legislation (including the RAO). It established the FCA (formerly the FSA) as the principal regulator and conferred on the FCA a general rule-making power, which it mainly achieves through the FCA Handbook, which contains rules (R) and guidance (G).The handbook contains various standards, Guides and other sources, covering an extensive range of financial services, including MCOB.


2. What does regulation involve?

MCOB regulates a range of activities involving regulated mortgage contracts and applies to four types of firm: 
(1) lenders/providers, (2) administrators, (3) arrangers, and (4) advisers, e.g. 

• Advising and selling standards
• Disclosure obligations
• Interest rates
• Responsible lending
• Charges
• Arrears, repayment shortfalls and repossessions 

3. The need for authorisation

The FCA requires authorisation to carry on regulated activities (a Part 4A Permission), and regulates activities:

S 19 contains a general prohibition. No person may carry on a regulated activity in the UK unless he is an authorised person. A regulated activity includes an activity of a specified kind which is carried on by way of business. There is guidance about this in PERG.

Entering into a regulated mortgage contract is a specified kind of activity (Art 61(1) RAO).

An agreement made in contravention of the general prohibition is a criminal offence (s 23) and is also unenforceable against the other party (s 26(1)) and the other party is entitled to recover money paid under it plus compensation calculated in accordance with s 28(2) (s 26(2)).

But if the court is satisfied that it is just and equitable in the circumstances of the case, it may allow the agreement to be enforced and any money paid to be retained (s 28(3)). This called ‘an Enforcement Order’. These provisions can throw up some tricky points. What if, instead of applying to court for an Enforcement Order, the parties enter into a compromise agreement. Does the consent order involve administering a regulated mortgage contract? Probably not – Fortwell Finance Ltd v Halstead [2018] EWCA Civ 676.

In considering whether to allow the agreement to be enforced, the court will have regard to the matters in s 28(4)-(6) – whether the person carrying on the regulated activity concerned reasonably believed that he was not contravening the general prohibition by making the agreement. See Helden v Strathmore Ltd [2011] EWCA Civ 542; Jackson v Ayles [2021] EWHC 995 (Ch).

Note, importantly, that if the court does not grant an Enforcement Order, and the borrower elects not to perform the (unenforceable) agreement, he must repay any money received by him under the agreement (s 28(7)). 

So, there is no windfall, and lender will at least be able to recover the principal. See Dickinson v UK Acorn Finance Ltd [2015] EWCA Civ 1194.

4. Redress

The vast majority of mortgage ‘issues’ are resolved by way of complaint to the lender and/or the FOS. The scope for redress is substantially wider than relying on a cause of action at law.

In terms of complaint to the lender, authorised firms are required to operate effective and transparent procedures for the reasonable and prompt handling of complaints in accordance with the complaints handling rules in the FCA Handbook (DISP). The rules require the lender to treat complainants promptly and fairly (DISP 1.1).

There are special rules for handling mortgage endowment complaints (DISP App 1). The objective of redress here is to put the complainant, so far as possible, in the position he would have been in if the inappropriate advice had not been given, or the other breach had not occurred (DISP App 1.2).

Alternatively, it may be possible to complain to the Financial Ombudsman Service (FOS). For jurisdiction see DISP 2.1.

The FOS is a statutory scheme established under Part XVI FSMA. It handles complaints concerning a range of mortgage issues:

• Early repayment charges
• Equity release
• Interest-only mortgages
• Mortgage arrears charges
• Mortgage shortfall
• Mortgage underfunding
• Valuations and Surveys

Significantly, the FOS has wide powers to resolve a complaint (DISP 3.5) and will determine a complaint by reference to what is, in his opinion, fair and reasonable in all the circumstances of the case taking into account relevant law and regulation, and also good industry practice at the relevant time (DISP 3.6).

The FOS will usually give a written determination including an award which can include money, interest or costs, or some other direction (DISP 3.6.6).

The maximum award is currently £375,000 (DISP 3.7.4). An award can be enforced through the courts. The FOS says it usually takes around 4 months to allocate cases, or 9-12 months if the complaint is particularly complex.  

If an award is accepted by a complainant, it is final and binding, and gives rise to a res judicata (Clark v In Focus Asset Management & Tax Solutions Ltd [2014] EWCA Civ 118).

Apart from the complaints procedure, or any separate common law cause of action, a contravention by an authorised person of a rule made by the FCA is actionable in damages at the suit of a private person who suffers loss as a result (subject to any defences that apply to actions for breach of statutory duty) (s 138D(2) FSMA).

For private person see Reg 3 of the FSMA 2000 (Rights of Action) Regulations 2001.

For a list of rules in MCOB which are actionable in damages, see MCOB Sched 5. For an example of a case involving claims for breach of common law, contractual and statutory duties, see Mason v Godiva Mortgages Ltd [2018] EWHC 3227 (QB).

Contravention of a rule does not make any transaction void or unenforceable (s 138E(2)) and is not a defence to a claim for possession (Thakker v Northern Rock Asset Management Plc [2014] EWHC 2107 (QB)).

Nor does the existence of the statutory duty give rise to a co-extensive duty of care at common law (Green v Royal Bank of Scotland Plc [2013] EWCA Civ 1197).

Glossary

CCA      Consumer Credit Act 1974
CONC   Consumer Credit Sourcebook 
FCA       Financial Conduct Authority
FOS       Financial Ombudsman Service
FSMA    Financial Services and Markets Act 2000
MCOB   Mortgages and Home Finance: Conduct of Business Sourcebook
PERG     Perimeter Guidance Manual
RAO      Financial Services and Markets Act 2000 (Regulated Activities) Order 2001
RMC      Regulated Mortgage Contract 

For a more extensive glossary, see the FCA Handbook.

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