LIBF CeMAP (Certificate in Mortgage Advice and Practice) — All Questions

The Financial Conduct Authority (FCA) derives its powers principally from:

• a.The Financial Services and Markets Act 2000, as amended by the Financial Services Act 2012✓
• b.The Data Protection Act 2018
• c.The Consumer Credit Act 1974 alone, together with the voluntary lending codes issued by the trade associations
• d.The Mortgage Credit Directive

FSMA 2000, as amended by the Financial Services Act 2012, established the FCA and sets out its objectives and rule-making powers. The other statutes address specific areas such as credit, mortgages and data protection, but do not constitute the FCA.

Which of the following is one of the FCA's three operational objectives under FSMA 2000?

• a.Guaranteeing every lender a profit
• b.Fixing mortgage interest rates
• c.Setting house prices
• d.Securing an appropriate degree of protection for consumers✓

The FCA's three operational objectives are consumer protection, market integrity, and promoting effective competition in the interests of consumers, supporting its single strategic objective that markets function well (FSMA 2000, ss.1B-1E).

Under the FCA's Consumer Duty, in force from 31 July 2023, firms must:

• a.Apply the Duty only to wholesale market counterparties
• b.Treat all customers identically regardless of their needs
• c.Act to deliver good outcomes for retail customers✓
• d.Prioritise shareholder returns over customer outcomes

The Consumer Duty introduced Principle 12, requiring firms to act to deliver good outcomes for retail customers, with detailed rules in PRIN 2A and four outcomes: products and services, price and value, consumer understanding, and consumer support. It sets a higher standard than the earlier Treating Customers Fairly framework.

If an authorised mortgage adviser gives negligent advice and later becomes insolvent, an eligible consumer's claim may be protected by the Financial Services Compensation Scheme (FSCS) up to:

• a.£50,000
• b.There is no protection for advice claims
• c.£170,000
• d.£85,000✓

The FSCS protects eligible claims for home-finance advice and arranging up to £85,000 per person per firm (raised from £50,000 in April 2019). It is the compensation scheme of last resort when an authorised firm cannot meet claims made against it.

A customer who is dissatisfied with how a mortgage firm has handled their complaint, and who cannot resolve it with the firm, may refer it to the:

• a.Bank of England
• b.HM Land Registry
• c.Financial Services Compensation Scheme
• d.Financial Ombudsman Service✓

The Financial Ombudsman Service (FOS) resolves unresolved complaints between consumers and financial firms. Its service is free to consumers and its decisions are binding on the firm if the consumer accepts them. The FSCS, by contrast, pays compensation when an authorised firm has failed.

Before advising on regulated mortgage contracts, a firm must generally:

• a.Be authorised by the FCA, or act as an appointed representative of an authorised firm✓
• b.Hold a banking licence from the Bank of England
• c.Obtain planning permission
• d.Register only with HM Land Registry and the local trading standards office before giving any advice

Advising on and arranging regulated mortgage contracts is a regulated activity under FSMA 2000, so a firm must be FCA-authorised or act as an appointed representative of an authorised principal that accepts responsibility for its regulated activities.

Under Article 61 of the Regulated Activities Order, a loan is a 'regulated mortgage contract' where it is secured by a mortgage on land in the UK, the borrower is an individual or trustee, and:

• a.The property is used solely for commercial or agricultural purposes, with no dwelling situated on the land at all
• b.The borrower is a limited company
• c.At least 40% of the land is used, or intended to be used, as a dwelling by the borrower or a related person✓
• d.The loan exceeds £1 million

A regulated mortgage contract requires that at least 40% of the mortgaged land is used, or intended to be used, as or in connection with a dwelling by the borrower or a related person (RAO 2001, Article 61). Lending to companies, and most pure buy-to-let, falls outside this definition.

A buyer purchasing a flat is told the title is 'leasehold'. This means the buyer:

• a.Owns the right to occupy the property for a fixed term granted by the freeholder✓
• b.Owns only the contents of the flat
• c.Owns nothing until the mortgage is repaid
• d.Owns the land and the building on it outright and indefinitely, with no ground rent payable to anyone

Leasehold ownership gives the right to occupy the property for a fixed term under a lease granted by the freeholder, often with ground rent and service charges. Freehold, by contrast, is outright ownership of the property and land for an indefinite period.

A property is subject to both a first and a second legal charge. If the property is sold following repossession, the sale proceeds are applied:

• a.Equally between the two lenders in proportion to the amounts they each advanced to the borrower
• b.To the first-charge lender in full before the second-charge lender receives anything✓
• c.To the borrower first
• d.To the second-charge lender first

Legal charges rank in order of priority: the first charge is repaid in full from the proceeds before the second-charge lender receives anything. This is why second-charge lending carries greater risk and typically a higher interest rate.

Two co-owners hold a property as beneficial joint tenants. On the death of one owner, that owner's interest:

• a.Passes automatically to the surviving co-owner by the right of survivorship✓
• b.Is sold by the lender
• c.Passes under the deceased's will to a chosen beneficiary
• d.Reverts to the freeholder

Under a joint tenancy the right of survivorship applies: the deceased's interest passes automatically to the surviving joint tenant, outside the will. Under a tenancy in common, each owner instead has a distinct share that passes under their will or the intestacy rules.

