Selfcert.co.uk has been criticised for circumventing rules intended to protect consumers. But is the lender legitimately filling a gap in the market, and will others follow suit?
Reports of the death of self-cert mortgages have been greatly exaggerated, as Mark Twain once very nearly said.
The so-called ‘liar loans’, banned in the UK by the Mortgage Market Review, made a comeback at the beginning of this year with the arrival of new lender selfcert.co.uk.
The firm is based in Prague and gets around the MMR by employing the EU’s Electronic Commerce Directive to write business in the UK. The fact that the firm is based abroad means it is not regulated by the Financial Conduct Authority, unlike UK-based firms.
Loss of regulatory protection
Since its launch, selfcert.co.uk has drawn criticism for avoiding the FCA’s rules and for the fact that UK borrowers would be unable to turn to the Financial Ombudsman Service or the Financial Services Compensation Scheme if something were to go wrong.
But is the self-cert lender really the villain of the piece or just an entrepreneurial firm legally filling a gap in the market? Could other firms be set up to emulate it? And what is the future for this type of lending?
The Council of Mortgage Lenders is clear that self-cert is not the solution to the problems facing the UK mortgage market.
A spokesman says: “We do not think firms should deliberately set out to circumvent what is a very clear regulatory intention – one that provides protection for consumers and also guards against macro-prudential risks.”
“We want to see a mortgage market that provides options and choices for as many credit-worthy customers as possible, including those who may have an irregular income, as long as the loan is affordable. We want a market that serves the self-employed and those with irregular incomes, but not through a self-cert option. The best way to meet the needs of these customers is through lenders operating within the regulated UK market.
“In recent years, we have seen the market adjust to accommodate more of these customers. We have also seen new challenger banks entering the market and they have helped to widen the range of options for borrowers who may not fit mainstream lending criteria – but with the protection of operating within the regulated UK market.”
A statement released by the FCA in response to the launch of selfcert.co.uk conveys a similar warning. The FCA says: “Firms providing online services from an establishment in a European Economic Area state other than the UK under the ECD have to comply with the law of that state, rather than with UK regulatory law. If anything goes wrong, the responsibility is with the other EEA state’s authorities.
“Even if a regulated mortgage adviser in the UK recommends such a mortgage, clients will not be able to get compensation from that adviser if it turns out they cannot afford the mortgage payments. This is because the adviser is not responsible for assessing affordability.
“Previously, when consumers took out a self-certified mortgage they self-certified that the income stated in their mortgage application was true. Because of the harm caused to consumers in the past, this is no longer permitted in the UK and firms must check that a customer can afford a mortgage, including verifying their income in every case.”
Brokers are sceptical too. London & Country associate director of communications David Hollingworth says: “Anyone seeing an overseas outfit as a positive move for the mortgage market needs to approach with caution.”
Cherry Mortgage & Finance broker Matthew Fleming-Duffy says: “Affordability-based lending is both practical and sensible for mortgage contracts, whether in the UK or across Europe.
“While selfcert.co.uk gained some dramatic headlines recently, I do not expect this to be the shape of things to come with regard to mortgage underwriting practice. Its website does not present a professional image and there is no reference to an arrears handling or repossession process.”
The owner of selfcert.co.uk is Graeme Wingate, founder of unsecured lending firm Quick Loans, which once offered payday loans. Perhaps this association with the controversial short-term loan market is another reason for the concern.
Asked whether other firms could follow in the footsteps of selfcert.co.uk, none of the industry experts contacted by Mortgage Strategy thought that would happen.
One reason cited is that, from this month – when the Mortgage Credit Directive must be adopted throughout Europe – all firms based in countries that must follow these rules will have to assess borrowers’ income. The Czech Republic, home of selfcert.co.uk, currently has no creditworthiness rules for lenders.
But the MCD will force lenders to judge creditworthiness by using information that is appropriately verified, including through reference to independently verifiable documentation where necessary”.
The FCA says the MCD is at odds with the self-cert business model. In January the regulator said: “From 21 March 2016, all firms offering mortgages in the UK (including EEA firms) will have to comply with the Mortgage Credit Directive, which requires a thorough affordability assessment based on information that has been verified by the lender.”
In response, however, Wingate claimed selfcert.co.uk complied with the creditworthiness guidelines of the MCD and the European Banking Authority.
He said: “There’s nothing in those rules. The wording they use is ‘creditors should make reasonable enquiries and take reasonable steps to verify consumers’ underlying income’.
