HNW loan cap is an empty gesture

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Yves Carcelle, the chief executive of Louis Vuitton, died last month at the relatively tender age of 66.  Reading his obituary in The Times, I was struck by his views on the global economic crisis, which were summarised as “the great thing about our business is that our consumers are very rich – and then they are a bit less rich, but still rich, right?”

It is an interesting and accurate point.  If you are very rich then the crisis is likely to have meant less to you than it did to someone with an asset and income position closer to the average.  In this context, let’s consider the subject of LTI caps. 

The Council of Mortgage Lenders has recently issued a response to the FCA’s guidance consultation on the subject, in which it focuses on the impact of the proposed 15 per cent limit for lenders in the HNW sector.

Whilst my own firm is not specifically in the high-net-worth sector, we are among a number of specialist lenders who are regularly approached by brokers on behalf of their HNW clients as an alternative to private banks, so the proposals do have an impact beyond the private banking sector.

The argument is that HNW borrowers, for whom MMR already recognises there are circumstances that can permit more flexibility in affordability assessment, should be exempt from the new LTI rules on the basis that their asset bases provide a source of repayment that does not exist in mainstream markets.  Moreover, HNW lending is a small proportion of overall lending, so represents very low macroeconomic risk, and most lending in this space is undertaken using manual underwriting and/or based on deep personal relationships.

It is clearly a good idea to mitigate macro level risk through LTI caps, however the mitigation needs to be applied to the right risks.  The real risk area for high LTI lending is in the mainstream market where relatively modest interest rate stress could cause significant affordability issues for many borrowers. 

The step down from very rich to just plain rich is a manageable one; a handful of borrowers having to hold off on their next Louis Vuitton purchase is not going to trigger the next crisis.