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CML industry approach MCD foreign currency loans Version 1.0 October 2015

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ABOUT THIS DOCUMENT This document has been prepared by and agreed among CML members for the implementation of the MCOB requirements for MCD foreign currency loans. Members were invited to take part in discussions on the production of the document and to comment on its contents. Members may choose to use this document to make, support or inform their policies on MCD foreign currency loans. There is no requirement to use it. Firms should ensure they consider the requirements for themselves and take their own view on how to apply the requirements to their own systems and processes. NOTES Members may share this document with their software providers and any other third-parties they deem appropriate recipients. This document is subject to version control. Minor changes, such as amendments to typography, will be reflected by increases of x.1 in the version number. Major changes, such as changes to assumptions or approaches to particular rules, will be reflected in increases of 1.x. The document includes links to MCOB where appropriate. At the time of writing, these links refer to the post-MCD future-dated version of MCOB. Please ensure that for links to areas such as MCOB 7A that the handbook at option is set to on or after MCD implementation. MCD foreign currency loans are a new concept to the UK market. This may mean the industry approach needs revising from time to time once customers are identified and once currency fluctuation events occur. The CML will keep the industry approach under review once the MCD rules take effect.

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Contents 1. Introduction and regulatory background ......................................................................... 4

1.1 Overall approach .................................................................................................... 4 1.2 Application .............................................................................................................. 4 1.3 Users of this CML MCD foreign currency loans industry approach .......................... 4 1.4 Sources for CML foreign currency loans industry approach .................................... 4 2.1 MCD foreign currency loan ..................................................................................... 7 2.2 Income and assets .................................................................................................. 7 2.3 Residency ............................................................................................................... 7 2.4 Identifying MCD credit agreements ......................................................................... 8

3. Scope ............................................................................................................................ 9 3.1 Application of the MCOB MCD foreign currency loan requirements ........................ 9 3.2 Participation in MCD foreign currency loans............................................................ 9 3.3 Limiting the customer’s MCD foreign currency risk................................................ 10

4. Pre-sale disclosure to customers with MCD foreign currency loans ............................. 11 4.1 Summary of requirements ..................................................................................... 11 4.2 MCOB pre-sale disclosure requirements ............................................................... 11 4.3 Industry approach to pre-sale notification .............................................................. 11 4.4 MCD foreign currency loans and advised sales .................................................... 12

5. Post-sale notification to customers with MCD foreign currency loans ........................... 13 5.1 Summary of requirements ..................................................................................... 13 5.2 Post-sale notification ............................................................................................. 13 5.3 What lenders should track ..................................................................................... 13 5.4 Relevant currencies .............................................................................................. 14 5.5 Multiple currency tracking ..................................................................................... 15 5.6 Currency tracking benchmark ............................................................................... 15 5.7 Frequency of notification ....................................................................................... 16 5.8 Customer opt-out .................................................................................................. 16 5.9 Content of notification ........................................................................................... 17 5.10 Format of notification ............................................................................................ 17

6. Examples of MCD foreign currency loan statuses ........................................................ 19 6.1 Examples of MCD foreign currency loan statuses ................................................. 19

Annex one: pre- and post-sale MCD foreign currency loan risk warnings ............................ 21 Annex two: pre-sale notification to customers with MCD foreign currency loans ................. 23 Annex three: post-sale notification to customers about 20% adverse movement for lenders using risk warnings ............................................................................................................. 24

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1. Introduction and regulatory background This section provides an introduction to the CML industry approach on MCD foreign currency loan mortgages and how they are administered under regulations. 1.1 Overall approach 1. This document explains the industry approach to meeting the foreign currency loan requirements

of the Mortgage Credit Directive (MCD). The purpose of this document is to align industry good practice and to help ensure the requirements are applied consistently across the industry.

2. The document focuses on the process for loans to new customers that are defined as foreign

currency loans under the MCD. Where lenders apply the requirements to existing customers, they may wish to have regard to this approach in deciding how to implement the requirements.

1.2 Application 3. Members may choose to use this document to make, support or inform their implementation of

the MCOB requirements for foreign currency loans. This includes the pre- and post-sale requirements. There is no requirement for members to use this document.

4. This document is written principally with regard to MCD regulated mortgage contracts. Where the

MCD foreign currency loan requirements are the same for CBTL, lenders should apply the same approach.

5. The MCD foreign currency loan rules derive from the MCD and are to be implemented in the UK

by 21 March 2016. However, lenders can begin applying the MCD requirements from 21 September 2015. Requirements for doing so are specified at MCOB TP 1.1.

1.3 Users of this CML MCD foreign currency loans industry approach 6. This document is aimed at lenders lending to customers whose loans are defined as MCD foreign

currency loans from 21 March 2016. Users may include those involved in the sales process and those involved in designing post-sale notifications to customers. Lenders may wish to share this document with their systems providers.

1.4 Sources for CML foreign currency loans industry approach 7. The FCA sets its rules for identifying MCD foreign currency loans in MCOB. HM Treasury sets

rules applicable to the new Consumer Buy to Let (CBTL) regime in the MCDO.

