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MMR won’t work for high net worth clients

When it comes to regulation high net worth borrowers are seen as a special case.

The Financial Services Authority recognised this for the first time in its December Mortgage Market Review paper.

It describes such borrowers as earning a gross income of no less than £1m a year or having net assets worth no less than £3m. They are likely to be financially capable and be able to repay capital, for example, through realising their assets, whether the mortgaged property itself or other assets.

In the paper, the FSA sets out two options for dealing with such borrowers. The first is to allow them to opt out of the advice process but all other aspects of the regulation will continue to apply. The second is to take them out of the equation altogether so regulation will not cover them.

So how do high net worth borrowers transact a mortgage? They usually use a private bank and often negotiate a bespoke deal with the lender.

Short-term loans linked to the borrower’s broader assets or investments are also typical. Rarely would they take out an off-the-shelf product. This makes borrowing by high net worth clients different to that of average borrowers getting an 80% LTV fixed rate, for example.

We believe the MMR rules for responsible lending and advice were not designed for this situation. This implies the FSA’s second option is the appropriate one – such borrowing should be taken out of the MMR.

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The value of an investment and any income from it can fall as well as rise and you may not get back the amount originally invested. Forecasts and past performance are not a guide to future performance. Some information and statistical data herein has been obtained from sources we believe to be reliable but in no way are warranted by us as to their accuracy or completeness. These are Neptune’s views and as such this document is deemed to be impartial research. We do not undertake to advise you of any change to our views.

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Comments
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  • Mike Snorkins 5th March 2012 at 12:57 pm

    Not change here then! One rule for the rich and the rest of us who actually do the work to keep the economy running are left dealing with BS regulations. Nice (not). Who caused the current financial crisis? I believe it was the super-rich ‘inventing’ more was to make money from money and then leaving it to the rest of us to pay off. Cheers for that guys. So much for the ‘free market’ – only free for those that have assets in excess of £3M.

  • Maurice Edgington 5th March 2012 at 11:54 am

    Agreed!