At Enterprise Finance we have always advocated regulation for the transparency and protection it affords consumers and the increased standards it demands.
You only have to look at how the residential mortgage market has been improved by greater legislation to realise its transformational effect.
Regulation has been a buzzword for specialist finance recently with the introduction of the EU Mortgage Credit Directive. But those who thought the start date of 21 March meant an end to increased regulation for the foreseeable future have had to think again.
On 29 March, along came the consultation on guidelines from the Prudential Regulation Authority on lending criteria for buy-to-let mortgages. Buy-to-let came under the Government’s spotlight last year with increased stamp duty for additional homes and the reduction of tax relief for landlords.
Although the Chancellor took no further steps in this year’s Budget – suggesting he may feel he hit the private rental sector too hard the last time – the PRA has now entered the debate. It is aiming to guard against a loosening of underwriting standards among the banks and building societies that fall under its purview.
Given the PRA’s duty to protect the depositors who fund those banks, it is understandable that it should intervene where necessary to ensure banks’ risk appetites are kept in line.
The buy-to-let sector has been relatively untended by regulation because it has been classified as a business transaction rather than as a consumer contract. The PRA obviously feels restrictions are needed for a sector that continues to grow at a considerable rate.
Among the recommendations in the PRA’s consultation paper are: an affordability assessment, the requirement for lenders to verify borrowers’ personal income, a minimum stress rate and a specialist underwriting process for landlords with more than four properties.
While the first two of these are sensible – and not dissimilar from the checks that specialist lenders already carry out – minimum stress rates may be harder to implement and being too rigid with certain criteria may rid the sector of the flexibility that has been one of its strongest attributes.
It is no secret that the bridging and buy-to-let sectors are intrinsically linked because some landlords rely on short-term finance to assist their property projects. So anything impacting the latter is bound to have a knock-on effect on the former. However, there is no need to panic just yet.
First, the PRA has liaised with banks for some time and believes that around three-quarters of them already comply with the proposals.
Further, while the PRA is acting to protect depositors, specialist lenders that are not PRA-regulated can expand to meet the evident need in the buy-to-let and adjacent sectors, such as bridging. The ability of non-bank lenders to step in and meet the customer need, while the PRA maintains retail customer protection, reflects a healthy capital market.
It is also worth bearing in mind that the private rented sector provides millions of Britons with a place to live. Anything that restricts too severely the supply of rental accommodation could cause potentially more catastrophic problems. Even if there is a contraction in the sector as a whole, the market that is addressable by specialist lenders will continue to grow.
Figures from the CML suggest that the overall share of the market accounted for by specialist lending has risen from 0.1 per cent in 2010 to around 4 per cent, and there is every reason to assume this will continue into the future.
Increased regulation need not knock this growth pattern off its stride as there will always be a significant swathe of borrowers whose financing needs do not fit the boxes of mainstream finance. These people will need specialist products, agile lenders and, most importantly, expert intermediary advice to steer them in the right direction.
In some ways, the proposed PRA restrictions could play into the hands of specialist lenders.
Danny Waters is chief executive of Enterprise Finance