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8. The source material for this document: Data Source Status Notes MCOB (Regulated Mortgages) In particular:

Published 31 October 2004. .

MCOB (Regulated Mortgages) Section 2A.3 Section 7A.4

Active from 21 September 2015; compliance required from 21 March 2016

Directive 2014/17/EU (of the European Parliament and of the Council of 4 February 2014 on credit agreements for consumers relating to residential immoveable property)

Published 4 February 2014.

Primary source for FCA policy statement 15/9.

HM Treasury MCD consultation (Implementation of the EU MCD consultation paper)

Published 5 September 2014. The draft MCD Order detailing the CBTL regime and giving powers to the FCA to implement the MCD.

FCA consultation paper CP14/20 (Implementing the MCD and the new regime for second charge mortgages)

Published 25 September 2014.

Proposals and draft rules for implementing the MCD into the UK (excluding CBTL) – superseded by PS 15/9.

HM Treasury summary of responses to MCD consultation (Implementation of the EU Mortgage Credit Directive: summary of responses)

Published 26 January 2015. HM Treasury’s analysis of responses and the final MCD order

HM Treasury’s Statutory Instrument (the Mortgage Credit Directive Order 2015)

Royal assent granted 25 March 2015.

This document prescribes the foreign currency loan requirements for CBTL.

FCA policy statement 15/9 (Implementation of the MCD and the new regime for second charge mortgages, feedback to CP 14/20 and final rules)

Published 27 March 2015. Publication of the final sourcebook amendments implementing MCD into the UK (excluding Consumer BTL).

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Data Source Status Notes CML buy-to-let statement of practice (Buy-to-let: statement of practice)

Published 7 April 2015. The statement of practice is designed to provide clarity about how responsible buy-to-let lenders operate, including information given to customers. The statement applies to all new buy-to-let lending, except where it is covered by FCA rules. CML members lending buy-to-let mortgages are required as a condition of membership to agree to comply with this statement of practice.

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2. MCD foreign currency loan definitions This section lists the definitions of MCD foreign currency loans and sources for information on customer statuses 2.1 MCD foreign currency loan 9. Article 4 (28) of the MCD and the FCA glossary define a MCD foreign currency loan as: “an MCD

credit agreement where the credit is:

a. Denominated in a currency other than that in which the consumer receives the income or holds the assets from which the credit is to be repaid; or

b. Denominated in a currency other than that of the EEA State in which the consumer is resident.”

[Note: article 4(28) of the MCD]

10. Part a of the above means a loan to a customer is an MCD foreign currency loan if he or she is

using dollar income to pay a sterling mortgage in the UK. Part b means a loan to a customer is an MCD foreign currency loan if he or she is resident in France and borrowing in sterling.

11. For the purposes of CBTL lending, the MCD Order 2015 defines an MCD foreign currency loan

as: “foreign currency loan” means a consumer buy-to-let mortgage contract where the credit is denominated in a currency other than that in which the customer receives the income or holds the assets from which the credit is to be repaid

2.2 Income and assets 12. The FCA confirms lenders are required to take into account only the income or assets the

customer will use to repay the mortgage. 13. MCOB 2A.3.3 G says: “Where:

(1) an MCD regulated mortgage contract is denominated in the currency of the EEA State in which the consumer is resident (“currency A”); and (2) the consumer receives income or holds assets in currency A but also receives income or holds assets in another currency (“currency B”); the MCD regulated mortgage contract will not be a foreign currency loan unless the credit is to be repaid wholly or in part from the income received or assets held in currency B”.

14. This guidance means a loan to a customer who is paid in dollars and sterling will be a MCD

foreign currency loan if the customer repays a sterling mortgage in the UK using the dollar part of his or her income.

15. The FCA confirms in paragraph 2.35 of PS 15/9 that the Gibraltar pound and the Isle of Man pound are not deemed foreign currencies under the MCD foreign currency loan requirements.

2.3 Residency 16. The FCA confirms in paragraph 2.33 of PS 15/9 that: “The MCD does not define residency and

therefore, in our view, the term retains its natural meaning. It remains for lenders to determine where a customer is resident in line with their usual policies and procedures.”

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17. Lenders should therefore apply their own definitions of residency when determining whether a loan to a customer is a MCD foreign currency loan due to the customer’s residency. In doing so, lenders may want to have regard to the FCA glossary definition of normally resident: “(in MCOB) normally resident; for the purposes of this definition:

1. an individual (whether or not acting as trustee) is to be treated as normally resident in the

country which he indicates is his country of residence, unless the firm has reason to doubt this; and

2. a body corporate acting as trustee is to be treated as resident in the country in which its registered office (or, if it has no registered office, its head office) is located.

18. Lenders should note that unlike with income and assets above, residency is restricted to EEA

states only. The government maintains a list of EEA states. 2.4 Identifying MCD credit agreements 19. MCOB 1.2.19 G confirms the status of MCD credit agreements:

1. To meet the definition of an MCD credit agreement (including a foreign currency loan), a contract must come within the definition at the time it is entered into.

