There is a common perception throughout the lending arena that lenders which aren’t regulated are dodgy dealers – lenders avoiding regulation as they want to hide under the radar. Lenders who tend to do shady slightly unethical loans – or why else would they not be regulated?
While this may be true for a small proportion of lenders there are a whole raft of very principled lenders who are not regulated for entirely different reasons.
The obvious reason to be regulated of course is in order to undertake regulated loans. So if a lender does no regulated business there is no need to be regulated. Of course with the misconception about unregulated lenders there is obviously a certain amount of respectability that comes from saying that you are regulated. As a result some lenders become regulated not because they need to be, but because of the kudos that they feel that they will get from being regulated. Some see it as a status symbol and feel they will get more business from borrowers over non regulated firms. Other lenders who carry out no regulated business have been required to become regulated because their funders have insisted on it.
So why wouldn’t every lender choose to be regulated? In an ideal world I guess they would be. If every type of loan was sold in the same way to people with the same levels of knowledge then having one set of rules would be easy. However, not every borrower requires the type of advice necessary in the sale of a residential mortgage. Property developers and professional landlords for example have a different set of requirements.
Secondly, and the biggest issue for many non-regulated lenders, is the significant cost of being regulated; this is not just the upfront costs but also the time and administration costs associated with being regulated. This can be prohibitive for smaller lenders who may well need to recruit more than one additional full time member of staff just to cope with the FCA requirements for being regulated.
This barrier to regulation are getting higher all the time, particularly for smaller or newer firms.
The demands of the MMR and then those about to come in for the European Mortgage Credit Directive will increase the administrative burden for firms of all sizes.
Conversely there are some very good, very ethical, lenders which either do not have the infrastructure to enable regulation or which have chosen not to be regulated because that is not the business they deal with. As a result choosing a lender requires more than a look at whether they are regulated or not.
To put our cards on the table, Hope Capital is not currently regulated as we deal purely with bridging loans and have no plans at the moment to facilitate owner-occupied loans on main residences which require regulation.
Looking towards the future, I fully expect that we will move towards an environment where all types of loans are regulated. Secured loans have been first but I’m convinced that it will not stop there. It makes sense to require all lenders to stick to a set of standards. But these should not become a barrier to entry so only the largest potential lenders can afford to set up in business. It is important that regulation also doesn’t prohibit the type of loans essential to property developers and corporate borrowers that typically need speed and flexibility.
As we expand and as the FCA continually looks to regulate more facets of bridging loans, so we will also potentially look to be regulated, probably at some point in the next 12 months.