“It’s very, very vague – there’s nothing in it. We’ve had legal counsel and legal experts on it and they’ve said there’s nothing there. It’s unenforceable.”
Wingate says selfcert.co.uk uses social media and credit checks to judge borrowers’ incomes and lifestyles.
However, lawyers say the current self-cert business model is incompatible with the MCD.
Henderson Chambers barrister Henry Warwick says the MCD wording must be kept open to enable EU countries to mesh the directive into their existing rules. But he adds: “It’s pretty clear in saying there has to be a thorough assessment of creditworthiness. So I can’t imagine how it would be the case that a purely self-certified mortgage application would meet the requirements for a thorough assessment.”
Edwin Coe real estate consultant Robert McNally says the MCD will force lenders to prove a borrower’s creditworthiness. He says: “That means they have to be able to prove it is affordable to the borrower; they have to have done something to be able to prove that.
“Affordability is potentially subjective, but it is a function of how much you’ve got going in and how much you’ve got going out. So how does the creditor know that information? He must have asked for it.”
Pinsent Masons partner Hannah Brader adds: “[Under the MCD] you have to carry out a through assessment of the consumer’s credit-worthiness and his ability to meet his obligations under the agreement.
“You have to look at external factors, you can’t just take the word of the borrower. You have to validate it and verify it.”
In February, selfcert.co.uk announced it would not be conducting any new lending for around 12 months.
Its website said: “We only had enough capital for around 300 mortgages. Since we launched back in January, we have received over 7,500 applications for these products. Unfortunately, there is simply no way we can meet demand and have ceased taking new applications until further notice.”
In the face of criticism, the firm is bullish about its right to offer mortgages to those unable to prove their income.
Writing on its website earlier this month, it said: “For us, it is sometimes like we’re living in a parallel universe, a universe where people ignore facts staring them in the face.
“These [critical] articles went into great detail about how self-cert was a very bad way of deciding who should get a mortgage and who shouldn’t. We need to point out that self-cert is not banned in the UK; it isn’t and never has been. People should remember this because it is a myth.
“Self-cert is still around for all the riskier debt. Riskier debt includes credit cards, payday loans and standard bank loans. There are literally billions of pounds of risky debt taken out each year using the self-cert method of approval.
“The less risky type of lending that is secured on property with a significant deposit, using self-cert, is banned in the UK. You can get riskier debt by using self-cert but you can’t get safer debt using self-cert.”
The lender argues that, if the notion of self-certification is so bad, the FCA should ban it from other areas of financial services, in addition to mortgages.
Its website says: “That’s what really is odd about the negative comments we are receiving. These experts are turning a blind eye to the elephant in the room, taking potshots at us. If self-cert really is that bad, and irresponsible, why not ban it completely from the UK market?
“Make credit card companies ask to see payslips before they open an account. Inform banks that they can only lend to their own customers unless they see payslips. All these would be a much better place to start, in our opinion, if the model is flawed.”
Stance on advice
What may infuriate some brokers is the firm’s stance over advice. This is what it says on its website: “The FCA says that you must pay for mortgage advice. Why? If you want advice then feel free, but we don’t insist you spend £1,500-plus for it.”
Selfcert.co.uk offers loans up to £500,000 outside London only, on a tracker basis only at up to 85 per cent LTV at base rate plus 2 per cent for the life of the loan. Its website does not clearly state the fees, although reports state there is a £600 application fee.
Its rates are reasonable against the market’s best. Its current 2.5 per cent two-year tracker with a £600 fee at 85 per cent LTV compares to a possible 1.07 per cent on a standard mortgage with a £975 fee at 60 per cent LTV, and 1.74 per cent with a £975 fee at 85 per cent LTV.
Self-cert mortgages were formally banned with the April 2014 implementation of the MMR. But self-cert was effectively extinct long before that point because most lenders had pulled out of the market. In fact, in July 2010 the former Financial Services Authority had reported that “the market has already adjusted by withdrawing self-certification products”.
Although many agree that ‘liar loans’ should be banned, selfcert.co.uk, unsurprisingly, does not. It states on its website: “Where is the evidence that they should be banned? We have never seen it. It’s actually the FCA and politicians who are dealing in conspiracy-type theories without evidence. Has anyone seen the evidence? Please send it to us!”
But the FSA had published figures in 2010 showing that, in August 2009, slightly over a fifth (21 per cent) of people with a self-cert mortgage were in arrears, compared to just 6 per cent where income had been verified.
Filling a need?
But is selfcert.co.uk in fact filling a gap in the market for would-be borrowers struggling to get a mortgage?
