The Treasury's confirmed position is that buy-to-let mortgages will not be included within the scope of direct regulation because it believes the letting of residential properties is a business activity and associated mortgages are therefore commercial loans.
The FSA had to draw the line somewhere, but it does seem to have excluded a market area that should be included. Zurich believes it is a serious oversight not to include buy to let in the impending mortgage regulation. We believe taking out a buy-to-let mortgage is, in the majority of cases, not viewed by borrowers as a “business transaction” the same way it is by the FSA.
We acknowledge that the people and organisations who buy, sell and own rental property as their main business activity should certainly be able to trust their own judgement when choosing sources of finance.
We also believe that they do not need a regulatory regime to shield them from ill-informed or biased advice about how best to finance their property deals.
However, we feel that the FSA's grouping of individual buy-to-let investors/ borrowers together with these truly commercial enterprises may not be in the best interests of these individuals in the long run. Most people investing in buy to let would not regard the mortgage for their rental property as a commercial loan.
Buy-to-let mortgages are sold through the same channels as residential mortgages and are offered by the same lenders. So far, buy-to-let borrowers have not been treated as commercial customers.
When they go to their financial adviser in the future (post-regulatory) environment, will they fully understand that buy-to-let mort- gages – and any associated advice they are given – are unregulated?
The main reason for FSA regulation is to provide consumer protection. Thousands of amateur landlords are active in this market and certainly do need greater protection.
FSA regulation seems the only sensible approach to ensure that this sector of the market receives the same professional advice and consumer protection that will be provided to the mainstream residential market.
However, the benefits of regulation must outweigh the costs. The buy-to-let sector has grown enormously but still only represents about 10 per cent of the rental market. If high costs were imposed on a small niche market, the customer would bear these costs at the end of the day.
If the FSA has no intention of covering buy-to-let, then another route to consumer protection could be to ensure that the activities of the practitioners involved in financing, valuing, and selling of buy-to-let properties are subject to a robust voluntary code of practice.
Similar to the Mortgage Code Compliance Board, this code of practice could become the industry norm and buy-to-let applications only accepted if advisers subscribe to the code.
It seems likely that many mortgage brokers will be forced into the non-regulated fringe industry as they will not be either authorised by, or exempt from, authorisation in time for the October 31 deadline.
Buy-to-let mortgages can be riskier than standard residential mortgages. There are far more elements to consider and generally a higher standard of advice is required.
It is true that, to date, the buy-to-let niche has attracted very little negative press.
This is hardly unsurprising when property prices continue to soar. How- ever, we all recognise that this is unlikely to continue – as with endowments, it is often not until the market turns that investors seek redress.
Zurich will treat buy-to-let in exactly the same way as we would a normal residential mortgage. Our advisers will be expected to provide the same sales docu- mentation as for a residential mortgage. We expect other networks to take a similar approach. Many buy-to-let lenders are already saying that they will only accept applications from brokers where the application is submitted with a valid FSA number. This in itself will mean that most applications will come from FSA authorised advisers. This adds further weight to the argument to include these mortgages under FSA control.
The recent announcement by the Treasury that home reversion schemes will be included under the FSA statutory remit was widely applauded by the mortgage industry. Common sense had won the day. We hope that a similar level of common sense will be given to buy to let and that in the future we will see it covered by the FSA's statutory regulation.
Richard Coulson is a director of Zurich Mortgage Network