2. The effect of (1) is that:

(a) a contract which, at the time it is entered into, comes within the definition of an MCD regulated mortgage contract (and a foreign currency loan where applicable) remains an MCD regulated mortgage contract (and a foreign currency loan where applicable) throughout its remaining term, even if there are subsequent periods of time when some or all of the conditions set out in the definition are not satisfied; and

(b) unless the contract is subsequently replaced with a new contract which meets the conditions in the definition, a contract which does not start out as an MCD regulated mortgage contract or a foreign currency loan cannot subsequently become one, even if the contract is subsequently amended so that it meets all the conditions set out in definition.

20. This means an MCD foreign currency loan is defined at the outset and that a mortgage that is not

an MCD foreign currency loan only becomes an MCD foreign currency loan if the contract is replaced with a new contract that meets the conditions in the definition.

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3. Scope This section clarifies some of the perimeters of the MCD foreign currency loan requirements. It does not recommend particular approaches and it is not an exhaustive list. 3.1 Application of the MCOB MCD foreign currency loan requirements 21. The MCD definition of a foreign currency loan is a new concept to the UK. It defines a foreign

currency loan according to the customer’s characteristics and the denomination of the loan rather than just the denomination of the loan. The MCD provides limited detail in a number of areas and the FCA sought to address this in its changes to MCOB following consultation on the MCD rules (CP 14/20). There remain a number of issues with the requirements and this document combines the regulations and CML members’ views to detail an approach compatible with the smooth-functioning UK mortgage market.

22. The MCD foreign currency loan requirements apply to (in alphabetical order):

Transaction type Consumer buy-to-let mortgages MCD article 3 (1) (b) credit agreements MCD regulated mortgage contracts

23. Whether and how the MCD foreign currency loan requirements apply to other post-contract

variations will depend on a firm’s process for these transactions. This is consistent with the FCA’s policy statement points on post-contract variations.

24. Lenders should note the reference above to MCOB 1.2.19 G. This confirms that a mortgage is a

foreign currency loan only at the outset. It cannot become one subsequently unless the contract is replaced with a contract that meets the conditions in the definition. Foreign currency loan requirements are therefore unlikely to apply to contract variations that do not result in new credit agreements.

25. Lenders should identify from the customer’s mortgage application whether a loan to a customer is

an MCD foreign currency loan. They may be able to use the affordability assessment to do so for example. Unless they have reasonable cause to do otherwise, lenders should assume that an MCD foreign currency loan remains one from this point.

26. Lenders can choose to apply the MCD foreign currency loan requirements to loans where they

are regulated mortgage contracts not subject to the MCD. MCOB 1.2.16 R permits this. 27. Prior to MCD implementation, MCOB rules on foreign currency mortgages were given at MCOB

5.6.127 R. Here a foreign currency loan is a regulated mortgage contract denominated in a currency other than sterling. This contrasts to the MCD foreign currency loan requirements, which make a loan a foreign currency loan depending on both the customer’s characteristics and the currency of the loan. MCOB 5.6.128 R specifies a risk statement that should accompany such loans.

28. The definition at MCOB 5.6.127 R applies to regulated mortgage contracts. The requirements will

therefore not apply to MCD regulated mortgage contracts.

3.2 Participation in MCD foreign currency loans 29. Lenders can choose not to offer MCD foreign currency loans. Neither MCOB nor the MCD specify

that lenders have to lend to customers whose characteristics would make a loan an MCD foreign

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currency loan. They only specify what lenders should do if they do decide to lend to these customers.

30. Where lenders choose to lend MCD foreign currency loans, they do not have to lend to every

customer with income or assets in any foreign currency. They can choose not to lend to customers whose income or assets are denominated in one or more currencies.

31. Residency extends only to EEA states. Again the MCD does not prescribe that lenders must lend

to customers in particular EEA states. Lenders can therefore choose not to lend to customers in particular EEA states. Lenders can also choose to extend the foreign currency loan requirements to customers whose residency is outside the EEA.

3.3 Limiting the customer’s MCD foreign currency risk 32. The MCD’s foreign currency loan requirements are designed to limit the customer’s exposure to

movements in foreign exchange markets. 33. The MCD requires that lenders make available arrangements that achieve this end. This

requirement is given at MCOB 2A.3.1 R. The rule requires that lenders give the customer a right to convert the currency of the mortgage to an alternative currency subject to specific conditions or make available other arrangements that limit the risks to the customer of foreign currency variations. Of the other arrangements, the FCA gives a non-exhaustive list of such other arrangements at MCOB 2A.3.2 G. This list comprises caps or risk warnings and is drawn from recital 30 of the MCD.

34. Lenders that choose to lend MCD foreign currency loans can therefore choose to offer their

customers any of the arrangements given at MCOB 2A.3.1 R. Lenders can offer other arrangements but in doing so they should have regard to the requirement at MCOB 2A.3.1 R (2) that the lender must ensure there are other arrangements in place to limit the exchange rate risk to which the customer is exposed.

