Executive Summary

This guidance was created to be a source for mortgage lenders providing APRC calculations for their customers as part of mortgage financial promotions, typical illustrations, ESIS illustration and mortgage offers. This guidance reflects current Financial Conduct Authority (FCA) rules on calculation of APRCs and supersedes any previous documentation/guidance on calculation of APRCs produced by UK Finance and the BSA (including guidance from CML on APRC calculations- Section 4.6 Assumptions (MCOB 10A.3.1 R (5)).

About this Guidance

This Guidance has been prepared by and agreed among UK Finance and BSA members in response to the FCA’s update on their expectations around MCOB 10A.3.1R(5) requirements for calculating APRCs. This guidance is limited to MCOB 10A.3.1R(5) only and does not cover all other APRC requirements. 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 calculations and disclosures of the APRC. 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.

Who This Applies To

UK Finance and BSA members may share this guidance with their system providers. This is not intended as a public document.

Background

Market turbulence in September 2022 caused reversion rates to be lower than new fixed rates, leading to the FCA providing updated guidance on MCOB 10A.3.1R(5). On 1 June the FCA published their expectations in respect of APRC calculation, and stated that lenders system issues have led some firms to incorrectly calculating the APRC, see here.

MCOB 10A.3.1R(5) states:

For an MCD regulated mortgage contract for which a fixed borrowing rate is agreed in relation to the initial period, at the end of which a new borrowing rate is determined and subsequently periodically adjusted according to an agreed indicator or internal reference rate the calculation of the APRC must be based on the assumption that, at the end of the fixed borrowing rate period, the borrowing rate is the same as at the time of calculation of the APRC, based on the value of the agreed indicator or internal reference rate at that time, but is not less than the fixed borrowing rate.

NOTE: the use of bold in the rule text is as per the FCA website.

FCA have provided clarity around MCOB 10A.3.1 R(5) whenever:

1. the prevailing reversionary rate for a fixed rate product is higher than the fixed rate, the fixed rate should be used for the initial term and the prevailing revert rate should be used for the remaining term, when calculating APRC as per the formula outlined in MCOB (see scenario 1).
2. the reversionary rate for a fixed rate product is lower than the fixed rate, the fixed rate should be used for the whole term, when calculating APRC as per the formula outlined in MCOB (see scenario 2).

Worked examples

Scenario 1

25 year mortgage, 3.99% two year fixed rate mortgage with a reversion rate of 4.49%

APRC is calculated using 3.99% over two years and 4.49% over the remaining 23 years for the purposes of the customer illustration

Scenario 2

25 year mortgage, 4.99% two year fixed rate mortgage with a reversion rate of 4.89%

APRC is calculated using 4.99% for the full 25 years for the purposes of the customer illustration.

Note – these examples only provide an illustration of how lenders apply the borrowing rate in calculating APRC and do not include other considerations such as charges. Firms should refer to MCOB 10A.1, MCOB 10A.2 & MCOB 10A.3

FCA Intermediate/ Stepped rate mortgages and APRC Calculations

When calculating an APRC for a product with unquantifiable variations in the borrowing

rate, such as a base rate tracker or a discounted variable rate, MCOB 10A.1.4R confirms

that the APRC should be calculated on the assumption the borrowing rate will remain

fixed in relation to the level set when the mortgage contract is entered into. Examples were provided separately by the FCA. Please see examples provided by the FCA in- Intermediate/ stepped rate mortgages and APRC Calculations

FCA Expectations

Although the FCA statement (1 June) highlights non-compliance there is no expectation that lenders try to identify any of the impacted customers and carry out any remedial work. The FCA made it clear they do not expect lenders to write to customers.

FCA confirmed that its statement is only applicable to APRC calculations.

The regulator expects firms to take prompt action to address this and bring themselves into compliance as soon as they are able, however they did not set a timeframe. The FCA acknowledged that firms/system providers are at different stages and when advised that development could take some time.

The FCA did not state that firms need to make manual interventions, instead they should explain to the customer how the firm has calculated the APRC. The FCA did state that if a lender thinks it will take longer than 18 months to make the necessary changes, it should notify its supervisor/the FCC, detailing the expected resolution date.

Firms do not have to notify the FCA when the changes to systems are implemented or when any review of mortgage APRC calculations from Oct/Nov 2022 is complete.

It would be appropriate for firms to discuss, and detail the route to resolution internally, so that, should the FCA ask for evidence of action is being taken, the appropriate records can be provided.

Disclaimer

This Guidance is aimed at mortgage lenders providing APRC calculations.

Please note that the content is prepared in response to the FCA’s update on their expectations around MCOB 10A.3.1R(5) requirements for calculating APRCs. This Guidance represents the views of UK Finance and BSA members. The content is strictly for guidance only and has not been approved by a regulatory body. It does not represent formal or legal regulatory advice, and whilst anyone is welcome to use the Guidance, it is entirely at their own risk. UK Finance, in collaboration with BSA, would like to emphasise that the Guidance is not binding, and does not give rise to any enforceable obligations or duties. Accordingly, UK Finance and BSA, shall not be responsible or liable for any loss, damages or costs arising from the use of this Guidance. Users of the Guidance should ensure that it is suitable for their use (and that appropriate due diligence has been conducted, including in relation to compliance with relevant laws).