Consultation On New Mortgage Rules

The UK Treasury is now consulting over the rules required to implement the European Mortgage Credit Directive by March 2016.

Importantly, the proposed rules will regulate second charge mortgages (also known as second charge loans, secured loans or secured personal loans) into line with first charge mortgage lending; and introduce a new set of regulations for buy-to-let lending, where the lending is to consumers rather than for business purposes. This is not expected to affect the vast majority of buy-to-let lending which is done for business purposes and therefore not subject to the European directive.

The consultation is open until early November 2014.

Submission on New Model for Retail Finance

Set out below are both the initial summary and my full submission to the Red Tape Challenge and the BIS Taskforce on Non-bank Finance. I'm very grateful to the colleagues who contributed, as mentioned in the longer document.

In its invitation to submit evidence of ‘red tape’ that is inhibiting the development of ‘disruptive business models’, the Cabinet Office notes the example of Zopa, “a company that provides a platform for members of the public to lend to each other, who found that financial regulations simply didn’t know how to deal with a business that didn’t conform to an outdated idea of what a lender is…” 

This paper demonstrates that financial regulation similarly fails to deal with a range of non-bank, direct finance platforms (“Platforms”) that share some of the key characteristics of Zopa’s person-to-person lending platform (see Annex 1). Accordingly, financial regulation is failing to enable the cost efficient flow of surplus funds from ordinary people savers and investors to creditworthy people and businesses who need finance. In particular, as further explained in Annex 2, the current regulatory framework:

• generates confusion amongst ordinary people as to the basis on which they may lawfully participate on alternative finance Platforms (even though some are licensed by the Office of Fair Trading);

• creates legal and regulatory issues that vary greatly depending on the structure of Platform and instrument adopted, particularly where investment is for return, rather than by way of donation (without return) to a good cause. This means that detailed legal advice is needed for any Platform and this is itself a barrier to entry for some schemes which may not pose any significant risk to the public. Platforms may also require a level of regulatory authorisation which may be inappropriate, again considering the low level of risk to the public.

• does not make alternative finance products eligible for the usual mechanisms through which ordinary people save and invest (as explained in Annex 2), and the inability to deduct bad debt before tax and the tax on interest charged to cover bad debt exposes individual participants on Platforms to much higher ‘effective tax rates’ than their applicable statutory rates (see Annex 3);

• discourages ordinary savers and investors from adequately diversifying their investments;

• incentivises ordinary savers and investors to concentrate their money in bank cash deposits, and regulated stocks and shares;

• inhibits ordinary savers’ and investors’ from accessing fixed income returns that exceed long term savings rates;

• inhibits the development of peer-to-peer funding of other fixed term finance (e.g. mortgages and project/asset finance); and

• protects ‘traditional’ regulated financial services providers from competition.

These regulatory failings could be resolved by creating a new regulated activity of “operating a Platform”, for which the best-equipped regulatory authority would be the Financial Services Authority (as replaced by the Financial Conduct Authority). In tandem, or as alternatives, there could be exemptions based on size of investment or risk (e.g. some schemes or platforms may involve minimal investment in what is sometimes a socially useful venture); lesser regulation/authorisation within existing classes of regulated activity (as for small payment services providers or small e-money issuers) ; or the official endorsement of self-regulatory codes (as banks enjoy in relation to the Banking Code, for example). Direct and indirect incentives that selectively favour incumbent banks and investment funds should also be recognised and modified to balance the competitive landscape. Detailed regulatory changes are explained in Annex 4. 

Regulation of the platform would be independent of any regulation that may apply to the type of product offered to participants on the platform (e.g. loans, trade invoices, debentures to finance renewable energy and lending for social projects, as noted in Annex 1). However, exemptions from regulations governing financial promotions and offers to the public could be granted for instruments that are offered on Platforms. 

Proportionate regulation that obliges Platform operators to address operational risks common to all products would also enable economies of scale and sharing of consistent ‘best practice’, and leave product providers and other competent regulators to focus solely on product-specific issues (e.g. consumer credit, charitable purposes). Similarly, participants on such Platforms do not need to be treated as if they are participating in the course of a ‘business’ if the Platform itself meets all the compliance requirements that a business of that kind would otherwise have to meet. 

Given the established nature of the financial regulatory framework and the dominance of incumbent banks in the provision of debt finance to individuals and small businesses in particular, it is unrealistic to assume that new business models will thrive without some alteration to the regulatory framework to enable rapid market entry and to facilitate strong, responsible growth.

Alternative finance briefing paper simon deane-johns 27 01 12

View more documents from Pragmatist.