35. There is no industry approach in favour of one or other arrangement. However, lenders that

choose to use risk warnings may wish to note:

• MCOB 2A.3.2 G (2) is explicit that risk warnings are compatible with the requirements given at MCOB 2A.3.1 R

• The MCD allows for the use of other arrangements at article 23 and at recital 30 explicitly permits risk warnings where they are sufficient to limit the customer’s exposure

36. In short, a risk warning can be an acceptable arrangement for limiting the exchange rate risk

specified in MCOB and the MCD provided that its terms are sufficient to lay out the customer’s exchange rate risk. This is explicit in the MCD and could not be varied without EU legislative change and change to the FCA’s rules.

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4. Pre-sale disclosure to customers with MCD foreign currency loans

This section documents the approach to pre-sale notification to customers with MCD foreign currency loans 4.1 Summary of requirements 37. There are relatively few pre-sale disclosure requirements in MCD and MCOB specifically for MCD

foreign currency loans. This section briefly summarises those pre-sale disclosure requirements and explains the industry approach to pre-sale notification.

4.2 MCOB pre-sale disclosure requirements 38. MCOB 5A annex I R, the European Standardised Information Sheet (ESIS) (lenders should note

the industry adoption of Mortgage Illustration as the customer-facing name for the ESIS), includes specific disclosures for MCD foreign currency loans. For example section three, Main features of the loan, requires lenders to tell customers which exchange rate risk mitigation option they have and section six, Amount of each instalment, requires lenders to explain what the customer’s repayments would be if exchange rates moved against the customer by more than 20%.

39. Where applicable, lenders issuing a KFI-plus will include the MCD foreign currency loan

requirement in section six of the ESIS with the KFI-plus. This requirement is given at MCOB TP 1.1 46.

40. MCOB 2A.3.6 R requires that lenders tell customers in the contract of its approach to complying

with MCOB 2A.3.1 R. Lenders using risk warnings to meet the requirement at MCOB 2A.3.1 R should state in MCD regulated mortgage contracts for MCD foreign currency loans that the lender will use risk warnings to tell the customer about the risks of having an MCD foreign currency loan.

41. There are no other disclosure requirements specifically for MCD foreign currency loans. 4.3 Industry approach to pre-sale notification 42. The CML industry approach is that lenders meeting the requirements at MCOB 2A.3.1 R using

the risk warning at MCOB 2A.3.2 G (2) should give customers an additional notification during the sales process. The notification should be given alongside the ESIS or KFI-plus.

43. The purpose of this notification is to alert the customer to his or her having an MCD foreign currency loan before the loan starts and to help raise the customer’s awareness of the risks associated with having an MCD foreign currency loan. The notification should explain to the customer why his or her loan is an MCD foreign currency loan, what the lender will do for as long as the customer holds the mortgage and tell the customer to make sure he or she understands the implications.

44. The industry has agreed a standard notification to this end. This is the pre-sale warning in annex

one. Lenders may choose to amend this to reflect their communication policies. 45. The industry approach envisages the pre-sale notification is given as a letter. The industry has

also agreed a standard letter, which is given at annex two. Lenders should ensure the letter is given in addition to the other information for MCD foreign currency loans identified in section 4.2.

46. Lenders may choose to include the notification within existing communication, such as suitability

letters or ESIS supplements, but lenders should be mindful of the potential for the notification to be less impactful if not given separately.

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47. Irrespective of lenders’ chosen approach and although this notification is not a regulatory

requirement, lenders should ensure they keep and maintain an adequate record that they have given the customer the pre-sale notification and of specific MCD foreign currency loan information given in advice or adequate explanation.

48. The industry believes the aggregate effect of these actions on the part of the lender will help raise

the customer’s awareness of the risks associated with having an MCD foreign currency loan. 4.4 MCD foreign currency loans and advised sales 49. MCOB does not make any MCD foreign currency loan-specific requirements in MCOB 4. For

example lenders are not required to give specific advice to MCD foreign currency loans. 50. Despite this, lenders should ensure their advice and adequate explanations effectively draw the

attention of customers who have MCD foreign currency loans to the foreign currency risks associated with their loan. In advised sales in particular lenders should consider explaining to customers why his or her loan is defined as a foreign currency loan under the MCD, what this means, how the lender will meet its obligations. For example lenders may choose to discuss with the customer the impact of a 20% currency fluctuation event on his or her affordability.

51. Lenders should have regard to the FCA’s TR 15/9, Embedding the Mortgage Market Review:

advice and distribution, when deciding how to add discussions about MCD foreign currency loans to their advised sales processes. This means advisors should probe to ensure the customer understands the implications and what the lender will do.

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5. Post-sale notification to customers with MCD foreign currency loans

This section explains the approach to meeting the requirements to give post-sale notifications to customers with MCD foreign currency loans 5.1 Summary of requirements 52. The MCD requires that customers with MCD foreign currency loans are notified on a regular basis

when there is a variation of 20% in the relative values of the currency of whichever of income, assets or residency defines their loan as an MCD foreign currency loan.

