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Regulation isn’t the whole story

Much talk of regulating the bridging sector is naive as it will not get rid of the cowboys. And using a regulated lender is only important if one is placing a regulated deal so brokers need to do proper due diligence on the firm they use rather than just looking to see if it has an FSA stamp

There has been a lot of industry chatter lately about the virtues of intermediaries using a regulated bridging company for their lending needs. Not surprisingly, this is the line being pushed by a couple of bridging firms authorised by the Financial Services Authority for mortgage contracts.

One packager said it would have only regulated bridging lenders on its panel because it would reassure borrowers and ensure that it deals with lenders with high standards.

Talk like this is interesting, but in many respects it is naive. One only has to go back to the FSA’s investigation of Bridging Loans Ltd a year or so ago, when the regulator issued over £100,000 in fines for serious failures relating to lending practices and for failing to treat customers in arrears fairly. One of the more embarrassing revelations was that one of the lender’s directors labelled its borrowers evil.

The point here is that Bridging Loans Ltd was, until recently, an FSA-regulated bridging lender.

In its most recent Mortgage Market Review discussion paper, the regulator devoted a whole section to bridging finance for the first time. Some were concerned by the FSA’s relatively new interest in the sector, while others welcomed it. The regulator highlighted possible issues regarding bridging firms’ underwriting standards and the way in which loans are extended.

The FSA’s commentary was broadly that any reputable lender is probably doing everything the regulator has suggested as prudent. Many of the suggestions are just good business practice.

At Montello, we are in the process of seeking authorisation and from our discussions with the FSA, it seems the regulator itself is not convinced there needs to be more regulation.

From our experience, the regulator is keen to learn more about the sector, but this does not necessarily mean its interest will result in a widening of the net of regulation. Obviously, if a bridging loan is against a borrower’s home, then it is already regulated. But to extend regulation beyond this is not necessarily a given.

Even the most recent correspondences between the Association of Short Term Lenders and the FSA explain that the latter is considering narrowing the net of regulation with regard to bridging finance. It specifically asked whether all business related lending should be excluded from regulation.

“Should we [the FSA] adopt a similar approach to that proposed for high net worth consumers, recognising that for some consumers, regulation is not needed to protect them from the decisions they make?” was the FSA’s question.

From our position, the sensible answer is a resounding yes. I can understand regulated bridging lenders banging the drum about the importance of regulation. When we are regulated, we will probably be full of bravado about its importance also. Obviously the increased costs of being regulated need to have some benefit – if only the right to brag about being regulated.

Whether regulated or not, unfortunately there are still cowboys that operate in the bridging finance market.

As competition intensifies, many smaller lenders will struggle for deal flow and will be forced to resort to unseemly tactics.

We had a borrower in our office recently who told us a story about a lender that turned up to inspect his property in a new Range Rover. After looking at the property, the lender explained that he would lend to the borrower and that he’d throw in the Range Rover – that is, add the cost of the car to the loan and give him the keys at drawdown. In the end it wasn’t just the free car that turned the borrower off, but the onerous loan terms.

Perhaps brokers and intermediaries should do more due diligence on bridging lenders, rather than simply checking if they are authorised by the FSA. One astute commentator recently noted that it was probably small bridging firms with no public profile that borrowers and intermediaries should be cautious about – and that regulation is important, but only if you are looking to place a regulated deal.
If a broker is looking to place a bridging loan that is not regulated, they are under a duty to their client to consider all lenders – both regulated and unregulated.

In reality, it will always depend on the borrower’s particular circumstances. If the client is relatively unsophisticated and looking to borrow against their family home, then a higher standard is necessarily required to protect them.

On the other hand, if the customer is an experienced property professional borrowing against a commercial property, they probably know what they’re doing and do not need a regulator to protect them in their commercial dealings.

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