Red Tape Challenge Submission - Summary

In its invitation to submit evidence of ‘red tape’ that is inhibiting the developmentof ‘disruptive business models’, the Cabinet Office notes the example of Zopa, “a company that provides a platform for members of the public to lend to each other, who found that financial regulations simply didn’t know how to deal with a business that didn’t conform to an outdated idea of what a lender is…” 

Financial regulation similarly fails to deal with a range of non-bank finance platforms that share some of the key characteristics of Zopa’s person-to-person lending platform. Accordingly, financial regulation is failing to enable the cost efficient flow of surplus funds from ordinary people savers and investors to creditworthy people and businesses who need finance. In particular, the current framework: 

1. generates confusion amongst ordinary people as to the basis on which they may lawfully participate on alternative finance platforms (even though some are licensed by the Office of Fair Trading); 
2. does not make alternative finance products eligible for the usual mechanisms through which ordinary people save and invest, exposing lenders to higher ‘effective tax rates’; 
3. discourages ordinary savers and investors from adequately diversifying their investments; 
4. incentivises ordinary savers and investors to concentrate their money in bank cash deposits, and regulated stocks and shares; 
5. inhibits ordinary savers’ and investors’ from accessing fixed income returns that exceed long term savings rates; 
6. inhibits the development of peer-to-peer funding of other fixed term finance (e.g.mortgages and project/asset finance, and even short term funding of invoices); and
7. protects ‘traditional’ regulated financial services providers from competition. 

These regulatory failings could be resolved by creating a new regulated activity of operating a direct finance platform, for which the best-equipped regulatory authority would be the Financial Services Authority (as replaced by the Financial Conduct Authority). Regulation of the platform would be independent of any regulation that may apply to the type of product offered to participants on the platform (e.g. loans, trade invoices, debentures to finance renewable energy and lending for social projects). Proportionate regulation that obliges platform operators to address operational risks common to all products would also enable economies of scale and sharing of consistent best practice, and leave product providers and other competent regulators to focus solely on product-specific issues (e.g. consumer credit, charitable purposes). 

Similarly, there is no reason why products distributed via these platforms should not also be eligible for the usual mechanisms through which ordinary people save and invest, such as ISAs, pensions and enterprise investment schemes.

I'm off to Number 10 today to discuss these issues, and will be submitting a more detailed paper in the coming weeks, both to the Red Tape Challenge and the BIS Taskforce on alternative business finance. I'm interested in any comments you may have.

FSA, OFT Seek To Avert Another PPI Scandal

Having covered the Great PPI Robbery - and the Redux - via Pragmatist for some years now, it's encouraging to see the FSA and the OFT remaining vigilant against another heist. Listen for any mention of a "debt freeze" or "debt suspension"; or a "debt waiver" or "debt cancellation" during your next discussion about a loan or mortgage - and assume a fee or higher interest rate or the need to make some kind of payment. You should also assume that activating the freeze or waiver will be harder than it looks.

If you think you need the insurance, you probably shouldn't be borrowing at all.

The FSA/OFT consultation on the guidance is open until 13 January 2012.

Excessive Mortagage Arrears Fees?

Following my recent post on excessive arrangement fees, it's worth noting that the FSA recently meted out a £630,000 fine for excessive arrears charges to Swift 1st Limited - the fifth such lender since a review in 2010. Swift will also have to pay about £2.35 million to redress the problems.

The FSA found that "Swift applied certain charges to its customers’ accounts... which ... did not reflect a reasonable estimate of the cost of administering an account in arrears."

The list of adverse practices is quite long, and worth comparing against your own mortgage statement or that of any client who has suffered arrears. However, you'll need to go back over all the old statements - the Swift practices dated back from June 2007 to July 2009...

The fees "were:

• Arrears management fee: a monthly management fee applied to a customer in arrears;
• Default notice fee: a default fee applied when a customer’s account fell into arrears;
• Unpaid mortgage payment fee: applied when a cheque, direct debit or standing order was not honoured by a customer’s bank; and
• Litigation fees: fees applied to customers’ accounts when Swift started legal proceedings."

"In addition:

• Swift applied excessive early repayment charges to the redemption figures of customers who were, or had been, in arrears;
• Swift failed to send all its customers in arrears certain prescribed documents, providing information on the options available to them;
• Swift focussed on the collection of arrears without always proactively engaging with customers to establish an appropriate “Arrangement To Pay” based on their individual circumstances; and
• Swift also failed to have adequate systems and controls in place to deal with early redemptions which resulted in some customers who redeemed their mortgages overpaying."