Second charge mortgages: service and product disclosure

From 21 March 2016, second charge firms must comply with the Mortgages and Home Finance: Conduct of Business Sourcebook (MCOB).

Service disclosure requirements

A firm must make an initial disclosure that gives the customer the following information:

  • whether there are any limitations in the range of products it will offer the customer, and if so what they are (MCOB 4.4A.1R(1))
  • the basis on which the firm will be paid (MCOB 4.4A.1R(2))
  • the availability of alternative finance options (MCOB 4.4A.1R(3)).

Product disclosure requirements

A firm must give the customer the European Standardised Information Sheet (ESIS). This is a product disclosure document designed to help customers shop around. Second charge firms must comply with this requirement from 21 March 2016. Firms must provide the ESIS to customers in the following circumstances:

  • Before a customer submits an application for a mortgage, unless an ESIS has already been provided (MCOB 5A.4.1R(1))
  • When the firm advises the customer to enter into a mortgage, unless the advice is given by telephone, in which case the firm must provide the ESIS within 5 business days (unless one has already been provided)(MCOB 5A.4.1R(2)(a)) 
  • The customer requests an ESIS, unless the firm knows it cannot offer that mortgage to them (MCOB.5A.4.1R(2)(b))
  • As part of an execution-only sale (or a potential execution-only sale) (MCOB 5A.4.1R(2)(c)) the customer has provided the firm with the relevant information to indicate which mortgage they wish to enter into (MCOB 4.8A.14R(1)) to MCOB 4.8A.14R(3), for example:
    • the name of the lender
    • the rate of interest
    • the interest rate type
    • the price or value of the property on which the mortgage will be secured
    • the length of term required by the customer
    • the sum the customer wishes to borrower
    • whether the customer wants an interest-only mortgage or a repayment mortgage.

MCOB 5A Annex 1 sets out the template for the ESIS document and the information it must include, and MCOB 5A Annex 2 provides instructions on how to complete the ESIS.

When an ESIS does not need to be provided

A firm does not need to provide an ESIS:

  • regarding a direct deal (MCOB 5A.4.2R(1))
  • if the customer refuses to disclose key information (MCOB 5A.4.2R(2))
  • if it does not wish to do business with the customer (MCOB 5A.4.2R(3)).

The rules do not require the firm to give the customer a further ESIS at offer stage unless there has been a material change since the first ESIS was given. However, lenders may give out a second ESIS at this point if they wish.

Post-sale disclosure requirements

The rules require certain information to be supplied to customers during the lifetime of the loan, including:

  • the information a firm must give the customer before the customer makes the first payment (set out in MCOB 7.4.1R)
  • an annual statement (requirement set out in MCOB 7.5)
  • certain event-driven disclosure requirements, such as where there is a variation to the contract – examples include where a firm provides services to a customer regarding a further advance, a rate switch, or adding or removing a party (set out in MCOB 7.6). MCOB 7 also requires that the customer is provided with an illustration, typically an ESIS, to make clear the price and features associated with that variation
  • the information a customer must be given if they experience payment difficulties and our expectations for their fair treatment by the lender (set out in MCOB 13).