5.2 Post-sale notification 53. The sole post-sale disclosure requirement for MCD foreign currency loans is given at MCOB

7A.4.1 R. This states:

(1) A firm must warn any consumer with a foreign currency loan, on a regular basis, where the value of either:

(a) the total amount payable by the consumer which remains outstanding; or (b) the regular instalments;

varies by more than 20% from what it would be if the exchange rate between the currency of the MCD regulated mortgage contract and the currency of the EEA State, applicable at the time of the conclusion of the MCD regulated mortgage contract, were applied.

(2) The warning in (1) must inform the consumer of a rise in the total amount payable by the consumer, setting out the right to convert to an alternative currency, where applicable, and the conditions for doing so. It must also explain any other applicable mechanisms for limiting the exchange-rate risk to which the consumer is exposed. [Note: article 23(4) of the MCD]

54. The industry notes there is considerable ambiguity in this rule, which the FCA has copied from the

MCD. This gives rise to a range of possible interpretations. However, it is possible to infer the customer outcome this rule intends.

55. The industry approach to interpreting this rule is that any customer who has an MCD foreign

currency loan will receive a notification once there is a variation against the customer of 20% in the exchange rates of the currency of the mortgage and the currency of the income or assets they use to repay the loan or the currency of where in the EEA they are resident (the ‘relevant currencies’).

56. The industry also interprets the requirements specified at MCOB 7A.4.1 R (1) and MCOB 7A.4.1

R (2) as giving lenders the option as to which of the variables they choose to track. 5.3 What lenders should track 57. Because lenders are tracking currency movements, any change in currency for a capital

repayment mortgage will by definition meet the requirements at MCOB 7A.4.1 R (1) and MCOB 7A.4.1 R (2). This is because basing the disclosure on percentage changes in the currency renders the actual values irrelevant and the lender’s disclosure would cover both the monthly instalments and the outstanding balance.

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58. All other things being equal, a 20% variation against the customer between, say, sterling as the currency of the mortgage and dollar as the currency of the income being used for repayments will apply equally in each case for a customer who is repaying their mortgage using dollar income. For example in this case a notification for a 20% movement against the customer in dollars would apply to both the monthly instalments of $1,000 and an outstanding balance of $100,000. Put another way, because lenders are disclosing on the basis of currency movements, any change in the currency values will apply equally to the monthly instalments and the outstanding balance.

59. The same will apply to interest-only mortgages where the currency of regular repayments and the

currency of the repayment method are the same. For interest-only mortgages where the currencies of the regular instalments and the repayment method differ, lenders should tell customers of variations for each. The approach in section 5.4 ensures this.

5.4 Relevant currencies 60. The industry approach in section 4.3 means lenders will need to track the relative positions of the

currency of the mortgage and the relevant currency or currencies that make the customer’s loan an MCD foreign currency loan.

61. Further the industry approach specifies that relevant currencies are only those that make the customer’s loan an MCD foreign currency loan. This is based on guidance is given at MCOB 2A.3.3 G. For example, with income and assets, lenders need only take into account the currencies the customer will use to repay the loan. For example a customer may receive 99% of their income in dollars and 1% in euro. As long as the mortgage is affordable on the dollar component only, lenders need only track the dollar position.

62. The industry approach notes this also applies where customers have both sterling and non-

sterling income. Where a customer’s mortgage is affordable on their sterling income only, lenders do not have to classify the customer’s loan as an MCD foreign currency loan.

63. Where a customer’s loan is an MCD foreign currency loans by his or her residence, lenders should track the currency that makes the customer’s loan a MCD foreign currency loan by residence. As a minimum this will be the currency of an EEA state. However, lenders can decide to broaden the scope to outside the EEA if they wish.

64. For interest-only mortgages, a customer may service the mortgage in one currency and repay the

capital at the end of their term in another. In these cases lenders will track both the currency used to meet the interest payments and the currency given in the repayment vehicle declared at the start of the mortgage. Separate notifications are required for each.

65. Where a customer’s loan is an MCD foreign currency loan by both the customer’s residence and

by his or her income or assets, the industry approach is that lenders should track the exchange rate of the currency of their income or assets. This is because the most significant risk to the customer’s ability to repay their mortgage concerns the relative value of their income or assets. In such cases residence will be disregarded and notification will only be given when the exchange rates applicable to income or assets cross the 20% threshold to the customer’s disadvantage. This makes such cases hierarchical: income, assets or both in the case of interest-only mortgages trump residency where the customer’s loan is an MCD foreign currency loan by the currency of income, assets or both and they are resident in an EEA state whose currency is not the same as the UK’s.

66. Customers whose loans are MCD foreign currency loans based on their having multiple

currencies risk receiving a significant volume of notifications if lenders have to give a notification

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for each currency where exchange rates move against the customer by 20%. This is likely to confuse the customer and to irritate them if they receive many such notifications at different times of the month.

67. Where a customer is resident in two or more EEA states, lenders should ask the customer to

specify the state of their primary residence and track the relevant currency. Where a customer is resident in both an EEA state and a non-EEA state, the firm should track the currency of the EEA state only. Lenders should make and maintain an adequate record of such an election by the customer.

