The Mortgage Market Review rules first brought elements of bridging into the FCA’s scope and defined much more clearly the types of deal it considered regulated.
I have always been a supporter of regulation. I believe its objective, to protect the consumer, is one which all professionals should keep in mind whether or not their business happens to fall inside or out of the rules. It is a standard that we should all subscribe to.
The introduction of the Mortgage Credit Directive in March this year brought additional focus from the FCA – this time onto second charge and consumer buy to let. The senior managers regime came in during 2015 and just last month, we saw the Prudential Regulation Authority lay down its own proposals affecting buy to let across both regulated and unregulated deals.
The introduction of so many sets of rules into historically unregulated sectors has, in my mind, undoubtedly raised the bar for all those who want to operate in them.
This raising of standards is ongoing still, in my view. Many lenders, distributors and brokers are still settling into the new environment and, we are still seeing some differences in how lenders choose to interpret where deals fall in the regulatory framework.
This is of course, in part because the FCA rules are guidelines and deliberately allow for lenders to interpret, therefore fostering competitive differences in the market. However, I would suggest that more time is needed for firms to get fully used to the new regulatory framework.
I was therefore interested to see the FCA’s new chief executive, Andrew Bailey, raise the possibility of further oversight of unregulated markets in the FCA’s mission statement, published ahead of the annual Mansion House speech in London in late October.
The statement quite rightly identified that “many of the problems we have seen in the market, from the crash of 2008 onwards, have been caused by regulated firms undertaking activities which are outside our ‘regulatory perimeter’.”
Rather than referring to markets such as bridging or commercial mortgages I think he was discussing scandals like Libor-fixing, however, I think we in the specialist lending market could also benefit from thinking about his points carefully.
Bailey has said the FCA will “prioritise intervening outside the perimeter” when they believe their objectives of consumer protection, competition and functioning markets are threatened.
He considers these occasions to be when an unregulated activity:
• Is illegal or fraudulent
• Has the potential to undermine confidence in the UK financial system
• Is closely linked to or may affect a regulated activity
• Calls into question the suitability of the firm
We currently have a very healthy and competitive specialist lending market. Bridging, commercial and development finance have all seen strong growth in recent years. Complex buy to let has been given a boost as landlords reorganise their finances ahead of the incoming tax relief changes next year.
Many of the firms that operate in these sectors are regulated entities and do business that falls both in and out of regulation.
I am all for professionalising our market – much has been achieved in this regard over the past seven or eight years in fact. I hope that the FCA’s comments are therefore interpreted by our industry not as a warning shot but as the chance to show that as a market we are far more mature and responsible than some firms in this sector were a decade ago. Many of them no longer operate.
There is, in my view, strong and yet flexible regulation in place to protect those who need protecting.
Mr Bailey also raised another interesting view in his mission statement: “We believe that a market where consumers never make poor choices is not feasible. Our focus is on ensuring the appropriate degree of protection for consumers.”
I agree. And I think that where much of specialist lending is concerned, the critical thing to remember is that these borrowers are businesses assessing risk and return.
We support the idea that all firms should behave responsibly and want to see that as the minimum across the market.
But we must also be mindful that we encourage an environment where choice and flexibility allow people and businesses to engage in sensible commercial activities where they choose.