In case you’re not a talented physicist, it is the same as saying that an environment will deteriorate unless you put some energy in to stop it from doing so; a new house, a relationship even, is in great shape on day one but if you don’t maintain it, it will degrade, ending up costing a great deal more to restore.
This law can also be applied to financial services regulation. It’s a moot point as to whether the current investment in regulation is the result of the industry’s failings or the regulator’s ambition, but clearly a lot of energy is being put in to the system. In accordance with the second law, the level of regulation is tending to a maximum.
Nationwide’s recent decision to stop interest-only lending should be reviewed in this context.
All lenders are facing up to the fact that the direction of regulatory travel in financial services is such that consumers will eventually be absolved of all responsibility for the financial purchases they make. Not so much caveat emptor, as caveat venditor.
As a mass market lender, this exposes Nationwide to enormous risk. It might be considered unfair, but it is a risk that they were right not to ignore.
There is a place for IO lending, but it is no longer in the mass market. IO should now be seen as a niche product, for which the target market needs to be very clearly defined.
It should not be the vehicle that allows people to buy houses bigger than they can afford – it should be used only for clearly identifiable borrower types, in clearly identifiable circumstances and with a robust repayment vehicle. With the best will in the world, that should not be a mass market proposition.
The Kent Reliance view? Well, as a niche lender, we recognise that IO is sometimes right for your clients. Note the emphasis on “sometimes”.
John Eastgate is sales and marketing director at Kent Reliance