68. There is no requirement for lenders to track whether the customer’s status changes over the

duration of the loan. MCOB 1.2.19 G (2) (a) confirms the customer’s MCD foreign currency loan status is set at the outset and fixed for the duration of the contract. This means that a loan to a customer who, for example, is a UK resident and receives in sterling the income they want to use to repay their sterling mortgage cannot become an MCD foreign currency loan if the customer receive his or her mortgage-servicing income in euro two years after the start of the mortgage. The exception to this is given at MCOB 1.2.19 G (2) (b).

5.5 Multiple currency tracking 69. The approach in section 5.3 accounts for scenarios where the customer has a single income that

is sufficient to repay the loan. However, there are likely to be cases where customers need to use multiple currencies to repay the loan. For example, joint customers may only be able to repay the loan if they can use all their income from dollars, euro, francs and yen.

70. The complexities associated with tracking multiple currencies in these cases make arriving at an

industry approach difficult. Lenders should therefore determine for themselves an appropriate approach to tracking multiple currencies. In doing so, they should be mindful that the measure is for consumer protection.

5.6 Currency tracking benchmark 71. For the purpose of monitoring currencies, MCOB 7A.4.1 R specifies that currency variations

should be calculated with reference to the exchange rates applicable at the time of the conclusion of the contract. This is relatively ambiguous in the UK and is therefore open to interpretation.

72. The industry approach to setting the benchmark date for conclusion of the contract is to use the

date on which funds are drawn down. This is chosen because it is at this point that the customer is exposed to MCD foreign currency risks rather than, say, the point of mortgage offer.

73. All variation over the time the customer has the mortgage with the lender should be tracked to the

exchange rate applicable at the date on which funds were drawn down. This means that where the exchange rate moves by 20% to the customer’s disadvantage relative to the exchange rate applicable on the date of draw down and then corrects to less than 20%, any subsequent move to the customer’s disadvantage should be measured against the exchange rate applicable at the date of draw down.

74. The industry notes a difference in the currency tracking benchmark required at MCOB 7A.4.1 R

and the instructions to complete the ESIS for MCD foreign currency loans. MCOB 5A annex II R 8.6 R (1) requires that lenders tell customers what repayments would be if exchange rates changed by 20% to the customer’s disadvantage. The lender will give the customer an ESIS before drawdown so the exchange rate is likely to be different for currency tracking purposes. However, this is accounted for in the introductory text to the ESIS, which says the information

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contained therein may change after its publication “in line with market conditions”. The post-sale notifications will be made against the exchange rate applicable at drawdown.

75. Despite this, lenders should interpret the rules as they are. Noting the requirements at PRIN 2.1.1

R, lenders should consider using the advice process or adequate explanation that the exchange rate used for the ESIS and the exchange rate used for post-sale notification may be different.

5.7 Frequency of notification 76. MCOB 7A.4.1 R requires that customers with MCD foreign currency loans are notified on a

“regular basis” when the 20% threshold is crossed. The FCA does not define “regular basis” and the MCD itself sets no such expectation. It is therefore for industry to define the frequency.

77. The industry notes there is tension between regular notification and frustrating the customer with

repeated notifications. As noted in the CML’s response to the FCA’s MCD consultation, a customer whose 25-year mortgage moves shortly after he or she draws the funds and never corrects, is unlikely to want 25 years of monthly notifications.

78. The industry approach to defining the frequency of notification therefore intends to alert

customers to the currency variation without giving the customer the same information over and over with no control over its frequency.

79. The industry approach recommends that lenders should give the notification on a quarterly basis

until or unless the customer’s currency position is or positions are corrected. A quarter is here taken to mean as an interval of around 90 days and should be calculated with reference to the date on which the first notification is sent.

80. Lenders should send the first notification following the crossing of the threshold within a

reasonable period after the currency fluctuation event to ensure that customers receive the notification promptly. This increases the likelihood of the customer’s being able to take action where necessary to reduce their exposure. There is no standard approach to defining a reasonable period; this is for lenders to decide. However, in doing so, lenders may wish to have regard to their practice in similar instances, such as where they make changes to the standard variable rate following a change in the Bank of England base rate.

81. Where the threshold is crossed multiple times over the course of the loan, the quarterly frequency

should be set with reference to the date on which the first notification is sent for the latest currency fluctuation event.

82. Lenders may choose to adopt alternative frequency approaches. One possible approach would

be to reduce the frequency of the notifications over time, such as quarterly for a year, six-monthly for the year after and then annual thereafter. Lenders should consider restarting the frequency for each currency fluctuation event.

83. The industry approach reminds lenders they are required only to notify the customer when the

currency variation negatively affects the customer. They can choose to give the notification if the variation is to the customer’s advantage but there is no requirement that they do so.

5.8 Customer opt-out 84. MCD article 41 (a) explicitly prevents member states from providing consumers with the option to

waive any rights under the MCD. Offering an opt-out is therefore not compliant with the MCD. However, it is possible that without one, based on this industry approach a customer could receive around 100 MCD foreign currency notifications over the course of a 25-year mortgage if

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the currency positions moved against the customer shortly after drawdown. This could lead to customers complaining to the lender about unwanted disclosures.

