Following the end of the consultation on 30 March for paper 11/31, Enness said the paper, published last December, proposed a more tailored and alternative approach for high net worth borrowers.
The MMR outlined a number of specific proposals concerning HNW borrowers, including:
• An alternative approach to HNW because of the complex nature of income and the short terms of most loans (typically five years).
• Suggesting the FSA could either disapply the mortgage rules to HNW borrowers or allow them to forego the protection of the mortgage rules.
• A definition of what constitutes HNW. As its starting point it suggests a gross income of no less than £1m pa or net assets of no less than £3m.
• Lenders would need to get a declaration from a professional (lawyer, accountant) that states the individual meets this definition.
• For HNW borrowers, affordability can be assessed on an interest-only basis providing there is a realistic and credible strategy for repaying the capital
In its submission to the FSA, Enness said it is fully supportive of the approach which places high net worth borrowers outside the normal rules. However, Enness said there still needs to be guidelines in place.
In an interview with Mortgage Solutions, Hugh Wade-Jones, director of Enness explained why high net worth clients do not need advised sales and should be exempt from restrictions on interest-only loans.
He said: “We’re not saying that people shouldn’t seek advice. I would always say that in the first instance you should speak to a specialist.
“What the MMR is proposing and what we’re agreeing with is that in certain situations the standard guidelines have been set out by the FSA are just not going to be suitable for individuals.
“Typically on the high net worth side, the lending is done as much against the client’s overall profile and their overall wealth and assets in the background as your standard Loan to Values and income multiples. In those circumstances, it’s just not practical that a client look to borrow within those guidelines, and if their allowed to make themselves exempt, then that’s best for everyone.”
The FSA has described a high net worth client as someone earning a gross income of no less than £1m a year or having net assets worth no less than £3m. Enness has proposed the regulator changes this to a gross income of £500,000 plus pa and an asset base of £3m – excluding the main residence – or £5m if the main residence is included.
In addition, Enness proposes that individuals, who work in certain financial sectors and hold specific qualifications, such as an ACA qualification for example, should also be exempt from the rules as they will have the financial knowledge to make an informed decision.
Hugh Wade-Jones added: “We believe £1m income pa is too high and clients earning this level of money are uncommon. Plus the employed tend to be heavily bonus-led which increasingly includes stock and other incentive schemes – it needs to be made clear whether this would be included as income.
“There also needs to be a greater understanding around the asset figure and whether this includes a main residence. Many individuals will have benefited from significant house price growth over the past 20 or so years and find themselves living in million pound-plus homes. Yet, they would never be deemed to be high net worth and should not be treated as such; we need to know if, as many private banks already do, this net asset figure excludes the main residence.”
Click here to watch the full interview with Enness Private Clients’ director Hugh Wade-Jones.
