FCA moves to close buy-to-let loophole that leaves FSCS exposed

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The FCA plans to close a regulatory loophole that leaves the Financial Services Compensation Scheme liable for paying claims made against mortgage brokers who advise on consumer buy-to-let.

Although the Financial Conduct Authority does not regulate this sector of the market, brokers need a supplementary permission to advise on such cases.

Consumer buy-to-let mortgages include loans taken out by so-called “accidental” landlords rather than people who rent properties as a business.

The FSCS normally does not cover consumer buy-to-let but the FCA has realised that, if regulated mortgage brokers sell it without the correct permissions, this could create an unexpected liability for the FSCS.

In a consultation paper last week, the FCA says: “Consumer buy-to-let activities carried out by firms that are registered under the [Mortgage Credit Directive] Order are not regulated activities under the Financial Services and Markets Act 2000, which means their Consumer buy-to-let activity is not covered by the FSCS.

“However, we have become aware that, contrary to our policy intention, some consumer buy-to-let activity is potentially within the scope of the FSCS.

“This could occur if an authorised firm carries out consumer buy-to-let intermediation, in breach of the order, but has not registered to do this.”


The regulator plans to change its handbook to remove all consumer buy-to-let from FSCS protection, and is consulting on this. It says the move would “remove an element of consumer protection”.

The consultation paper says: “We propose amendments to the handbook to ensure that all CBTL activity is outside the scope of the FSCS.

“This includes CBTL activity carried on by an EEA firm through an establishment in the UK where the firm has chosen to top up any cover provided by a compensation scheme in its home state for its mortgage activities by obtaining cover from the FSCS.”

An FCA spokeswoman says: “In the drafting of the rulebook, it gives some consumer buy-to-let customers FSCS cover when they shouldn’t have it, so we’re closing that loophole.”

The FCA and FSCS have not seen examples of brokers selling CBTL without permission, according to spokespeople. But this may have occurred without the authorities’ knowledge or the situation escalating to an FSCS claim being made.

Keystone Buy to Let Mortgages and Mortgages for Business managing director David Whittaker says lenders should check brokers’ CBTL permissions.

“If the FCA says brokers can do consumer buy-to-let only if they have registered to do so, what are the lenders doing if they take an application on consumer buy-to-let? They should be checking each and every one against the FCA register,” he says.

Fleet Mortgages chief executive Bob Young says his firm does not conduct consumer buy-to-let but agrees that lenders should be conducting due diligence on brokers’ permissions.

He adds: “We would make sure they had the right permissions. If they were with a network, they would have the permissions. If they were an individual, we would make sure they had what they needed.”

Whittaker says the FCA should ask lenders to vet brokers more thoroughly while waiting for the consultation to finish.

He says: “They should say to the lenders ‘every piece of consumer buy-to-let business you do, you must check, for the time being, that the broker has the relevant permissions’.”

Young says lenders will welcome the FCA move to close the loophole.

He says: “I can’t speak for the industry but my guess is lenders would always welcome clarification.

“I’m a big fan of the FCA. I know it is easily knocked by brokers and lenders but I’m a great fan and this is an example.

“If what it’s doing is saying ‘This could be a problem, let’s sort it out now’, that’s much better than waiting for it to become a problem.”