85. Lenders may therefore choose to offer customers the option to opt-out. However, lenders that do

so should be mindful that the rules do not provide for such an arrangement and that there may be some regulatory risk associated with doing so.

86. Because neither MCOB nor the MCD provide for such an opt-out, there is no industry approach to

opt-outs. However, if lenders choose to provide one, they should consider what approach to take where currencies exceed the 20% threshold and then fall below it multiple times over the duration of the mortgage contract. A customer who has opted out of the notifications once may then need to be given further notifications if the currency position falls below the threshold after the customer has opted out and then exceeds it again, opting out each time.

87. Lenders are advised to ensure their communication to customers both pre- and post-sale tells

customers about their ability to opt-out. The example letters in annex two and annex three include suggested text.

88. It is recommended good practice that lenders providing an opt-out make and maintain an

adequate record of both their decision to provide an opt-out and their basis for doing so and of their customer’s request to opt-out of these notification requirements.

5.9 Content of notification 89. MCOB 7A.4.1 R requires that lenders use the notification to tell the customer what arrangements

there are for limiting his or her exchange rate risk. MCOB 2A.3.1 R and MCOB 2A.3.2 G respectively explain and suggest what options lenders could make available.

90. Lenders should provide a notification that tells the customer the relative position of the currency of

his or her income, assets or EEA state of residency has crossed a 20% threshold whenever that threshold is crossed.

91. MCOB 7A.4.1 R (2) is explicit in requiring that the firm explains the customer has either a right to

conversion or it should explain any other applicable mechanisms. The industry standard notification for lenders is given in annex three. This notification is written for those using risk warnings. Lenders offering conversion rights, caps or other methods should substitute the risk warning for information on how customers can exercise these options.

92. For lenders using risk warnings as their mitigation approach, the industry standard risk warning is

the post-sale risk warning given in annex one. This is the risk warning that meets the requirement at MCOB 2A.3.1 R and MCOB 2A.3.2 G.

93. Lenders may choose to amend the notification to reflect their communication policies. They may

also choose to customise the document where they see fit, such as by replacing the generic reference to the customer’s residency in a European Economic Area state with the actual state of residency of the customer to whom the notification is addressed applicable when the mortgage was entered into.

5.10 Format of notification 94. MCOB 7A.4, which is copied from article 23 of the MCD, specifies no requirements for the format

of the notification.

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95. The notification should be given in a durable medium. Lenders can choose whether to give this as paper or electronic correspondence but they should ensure they make and retain an adequate record of having given each notification.

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6. Examples of MCD foreign currency loan statuses This section gives a non-exhaustive series of examples of where a loan is and is not an MCD foreign currency loan according to the MCD 6.1 Examples of MCD foreign currency loan statuses The following is a non-exhaustive list of examples to illustrate whether a loan to these customers is or is not an MCD foreign currency loan. 1. Repayment mortgage to a UK resident repaying using a sterling income to pay a mortgage on a

UK property Customer one Customer two Mortgage type Repayment Mortgage currency Sterling Property location UK Customer residency UK UK Income for repayments Sterling (100%) Sterling (100%) Assets for repayment Not applicable Not applicable Loan status Not an MCD foreign currency loan Currency tracked Not applicable 2. Repayment mortgage to a Spanish resident repaying using a euro income to pay a mortgage on a

UK property Customer one Customer two Mortgage type Repayment Mortgage currency Sterling Property location UK Customer residency Spain Not applicable Income for repayments Euro (100%) Not applicable Assets for repayment Not applicable Not applicable Loan status MCD foreign currency loan Currency tracked Euro (income) 3. Interest-only mortgage to a USA resident using sterling income to repay the interest and a UK

property as the repayment vehicle to pay a mortgage on a UK property Customer one Customer two Mortgage type Interest-only Mortgage currency Sterling Property location UK Customer residency USA Not applicable Income for repayments Sterling (100%) Not applicable Assets for repayment Sterling (100%) Not applicable Loan status Not an MCD foreign currency loan Currency tracked Not applicable

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4. Interest-only mortgage to one British and one Italian resident using sterling, euro and dollar income to pay a mortgage on a UK property

Customer one Customer two Mortgage type Interest-only Mortgage currency Sterling Property location UK Customer residency UK Italy Income for repayments Sterling (33%); dollar (66%) Sterling (100%) Assets for repayment Euro (100%) Euro (100%) Loan status MCD foreign currency loan Currency tracked Dollar (income) and euro (repayment vehicle) 5. Repayment mortgage to a Kuwaiti resident using sterling and yen income to pay a mortgage on a

UK property Customer one Customer two Mortgage type Repayment Mortgage currency Sterling Property location UK Customer residency Kuwait Not applicable Income for repayments Sterling (50%); yen (50%) Not applicable Assets for repayment Not applicable Not applicable Loan status MCD foreign currency loan Currency tracked Yen (income)

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Annex one: pre- and post-sale MCD foreign currency loan risk warnings This annex specifies the pre- and post-sale risk warnings lenders should give customers who have MCD foreign currency loans. The post-sale risk warning is used to meet the requirements specified in MCOB 2A.3.1 R and MCOB 2A.3.2 G. Pre-sale risk warning You have applied for a loan which is subject to regulatory rules relating to foreign currency loans. These rules make the loan you have applied for a foreign currency loan. This is because your loan will be in a currency different to either the:

• Currency of the income or assets you intend to use to repay the mortgage; or the • Currency of the European Economic Area state in which you are resident.

