MCOB came into force on 31 October 2004 and sets out a number of principles by which residential mortgage providers should conduct their business. It also sets out certain rules for dealing with borrowers who are in arrears with their mortgage repayments.
Mr. and Mrs. Thakker were significantly indebted to Northern Rock, who commenced possession proceedings in order to recover their security. Mr. and Mrs. Thakker defended that claim and counterclaimed, alleging that Northern Rock had breached a number of the MCOB rules and they were therefore not entitled to take possession of the mortgaged property.
In so doing Mr. and Mrs. Thakker argued that the principles set down in the case of National Westminster Bank Plc v Skelton  (i.e. that a borrower cannot normally resist a claim for possession by asserting a counterclaim which would be set-off against the mortgagee) should not apply to the regulatory regime set out in MCOB, which came into force after the decision in Skelton.
The Court rejected that argument. The Court held that there were two stages in possession claims:
1. Did the mortgagee have a right to possession?
2. If so, should the Court exercise its discretion to stay possession?
The Court held that a breach of MCOB would not result in the underlying transaction being void or unenforceable (by reference to section 151(2) of the Financial Services and Markets Act 2000 (now replaced by section 138E(2)). In the light of this provision the Court held that even if the breaches of MCOB could be proved, they could not defeat the mortgagee’s right to possession. Any breaches may give rise to a loss resulting in damages and could then be considered as a matter of discretion so as to suspend execution of a possession order or to stay such an order, but would not defeat the claim for possession itself.
This case serves as a useful reminder of the general principle that a lender has an absolute right to possession which will not be defeated by a counterclaim. Of course, lenders should ensure compliance with the MCOB rules, a breach of which can result in regulatory and disciplinary action by the FCA and potentially a claim for damages by a borrower.
Attributed to Layla Kelly, an Associate with Bootes Solicitors in Manchester