OpinionJul 18 2014

Regulators turn attention to ‘unsafe’ buy-to-let sector

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It’s a debate that seemed to have been put to bed four years ago, but we could once again be set for a push to bring buy-to-let loans under the regulated mortgage umbrella.

On Tuesday (15 July) the Treasury Select Committee’s hearing into the June Financial Stability Report saw Bank of England governor Mark Carney lay out options that would be considered in addition to the cap on mortgage lending already introduced to cool the housing market.

Mr Carney said that its suite of tools could include bringing in restrictions on the loan-to-value ratios bank can lend, or require banks to hold more capital against activities in particular sectors or otherwise to provide “counter-cyclical buffers”.

This is all becoming rather hackneyed now, especially while the industry digests the impact of the three-month old Mortgage Market Review, and questions from MPs quickly moved to the impact on the broader market of unregulated buy-to-let loans.

A Treasury consultation in 2009 and 2010 resulted in a stay of execution on bringing BTL under mortgage regulations, however it new seems regulators have heard feedback critical of private landlord purchases and are steeling themselves for another run.

Prudential Regulation Authority chief executive Andrew Bailey stated that while he would be very attentive to the area, the watchdog has no ‘toolkit’ to “wade in” in line with it’s statutory objectives.

Donald Kohn, external member of the Financial Policy Committee, also told MPs that his macroprudential panel would keep a close eye on it, adding that the buy-to-let market was a ‘potential safety valve’ that might not be ‘completely safe’.

One of our regular reader commentors, Colin Cloy, will be pleased if this is the outcome. Echoing previous vituperative on the subject he wrote below the article: “The BTL mortgage market is not a safety valve... It is full of rampant fraud both in respect mortgage and income tax.

“The sooner this market is regulated by the PRA and the FCA the better.”

In what could be seen as an acknowledgment of the dangers of out of control BTL lending last Friday, Royal Bank of Scotland introduced a cap of 4.99x income per application with effect from Monday (14 July).

This move on its own is likely to be isolated, however: this week Santander, Virgin Money, the Coventry Building Society and the Yorkshire Building Society all confirmed that they have no plans to follow suit.

FCA looks at ongoing advice

In the adviser space, the FCA seems turned its attention to emerging advice business models and the ongoing services being provided by advisers as part of its third thematic review into RDR.

In a communication sent to firms and seen by FTAdviser, the FCA says it is using the review as an opportunity to examine “developing business models” and to understand more about firms’ service propositions, “particularly their ongoing services where these are provided”.

As you might expect, advisers were less than delighted to hear that the regulator is looking to delve further into their business models, those I guess few are particularly surprised.

Meanwhile, the FCA’s move to bring the secured loans market under its supervision in April was praised with boosting the sector’s reputation and encouraging several reputable mortgage lenders to move in and opening the market for advisers.

Darrell Walker, head of intermediary at Freedom Finance offshoot The Lending Wizard, said: “Now we’re all under the same umbrella, this proves our proposition is fit for purpose, and any mortgage adviser now has got to consider a second charge as a viable option when they’re giving holistic mortgage advice.

Legal issues

The long arm of the law was also in force this week, with several decisions of note coming to light.

A financial adviser went on trial at Exeter Crown Court accused of stealing his former boss’s database of clients, in order to set up his own business.

Stephen Wales allegedly sent e-mails to himself from his old job on which he attached sensitive and confidential information. He is also accused of downloading an entire six gigabyte database onto a removable drive on his last day of work.

His former employer called in the police after finding that 30 clients had left his firm within a month of Mr Wales setting up his own business in Devon. Mr Wales, aged 35, of Torquay, denies fraud.

Mr Wales told the jury he had agreed that he would take a number of clients with him who he had introduced to the firm either in person or when through another adviser who had passed them over through him.

He said he took the data so he could serve these clients and had deleted and not used any that related to the 400 other customers of the Pension Drawdown Company.

While that case was just starting, the 2011 conviction of Gresham Ltd’s Edward Davenport for conspiracy to defraud was finalised with Judge Testar demanding £13.9m in confiscation and compensation at a hearing at Southwark Crown Court.

Mr Davenport was convicted, along with eight others, for his role in the company which was promoted falsely as a long-established, wealthy and prestigious financial organisation capable of lending hundreds of millions of pounds as venture capital.