The rules seek to warn you about the risks of fluctuations in currency exchange rates if the value of the relevant currency (or currencies) moves against you by at least 20%. Such a movement in the relevant currency’s exchange rate may make it more difficult for you to afford your mortgage payments and/or affect the value of the asset(s) you intend to use to fully repay your mortgage. What we will do We will notify you when the relative positions of the currency of your mortgage and the currency of [delete as applicable: the income/assets you intend to use to repay your mortgage and/or the currency of the European Economic Area state in which you are resident] move against you by at least 20% and on a regular basis thereafter. What you should do You should ensure you understand the implications of having a foreign currency loan and that you are able to continue to make your mortgage payments/repay your mortgage in the event of movements in exchange rates. Please seek independent financial advice if you have any concerns in this respect. Post-sale risk warning What has happened Our monitoring of your account shows the value of the relevant currency (or currencies) has moved against you by at least 20%. This means the value of [as applicable: your regular instalments and/or your outstanding balance has/have] increased relative to the currency of your loan. Such a movement in the exchange rate may make it more difficult for you to afford your mortgage payments and/or affect the value of the asset(s) you intend to use to fully repay your mortgage. What you should do next You should ensure you understand the implications of having a foreign currency loan and that you are able to continue to make your [as applicable: mortgage payments/repay your mortgage]. Please seek independent financial advice if you have any concerns in this respect or contact us on XXXXXX.

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Lenders should ensure that, where used, these risk statements are clearly and prominently displayed. This means it should be given in bold, in a font bigger than any text immediately before or after it and clearly distinct from any accompanying text, such as separated by one blank line on either side or in a box.

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Annex two: pre-sale notification to customers with MCD foreign currency loans This annex specifies the pre-sale notification to customers with MCD foreign currency loans. Dear Customer, We identified during your mortgage application that your mortgage is a foreign currency loan according to European law. This is because the currency of the mortgage you have applied for is different to [delete as applicable: the income/assets you intend to use to repay your mortgage or the currency of the European Economic Area state in which you are resident]. You have applied for a loan which is subject to regulatory rules relating to foreign currency loans. These rules make the loan you have applied for a foreign currency loan. This is because your loan will be in a currency different to either the:

• Currency of the income or assets you intend to use to repay the mortgage; or the

• Currency of the European Economic Area state in which you are resident. The rules seek to warn you about the risks of fluctuations in currency exchange rates if the value of the relevant currency (or currencies) moves against you by at least 20%. Such a movement in the relevant currency’s exchange rate may make it more difficult for you to afford your mortgage payments and/or affect the value of the asset(s) you intend to use to fully repay your mortgage. What we will do We will notify you when the relative positions of the currency of your mortgage and the currency of [delete as applicable: the income/assets you intend to use to repay your mortgage and/or the currency of the European Economic Area state in which you are resident] move against you by at least 20% and on a regular basis thereafter. What you should do You should ensure you understand the implications of having a foreign currency loan and that you are able to continue to make your mortgage payments/repay your mortgage in the event of movements in exchange rates. Please seek independent financial advice if you have any concerns in this respect.

[Optional text: You will be able to opt-out of receiving these letters after you have held your mortgage for more than one year. We will write to you with more information about this when you are eligible.]

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Annex three: post-sale notification to customers about 20% adverse movement for lenders using risk warnings This annex specifies the notification required at MCOB 7A.4.1 R. It includes the risk warning specified in annex one. Dear Customer, When you took out your mortgage with us, we identified that your loan was in a currency different to either the:

• Currency of the income or assets you intend to use to repay the mortgage; or the • Currency of the European Economic Area state in which you are resident.

This means your loan is a foreign currency loan according to European law. This law requires us to write to you whenever the value of the relevant currency (or currencies) moves against you by 20%. What has happened Our monitoring of your account shows the value of the relevant currency (or currencies) has moved against you by at least 20%. This means the value of [as applicable: your regular instalments and/or your outstanding balance has/have] increased relative to the currency of your loan. Such a movement in the exchange rate may make it more difficult for you to afford your mortgage payments and/or affect the value of the asset(s) you intend to use to fully repay your mortgage. What you should do next You should ensure you understand the implications of having a foreign currency loan and that you are able to continue to make your mortgage payments/repay your mortgage. Please seek independent financial advice if you have any concerns in this respect or contact us on XXXXXX.

Further letters about your mortgage Until or unless the currencies move in your favour so that the variation is less than 20%, we will continue to send you a letter like this once every 90 days. [Optional: You can ask us to stop sending you the letters if you no longer want them. To update your communication preferences, please contact us on XXXX or visit us at www.lender.com.]

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