The advent of Mortgage Day – as well as the Government's recent decision to regulate home-reversion plans – has stimulated debate about other areas that might ostensibly come under FSA control.
The regulation of buy to let is one topical example – and one that is failing to find a consensus among mortgage lenders.
Clearly, buy-to-let mortgages are different from residential mortgages.
Normally, a borrower wants to buy a property and takes out a mortgage to fund it. If repayments are not maintained, the borrower risks losing the roof over their head. This is a serious consequence and explains why the safeguards afforded by regulation are necessary. But buy to let is a commercial transaction with no such ramifications.
Because of the commercial nature of buy to let, it would be difficult to determine how it would be adequately regulated. For example, would limited company buy-to-lets be regulated? And what of overseas residents investing in the UK or live-work units?
Certainly, the difficulties in setting parameters are not enough on their own to preclude the sector from regulation – the legislature has often managed to regulate a range of nebulous commercial, social and cultural interactions.
However, it does raise the issue as to what extent commercial transactions should be regulated.
One of the most persuasive arguments against regulating buy to let is this simple fact – you can regulate a mortgage, but you cannot regulate market conditions.
Proponents argue that regulation is necessary in order to protect the large number of new, inexperienced investors to the market. Not only is this debatable, it is not entirely rel- evant. This is because problems that arise for inexperienced investors are not generally due to the mortgage but because of the property purchased.
Regulation of buy to let is unlikely to help an investor if they are selling a property that has depreciated in value because of a downturn in the market or because they are unable to find a suitable tenant.
A key facts illustration or mortgage quotation will provide little comfort to a customer suffering a long void period. The key point is this – investors need to take extreme care when choosing their buy-to-let property. They need to do their homework, find a property in a suitable area and understand that a buy-to-let property is a medium to long term investment. Regulation would not affect these key points.
The image of unscrupulous “cowboys” offloading buy-to-let mortgages to vulnerable investors may be evocative but is not a reflection of what is happening. There are already numerous ways – even without regulation – that customers are protected.
For instance, after N4, many of the major buyto-let lenders have announced that they will only distribute products through authorised brokers or through those that specialise in the area.
And the FSA has stated that it could examine any buy-to-let financial promotions. As for Arlas's mooted code of practice – many lenders already abide by the National Association of Commercial Finance Brokers' code that precludes dishonest, dishonourable or deceitful behaviour.
Recent comments by the Association of Mortgage Intermediaries that introducing a code of practice would bolster confidence in the buy-to-let sector are misplaced.
Concerns expressed about this sector have tended to centre on the health of the market, not how the products are sold. And regulation would not protect investors from the natural fluctuations in the market or from the risks that come with every type of investment.
Regulation is becoming a part of life for brokers and lenders. Over time, the FSA's regulatory arms will and should stretch to embrace other areas, such as home reversion and second-charge mortgages. Nevertheless, there is no point in regulation for its own sake and buy-to-let mortgages should be viewed as commercial transactions outside the ambit of regulation.
Tim Dawson is managing director of Mortgage Express