A lender arranges a basic mortgage valuation of a property. The primary purpose of that valuation is to:

• a.Give the buyer a detailed report on every defect
• b.Set the stamp duty payable
• c.Guarantee the buyer against future repair costs
• d.Confirm to the lender that the property is adequate security for the loan✓

A mortgage valuation is carried out for the lender to confirm the property is worth enough and is suitable security for the loan. It is not a detailed condition report; a buyer wanting that should commission a RICS HomeBuyer report or a full building survey.

Where a firm gives advice on a regulated mortgage, the suitability rules in MCOB 4.7A require it to:

• a.Recommend a mortgage that is suitable for the customer, having assessed their needs and circumstances✓
• b.Recommend the mortgage paying the firm the highest procuration fee, provided the customer can afford the payments
• c.Recommend any mortgage the customer requests without any assessment
• d.Provide information but never a recommendation

MCOB 4.7A requires that, on an advised sale, the firm assesses the customer's needs and circumstances and only recommends a regulated mortgage contract that is suitable, taking account of factors such as affordability, the term, and the customer's objectives.

Under the Mortgage Credit Directive, the pre-contract disclosure document a customer must receive, illustrating the mortgage's costs and features, is the:

• a.Consumer Duty outcomes statement
• b.Annual percentage rate table only
• c.Land Registry title plan
• d.European Standardised Information Sheet (ESIS)✓

Since the Mortgage Credit Directive (in force 21 March 2016), the ESIS replaced the old Key Facts Illustration (KFI) as the standard pre-application and pre-contract disclosure document (MCOB 5A), setting out the loan's key features, costs and the APRC.

A mortgage sale may proceed on an execution-only (non-advised) basis only where:

• a.The customer has rejected advice or the sale meets the specific MCOB conditions, and no personal recommendation is made✓
• b.The customer is a first-time buyer who has confirmed in writing that they do not want to receive any form of advice at all
• c.The adviser makes a recommendation but records no advice
• d.The loan is above £500,000

MCOB restricts execution-only sales: most interactive sales must be advised, and an execution-only route is only available in defined circumstances where no personal recommendation is made and the customer positively elects to proceed without advice (MCOB 4.8A).

A mortgage financial promotion issued by an authorised firm must be:

• a.Approved by the Bank of England
• b.Clear, fair and not misleading✓
• c.Free of any risk warnings
• d.Sent only to existing customers

MCOB and the FCA's Principles require that communications and financial promotions be clear, fair and not misleading, so that customers are not given a false impression of a mortgage's costs, risks or features.

At the outset of a mortgage interview, the adviser should disclose:

• a.The customer's full credit score and personal financial details to selected third-party lenders
• b.The nature and scope of the service and how the adviser will be paid, including any fees✓
• c.Only the lender's name
• d.Nothing until the application is submitted

MCOB disclosure rules require the firm to explain, early in the process, the type of service offered (advised or execution-only, whole-of-market or restricted) and the basis of its remuneration, including any fees the customer will pay, so the customer can make an informed choice.

A central principle of the Mortgage Market Review (in force April 2014) is that:

• a.Borrowers may self-certify their income without evidence, provided they can show a clean credit history over recent years
• b.Affordability is the borrower's sole responsibility
• c.The lender must assess and take responsibility for whether the mortgage is affordable, verifying income✓
• d.Interest-only mortgages are banned outright

The MMR placed responsibility for assessing affordability firmly on the lender, requiring income to be verified and effectively ending self-certification. Interest-only lending was not banned but is only permitted where there is a credible repayment strategy.

When assessing affordability under MCOB 11, a lender must consider whether the borrower could still afford the mortgage if:

• a.The borrower moved abroad
• b.Interest rates were to rise over the early years of the mortgage✓
• c.House prices were to double
• d.The borrower were to win the lottery or receive a large and unexpected inheritance during the term

MCOB 11 responsible-lending rules require an interest-rate stress test: the lender must assess whether repayments would remain affordable if interest rates rose during the early years, rather than assuming rates stay low. Net income and committed expenditure must also be assessed.

A lender may grant an interest-only mortgage under current rules where:

• a.The borrower is over 40 years old
• b.No repayment plan is needed at all
• c.The borrower simply hopes that house prices will rise enough to cover the outstanding capital by the end of the term
• d.There is a credible, clearly understood strategy to repay the capital at the end of the term✓

Interest-only mortgages are permitted only where the borrower has a credible and clearly understood strategy for repaying the capital, such as an investment or savings vehicle. Reliance on assumed future house-price rises is not an acceptable repayment strategy.

One effect of the Mortgage Credit Directive (2016) was to:

• a.Require all mortgages to be interest-only
• b.Bring second-charge mortgages fully within MCOB and create a regime for consumer buy-to-let✓
• c.Abolish the FCA
• d.Remove all conduct regulation from first-charge residential mortgages that are sold to individual consumers

The MCD brought second-charge mortgages (previously regulated under the Consumer Credit Act) fully within MCOB, introduced the ESIS and APRC, and created a registration regime for consumer buy-to-let lending to 'accidental' landlords who are acting as consumers.

