Lenders using MCOB loophole to avoid self-cert regulation

Ramesh Sharma

June 1, 2004

A gap in the MCOB rules meant lenders were not required to switch their entire mortgage books to regulated status. In the case of pre-‘Mortgage Day’ contracts, if the client is not borrowing more money and it’s a straight transfer, the lender can keep it as an unregulated contract.

Mortgage Introducer has been informed this is resulting in some lenders automatically switching clients to new products with higher rates and ERCs, without giving them the opportunity to visit a broker.

One source told MI this practice may be rife in the self-cert sector where lenders could rewrite these cases as a regulated contract but are choosing not to as they know it would not get past the FSA’s rules. He said: “We have to ask if this gap in the MCOB rules is being exploited and is against the FSA’s ‘Treating Customers Fairly’ principles as the client would not have the same protection under the Financial Ombudsmen Scheme (FOS). Lenders could easily make the new loans regulated if they wanted.”

He added: “Are they automatically switching the contracts because it’s best for the customer or because it’s easier to avoid the FSA and FOS? With many self-cert cases arranged before ‘Mortgage Day’, the amount lent would probably not get past the FSA if they were regulated cases.”

Carla Lavender, spokesperson at BM Solutions, said: “It all comes down to interpretation of MCOB. We see nothing wrong in keeping these contracts as unregulated. Any reputable lender in the market before ‘Mortgage Day’ would have had stringent processes in place and lent responsibly for self-cert.”

But Chris Cummings, director of AMI, commented: “We are aware that lenders are choosing to use this loophole. But they need to abide by the spirit of MCOB, not just the letter.

“The main concern is that borrowers may think it’s easier and best to simply switch deals and keep them unregulated but do they know they are losing the protection of FOS? It would be better to do things properly and switch to regulated contracts.”

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