How important is the FSA’s drive for greater transparency and will it achieve its aims?
Examining the issue in this week’s Market Watch are:
Gavin Diamond, finance director, Cheval says there needs to an equivalent to the FSA’s MCOB handbook, designed specifically for short term lending.
Colin Sanders, CEO, Omni Capital argues the retained-interest model is an important part of bridging’s flexible offering.
Phil Jay, director at Complete FS insists formal regulation of the whole industry may be the solution to meet the FSA’s standards.
Gavin Diamond, finance director, Cheval
Those lenders that are already FSA regulated have always had the application of the MCOB rules at the core of their processes and procedures. The Mortgage Conduct of Business (MCOB) rules, together with the fundamental principles of responsible lending and treating customers fairly, require lenders to produce an interest rate, fees and charges that are clear, fair and not misleading. The Common Law case of Hurstanger v Wilson also requires the disclosure of the amount that the broker receives as a procuration fee from the lender.
The FSA expects regulated lenders to apply the same principles in respect of all of their lending – whether a regulated loan or not. Transparency of pricing and costs is in the best interests of the borrower, and can only ever be a good thing. The FSA’s drive in this regard is important – particularly with respect to owner-occupied properties and generally ‘unsophisticated’ borrowers.
The MCOB rules were set up with regular long term mortgages in mind and it has been difficult to apply certain aspects to short term lending. However, since the MMR consultation process (during which the Association of Short Term Lenders held discussions with the FSA), there is a recognition by the FSA that short term lending is a niche area that requires separate consideration.
Colin Sanders, CEO, Omni Capital
As it continues to raise its profile and presence, it was inevitable that bridging would come under closer regulatory scrutiny. This, despite only a small part of the sector – anecdotally believed to be no more than 10% – qualifying as regulated lending.
The fact the FSA has chosen to focus on lenders’ treatment of interest rate calculations, and how, together with fees and other charges, is explained to borrowers, should come as no surprise given the regulator’s historic focus on fairness, transparency and consumer outcomes.
The FSA appears less concerned with how interest rates are calculated than with their explanation. This matters because the retained-interest model is an important part of bridging’s flexible offering and is not, in itself, necessarily controversial. To lose it would dilute bridging’s continuing attractiveness as an alternative borrowing solution.
Regulated or not, all responsible lenders will agree that borrowers should be provided with clear, unambiguous information regarding the interest, fees and charges associated with their borrowing facility. It can be achieved through a simple, inexpensive documented process that satisfies both the FSA and the flexible requirements of borrowers. Failure to comply is likely to result in a more draconian response.
Phil Jay, director at Complete FS
The regulator is right on the money. Transparency is a key requirement if the client is going to be able to make an informed decision on any financial transaction. The fact that bridging has been a “little behind” the transparency curve has become more marked as its popularity has catapulted it from being a small and anonymous specialism to its current pin up status.
The FSA is shining light into the darker places where a number of fringe lenders have been operating with impunity and one of its first tasks will be to label and catalogue all lenders in the market and particularly those which operate in the non-regulated area. This has continued to be a haven for lenders, which have more in common with the Arthur Daley school of customer care than with the modern, compliant, customer centric approach which leaders in the industry have adopted.
To achieve its aims, formal regulation of the whole industry seems to be the only viable course. Provided it does not tinker with bridging’s key Unique Selling Points (USPs), regulation will ensure a level playing field in terms of presentation of the facts for clients, an end to the smaller cowboys and, most importantly, improve confidence in the bridging proposition as a whole.