The APRC (Annual Percentage Rate of Charge) shown on an ESIS represents:

• a.The rate of stamp duty
• b.The valuation fee
• c.The lender's own profit margin only, before any fees or charges are added to the loan
• d.The total cost of the mortgage to the borrower expressed as a yearly percentage✓

The APRC expresses the total cost of the mortgage (interest plus mandatory charges) as a single annual percentage rate, helping borrowers compare deals on a like-for-like basis. The MCD also requires a second APRC illustrating the effect of higher rates.

Under a capital-and-interest (repayment) mortgage, the borrower's monthly payments:

• a.Vary directly with the stock market
• b.Are invested in a separate savings plan
• c.Cover both interest and a portion of the capital, so the balance is cleared by the end of the term✓
• d.Cover interest only, leaving the capital outstanding at the end of the term

A repayment (capital-and-interest) mortgage's payments include both interest and capital, so provided all payments are made the loan is fully repaid by the end of the term. An interest-only mortgage instead leaves the capital to be repaid separately.

An offset mortgage works by:

• a.Converting the loan into a foreign currency
• b.Guaranteeing a cashback each year
• c.Setting the borrower's linked savings balance against the mortgage balance to reduce the interest charged✓
• d.Fixing the interest rate for the whole term so that the borrower's monthly payment never changes for the entire mortgage term

An offset mortgage links the borrower's savings (and sometimes current-account) balances to the mortgage; interest is charged only on the net balance, reducing the interest cost while keeping the savings accessible. It does not fix the rate or pay cashback.

A tracker mortgage's interest rate:

• a.Moves in line with an external benchmark such as the Bank of England Bank Rate, at a set margin✓
• b.Never changes
• c.Is fixed for the life of the loan
• d.Is set at the lender's absolute discretion with no reference point

A tracker rate is a variable rate that follows a stated external benchmark, most commonly the Bank of England Bank Rate, plus a fixed margin, so the payment rises and falls with that benchmark. This differs from a lender's own standard variable rate, which the lender itself sets.

A 'discount' mortgage offers the borrower:

• a.A fixed rate for five years
• b.A set reduction off the lender's standard variable rate (SVR) for a period✓
• c.A rate that tracks the Bank of England Bank Rate
• d.An interest-free loan

A discount mortgage charges the lender's standard variable rate (SVR) less a set discount for an introductory period. Because it depends on the SVR, which the lender controls, the actual rate can move if the SVR changes.

A capped-rate mortgage protects the borrower by ensuring that the interest rate:

• a.Can fall but cannot rise above a stated ceiling during the capped period✓
• b.Always equals the Bank Rate
• c.Rises automatically each year
• d.Is fixed for the whole term and can never change under any market conditions

A capped rate is variable but cannot exceed a stated ceiling ('cap') during the capped period, giving the borrower protection against rises while still allowing the benefit of falls. A 'capped and collared' product also has a floor below which the rate cannot fall.

Where a borrower falls into arrears, MCOB 13 requires the lender to:

• a.Add unlimited charges to the account
• b.Repossess the property immediately once a single monthly payment has been missed by the borrower
• c.Treat the customer fairly and consider repossession only as a last resort✓
• d.Refuse to communicate with the borrower

MCOB 13 requires lenders to deal fairly with customers in payment difficulty, make reasonable efforts to agree a way to resolve the arrears, and treat repossession as a last resort after other options have been considered.

As a condition of a mortgage, a lender will normally require the borrower to have:

• a.Travel insurance
• b.Life insurance covering the lender's directors and senior managers for the duration of the loan
• c.Buildings insurance covering at least the reinstatement value of the property✓
• d.Pet insurance

Lenders require buildings insurance so that the property, which is their security, can be rebuilt if it is damaged or destroyed; cover must be at least the reinstatement value. Contents insurance, by contrast, protects the borrower's belongings and is optional.

A mortgage adviser who suspects that a client's application contains falsified income documents to obtain a larger loan should:

• a.Ignore it if the client insists
• b.Decline to proceed and, where appropriate, make a suspicious activity report, in line with anti-money-laundering obligations✓
• c.Increase the size of the requested loan to help the client meet the higher purchase price they have privately agreed with the seller of the property
• d.Simply tell the client to find a different lender

Submitting falsified documents is mortgage fraud. Under the Money Laundering Regulations 2017 and the Proceeds of Crime Act 2002, the adviser must not facilitate it and, where suspicion of criminal proceeds arises, must consider making a suspicious activity report (SAR) to the National Crime Agency, without tipping off the client.

Which protection product is most commonly recommended to repay the outstanding balance of a repayment mortgage if the borrower dies during the term?

• a.An annuity
• b.Decreasing term assurance✓
• c.Private medical insurance
• d.Motor insurance

Decreasing term assurance provides a sum that reduces broadly in line with the falling balance of a repayment mortgage, so it can clear the outstanding debt on death for a relatively low premium. Level term assurance is more commonly paired with interest-only mortgages, where the balance stays constant.