Not before time, the decision has been taken to regulate home-reversion equity-release schemes. But what of the other areas of the mortgage market where there are no plans to regulate, such as the booming buy-to-let sector as well as second-charge homeloans?
The Government has heeded warnings that with lifetime mortgage plans coming under FSA scrutiny with other mortgages in October, leaving home reversion outside regulation would have encouraged unscrupulous people to deal only in the unregulated part of the market.
But the regulator has so far failed to apply the same logic to other unregulated areas of the mortgage market.
Birmingham Midshires is seriously concerned over potential abuses in these unregulated areas and would also like to see the current rules on packagers tightened to avoid future abuses.
We take the position that by leaving buy to let and other areas unregulated, the Government is creating a ripe breeding ground for brokers unconcerned with giving consumers the best service and the protection they deserve.
We also believe that while regulation will drive the cowboys out of the market, those lenders who continue to do business with unregulated brokers in the post-regulation world are leaving a trapdoor open for them to come back in to do business.
It does not appear to us to make any sense to leave key parts of the mortgage market where consumers are open to potential rip-offs such as high and unclear charges outside of the FSA's jurisdiction. So what is the FSA's position on why the three areas in question are off the regulatory radar?
The FSA seems to have taken the position that buy to let is a commercial transaction done by businesspeople who are building up a professional portfolio.
Last year, Birmingham Midshires emerged as the biggest buy-to-let lender, with around 25 per cent of the market and we beg to differ with the image of buy-to-let borrowers as professionals who do not need the consumer protection afforded to standard residential borrowers.
Around 85 per cent of our borrowers have only one other property in addition to their own dwelling. The majority of our buy-to-let borrowers are private individuals.
The FSA has at times concurred with this image of the buy-to-let borrower. Back in December 2001, when John Tiner was FSA managing director, he addressed the Council of Mortgage Lenders' annual conference in London. In his speech, he clearly located buy to let in the realm of the private investor, as opposed to business sphere. Tiner said: “Investors are increasingly turning to the buy-to-let market as a source of long-term income and savings, which is an attractive complement to some traditional saving and equity products, especially during a time of low nominal interest rates. Borrowing to fund this investment offers good opportunities to spread investment risk. Investors should be clear-sighted, however, about the long-term nature of this investment and the possible difficulties they may face in cashing in their property investment in the event of a weak market.”
In April, it was revealed that over 40 per cent of buy-to-let landlords have been in the market for only a year or less, according to a survey by the Association of Residential Letting Agents. Surely, then buy to let is an area crying out for the same kind of statutory protection for individuals as will be granted to residential borrowers come October?
At Birmingham Midshires, we apply the same belief to second-charge loans on properties. These are the products which seem to dominate the advertisements on daytime television and offer homeowners up to 125 per cent of the equity in their home, often with the aim of paying off or reducing other debts.
Debt charities have expressed concerns that the typical second-charge borrower is financially unsophisticated and say they are quite often desperate young families.
It is believed that many borrowers have little appreciation of the risks or the alternatives, such as approaching their mortgage lender for a further advance.
Debt charities recognise the fact that these loans appear to have fallen by the regulatory wayside as a problem and the Office of Fair Trading undertook a market investigation of the products.
But despite some deep-seated concern among experts and our fears that the market will be open to higher charging and the growth of disreputable brokers, there remain no plans to regulate second-charge loans. The current position on the regulation of packagers is something of a grey area and we would like to see it tightened up. The FSA says whether mortgage packagers will need authorisation will depend on the precise activities they undertake. Where a packager has no contact with the consumer and merely packages the mortgage, they are unlikely to need authorisation.
The regulator also concedes that it is difficult for it to confirm whether specific types of packagers will be regulated under the new mortgage regime because each firm undertakes different activities and it is these activities which will determine whether a firm falls within the scope of the new mortgage regime.
We feel that some packagers engage in activities whereby they actively influence the decision of the consumer and what we do not want to see is artificially low arrangement fees appearing on KFI documents when the packager fee is very high and arguably, ought to be disclosed to the consumer. The current rules allow loopholes to avoid full transparency and we would like to see them closed.
To bring buy to let and second-charge loans under full regulation is likely to require primary legislation which could take years to enact. We will continue to lobby to end the inconsistencies we see in mortgage regulation and also carry on standing our ground by refusing to do business with unregulated brokers.