Arrears, Post-Completion and Protection
The final topic covers what happens after completion and when payments go wrong: the fair treatment of borrowers in payment difficulty under MCOB 13, the pre-action steps and possession process, the insurance a lender requires and the life and health protection products that support a mortgage, and the adviser's anti-fraud and anti-money-laundering duties.
MCOB 13: treating borrowers in arrears fairly
MCOB 13 governs how lenders must deal with customers in payment difficulty. A 'payment shortfall' arises when the customer fails to pay the full amount due, so the shortfall accumulates. The overriding duty is to treat customers in arrears fairly, make reasonable efforts to reach an agreement over repayment, and treat repossession as a genuine last resort — pursued only after all reasonable alternatives have been considered. Once an account is in arrears the firm must provide the customer with prescribed information promptly (for example the current balance, the arrears, charges being incurred and where to get free debt advice), and any charges the firm imposes for arrears must be a reasonable estimate of the cost of the extra administration the shortfall causes — they must not be used to penalise or profit from the customer. Firms are expected to signpost customers to free, independent debt advice (for example StepChange, Citizens Advice or the National Debtline).
Forbearance: the alternatives to repossession
MCOB expects lenders to consider a range of forbearance measures before repossession, tailored to the customer's circumstances. Capitalising arrears means the lender adds the accumulated shortfall to the outstanding capital and recalculates the payments over the remaining term, clearing the arrears from the account (though it increases the balance on which interest is charged). Extending the mortgage term reduces the monthly payment by spreading the balance over longer, which can restore affordability but increases the total interest paid. A temporary concession such as allowing the borrower to pay interest only for a short period, or accept reduced payments, can bridge a short-term difficulty. Other measures include changing the payment date or arranging a formal repayment plan for the arrears alongside the normal payment. The adviser and lender should choose a measure that is genuinely sustainable for the customer, consistent with the Consumer Duty's aim of avoiding foreseeable harm.
The possession process and shortfall debt
If forbearance fails, possession is a last resort and is subject to procedural protection. In England and Wales a lender must comply with the pre-action protocol for mortgage arrears before starting court action, showing the court it has tried to resolve matters. A court may grant a suspended possession order, which typically postpones eviction for as long as the borrower keeps to agreed terms (usually the normal payment plus an agreed sum off the arrears), giving a further chance to recover. Where the lender does take possession and sell, MCOB 13.6 requires it to take reasonable steps to obtain the best price reasonably obtainable and to account to the customer: any surplus after the debt and costs belongs to the borrower, but crucially, if the sale proceeds are less than the outstanding debt, the borrower remains liable for the shortfall — the debt is not written off by the sale, and the lender may pursue it (subject to limitation periods). This is why avoiding repossession usually serves the borrower better than letting the property be sold.
Buildings insurance and the lender's security
As a condition of the mortgage a lender will normally require the borrower to hold buildings insurance for at least the property's full reinstatement value — the cost of rebuilding, which is not the same as the market or purchase price. This protects the lender's security: if the property is damaged or destroyed, the insurance funds reinstatement so the asset backing the loan is preserved. The reinstatement figure is usually stated in the valuation or a rebuilding-cost assessment. Advisers should note the distinction the exam tests: buildings insurance is generally mandatory (it protects the security), whereas contents insurance and payment-protection-type cover are optional protections for the borrower, and firms must not make a mortgage conditional on buying their own insurance.
Protection products: life and health cover
Advisers should be able to match protection products to a mortgage need. To repay an outstanding balance on death, the type of life cover should mirror how the debt behaves. Decreasing term assurance is the classic match for a capital-and-interest (repayment) mortgage, because the sum assured falls broadly in line with the reducing loan balance, so cover and debt run down together and premiums are relatively low. Level term assurance keeps a constant sum assured and is appropriate for an interest-only mortgage, where the capital stays the same throughout the term. Family income benefit pays a regular income (rather than a lump sum) to dependants from the date of death to the end of the term, useful for replacing household income. Whole-of-life assurance has no fixed term and pays out whenever death occurs, so it is used for permanent needs (such as inheritance-tax liabilities) rather than a term-limited mortgage. Options on term policies are tested: a convertible policy lets the holder convert to a different (for example whole-of-life or endowment) policy without further medical evidence; a renewable policy lets the holder renew for a further term without new medical evidence; and increasing (index-linked) term assurance raises the sum assured over time to keep pace with inflation. On the health side, critical illness cover (CIC) pays a lump sum on diagnosis of a specified serious condition (and, on an 'accelerated' basis added to a life policy, pays on the earlier of critical illness or death, ending the policy), while income protection (IP) replaces a proportion of lost earnings if the insured cannot work through illness or injury, paying until recovery, retirement or the end of the term.
Fraud, money laundering and the adviser's duties
Advisers sit on the front line against mortgage fraud and money laundering. If an adviser suspects that a client's application contains falsified income documents or other misrepresentations, they must not proceed with or facilitate the application — knowingly submitting false information is mortgage fraud and a criminal offence. Under the Money Laundering, Terrorist Financing and Transfer of Funds Regulations 2017 (the MLRs) firms must carry out customer due diligence, verify identity and monitor for suspicious activity. Under the Proceeds of Crime Act 2002 (POCA), where an adviser knows or suspects that funds represent the proceeds of crime, they must consider making a suspicious activity report (SAR) to the firm's nominated officer / the National Crime Agency (NCA) — and must not 'tip off' the client that a report has been or may be made, as tipping off is itself an offence that could prejudice an investigation. The correct action on suspicion is therefore to report through the proper channel and stay silent to the client, not to challenge the client directly or simply decline the case without reporting.
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