Bridging In-depth
A question of regulAtion
the biggest question mark in the short-term lending sector at the moment is regulation. the burst of activity in the bridging, secured lending, second charge and short- term markets has largely been made possible because of minimal regulatory interference but the existing framework is already in line for change.
Currently second charge loans and secured loans are regulated by the Office of Fair trading. From 2012 regulatory responsibility for this type of loan will transfer to the Financial Services authority (which by then will be split into the Financial Conduct authority and prudential regulatory authority). lenders offering second charge loans will have to ensure they are treating Customers Fairly under FSa guidelines, which some have argued may reduce the need for secured lending. Second charge and secured loans tend to be more expensive than remortgage and consequently the industry has raised fears about the future need for secured loans where a customer can remortgage at a cheaper rate. the FSa has suggested it is not minded to regulate the bridging market and the association of Short term lenders says it has been working hard to ensure that mindset remains the status quo. Bridging by its nature is not a long-term
“Any decent broker will almost treat a bridging deal as though it’s regulated and do the sense-check even before it gets to the lender. You’re making sure the client understands their affordability, what the payments will be, how long a term is realistic, what happens if the term has be longer. The first person the client and the lender for that matter will go to if something goes wrong is the broker. As a broker there’s no way you would risk saying
12 BRIDgIng InTRoDuCER July 2011
finance option and is best suited to commercial and development situations. However, lenders and brokers agree that there are some grey areas which would benefit from heavier oversight from the authorities. the most regularly cited example of this is where a bridging loan is given to a consumer for a second property, not the primary residence. the loan is required to bridge the gap between that second property becoming the primary residence and the sale of the existing primary residence. If short- term finance is used to help families move house, upsize or indeed older people downsize because in a sticky housing market they are having trouble selling their existing home, there are certainly grey tCF areas. Bridging is an expensive solution and the borrower’s exit looks reliant on the sale of a property. meanwhile that borrower’s equity is being eaten into month by month at an average rate of 1.5%. ray Cohen, a specialist compliance consultant and director of Jackson Cohen, says it shouldn’t be a grey area. “my view is that this is regulated and the rules are pretty clear,” he says. “the purpose of the loan is to buy a property as a second home and not an investment property. the borrower has no intention to let it but some unregulated bridgers will lend in this scenario. there’s no case law on this as yet which
to the lender the exit is refinance without having something on file to back that up.”
The fact these discussions are being had more openly highlights a changing attitude towards the bridging market.
“The fact that some firms
have moved voluntarily to FSA registration indicates that this is becoming a more professional market,” says Sinclair. “The general level of knowledge about products
doesn’t help however, conversations I’ve had with FSa suggest they view this type of loan as a regulated deal.” most short-term lenders agree this sort of lending is irresponsible and consider it a regulated residential mortgage contract. However, there are anecdotally still lenders out there engaging in this type of deal, branding it unregulated. there is also increasingly the
european spectre of Brussels to consider with all things legal. In march this year the european Commission published its Directive on Credit agreements relating to residential property. under these guidelines, which are still being lobbied in europe, residential buy-to-let and all short- term finance secured on a residential property will be caught by regulation. In Britain this could mean bridging will end up being regulated by the FSa. trade associations including
the european mortgage Federation, the Council of mortgage lenders and the association of mortgage Intermediaries have all said publically they will lobby against over-burdensome regulation of the short-term lending market at a european level, however there remain concerns that some compromises will have to be reached and lending secured on regulated properties will come under the FSa’s jurisdiction.
and how short-term finance works means it’s got better, and that people see it as a specialisation indicates improvement.” Lawton says there is an onus to
behave professionally on the broker as well. “We’re fully qualified to do other mortgage business and I can see there may be an argument for brokers becoming qualified to advise on bridging in the future.” Coreco is already going down this road. “We are formalising our
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