Self-employed business owners are often cited as the key group of people who find it difficult to prove their income, but they are not alone. Clients who are not on the PAYE system typically need two or three years’ worth of accounts or tax returns to prove their income for a mortgage.
Contract workers, freelancers and anyone whose circumstances have recently changed may all face being denied a mortgage by some lenders for not having the proper proof of income.
Mortgage Advice Bureau head of lending Brian Murphy says more UK lenders are trying to cater for people who cannot easily prove their income.
“A number of lenders have tried to be more accommodating and adopt an individual underwriting approach, but they still need to evidence income,” he says.
“Lenders may well develop tools in the longer term that allow them to be more comfortable in servicing debt with lesser levels of evidence around income.”
Fleming-Duffy points out that both Precise Mortgages and Kensington offer mortgages to self-employed workers with only one year’s worth of accounts, albeit at a higher rate than if they had at least two years’ worth.
He says some lenders, such as Saffron Building Society, will also help contract workers without two to three years of audited accounts or tax returns.
“More than half of new businesses don’t survive beyond five years so we must acknowledge that lending into this sector comes with enhanced risk and the limited mortgage options and higher pricing structure reflect that appropriately,” he adds.
“On a separate note, the application process is no tougher for the self-employed than it would be for someone with a full-time job.”
SPF Private Clients chief executive Mark Harris says: “It is undoubtedly harder for the self-employed than those on PAYE to get a mortgage but a good broker will know of a number of lenders prepared to assist self-employed borrowers. Some of these lenders operate only via brokers so, to improve their chances of getting funding, the self-employed should go via a broker.
“Lenders often have different approaches to self-employed income. That is where brokers can help and add value. Some lenders use projected income, others use 12 months’ income, while some require two or even three years of income. Lenders also have different approaches to retained profits.”
Although some lenders offer a lifeline to non-standard borrowers, there is frustration within the industry over the plight of those who cannot easily prove their income. Intermediary Mortgage Lenders Association chairman Kevin Purvey says: “Supply has been constrained by regulation, and this means many non-standard borrowers are increasingly looking to more obscure sources of credit, such as selfcert.co.uk.”
“The reality is, however, that while borrowing may not be wholly straightforward for self-employed and contract workers, they still have plenty of opportunities in the domestic market. Lenders are acutely aware of the problems these groups face when it comes to demonstrating income and are practical in their approach to providing a solution.
“More needs to be done on the part of policymakers to ensure that the regulatory framework does not impinge lenders’ capacity to help non-standard borrowers.”
The next step in the story of self-cert mortgages in the UK will come with the imminent implementation of the MCD, when the Czech regulator will have to make a decision about the future of selfcert.co.uk.
The Czech body had not published guidance on the new rules at the time of writing. So the UK mortgage market will have to wait to see whether self-cert mortgages are here to stay, while the industry, Government and regulators must find other ways to tackle hurdles to homeownership in the UK.
Comment by David Hollingworth
Associate director of communications, London & Country
Self-certification was designed to assist those self-employed borrowers who did not have enough history of income to meet the requirements of high-street lenders.
Unfortunately, the loans became subject to wide-scale abuse, ultimately earning the moniker of ‘liar loans’ and leading to action through the MMR to erase any possibility of their return. And then selfcert.co.uk came up with the idea of circumventing regulations by setting up overseas.
Is that what the industry really needs? The MMR was designed to prevent a return to irresponsible lending and enhance the protection of borrowers. Anyone viewing an overseas outfit as a positive move for the mortgage market needs to approach it with caution.
I do not expect this to be the first of many such lenders. Consumers have become very aware of the need for advice and anything offering an online execution-only service without any of the protections of the UK regulator is likely to have limited appeal. Bizarrely, selfcert.co.uk seems to suggest advice is available from its Prague-based advisers, although my understanding is that any advice would be affected by state rules.
What is really needed is a more appropriate approach by lenders to the needs of self-employed borrowers within the current framework. There is little wrong in expecting a borrower to demonstrate a record of income but the typical minimum of two to three years of accounts can be a struggle for some.
Some lenders can already accommodate those with as little as one year of accounts as long as the case is strong. Lenders such as Precise and Kensington have made it a point of differentiation.
However, I expect to see more lenders increasing their flexibility, such as already shown in the approach towards contractors.
A more pragmatic approach to the self-employed and contractors must be preferable to any proliferation of sites attempting to hook borrowers by sidestepping the very rules put in place to protect consumers.