The bridging sector is one of the few financial markets that has escaped the complete governance of the Financial Conduct Authority. Although bridging loans obtained for residential use are regulated, those for business
or investment purposes are not.
How long can the market withstand such a contradict-
ory regulatory stance, and is it only a matter of time before
all sectors of the bridging market fall under the FCA’s watchful eye?
Regulation could stifle innovation
The question of whether the entire market should be regulated continues to divide those in the sector. Some argue that regulation would bring uniformity and put the market on an even keel. Others believe such a move would do more harm than good.
Fiduciam chief executive officer Johan Groothaert believes regulating short-term credit to businesses would be counterproductive because it would become even
more difficult for SMEs (small and medium-sized enterprises) to obtain finance.
“SMEs have already been singled out by Basel III and to impose another layer of complexity on their financing would be very detrimental,” he says.
“It would also set the UK apart as loans to businesses and the activity of providing such loans are not regulated anywhere in the European Union.
“I believe time would be better spent on reviewing which financial regulations harm our SMEs unnecessarily, rather than on how to increase the regulation.”
One adviser, who wishes to remain anonymous, says the requirements of businesses are often very different from those of residential bridging clients.
“Regulating the entire bridging market would be tantamount to telling people how to run their business,” the adviser claims.
“Let’s say someone wants to transform their technology gaming business to make bespoke virtual reality headsets as this is where they see future demand and increased profit.
“They have been offered a lucrative contract but need to start production immediately to secure the deal. They are prepared to sell their buy-to-let [BTL] property to give the cash injection needed. As an entrepreneur they are pre-pared to take this gamble in the knowledge they will have
to sell their BTL property if the plan fails.
“Which adviser has the knowledge to advise on that being a suitable loan? That is the borrower’s area of expertise.
We may think his plan is crazy but what do we know about virtual reality headsets? Imagine the amount of research a broker would have to do to be satisfied it was a suitable loan and a good outcome.
“The best we can do is provide a loan that meets their stated requirements,
but the borrower must decide if it is a
suitable use of their assets and a risk they are willing to take,” the adviser explains.
Achieving transparency
Connect Mortgages sales director Kevin Thomson believes the bridging market should be regulated. “This would ensure not only that customers get the best bridging deal but also that they are protected with regard to the exit from the loan, and that all fees are transparent and known up front,” says Thomson.
“Customers need to be assured at the outset that they will not be left with unreasonable extension fees, particularly ones they didn’t know about at the start of the loan process.
“There also needs to be some flexibility regarding the exit date, so that customers are not forced into re-bridging or even losing the property; all of which incurs more and more costs, which can be punitively high,” he adds.
Trinity Financial product and communications director Aaron Strutt says bridging loans typically are more expensive than other forms of finance and consumers need to be careful about which firms they deal with.
“Some of the bigger bridging providers and well-known lenders have a good reputation and there is not a huge amount to worry about as long as the borrower has the money to pay the bridge back,” he says.
If they can’t repay the debt, however, it can quickly become very expensive, Strutt warns.
“One problem is the sheer number of lenders in the bridging space, many of which are small private firms with a small panel of investors,” he explains.
“In a similar way to Dragon’s Den, an enquiry can come via email to one such private lender. It is then sent out to investors to see if they want to lend on it.
“If it is a fairly straightforward case, a borrower can shop around so they are not overcharged,” he says. “If, however, the deal is particularly complex, the client may have no other option but to accept the fee the firm is quoting.”
Self-policing sector
Bridging firms that are members of the Association of Short Term Lenders (ASTL) must abide by its Code of Conduct, which has strict rules around client fees.
With membership of the association being voluntary, however, is this self-
policing approach enough? ASTL chief executive officer Vic Jan-nels believes the Code of Conduct is keeping the industry on track.
“The question of regulation is one of the reasons why it is so important for lenders in our market to join the ASTL,” he says. “Our Code of Conduct creates standards among our members that provide a benchmark for the entire sector to follow; and, with this form of self-policing, I see no current reason why the whole sector needs to be overseen by the FCA.”
Jannels believes market-wide regulation would bring added costs and could stifle innovation. “I’m not against regulation but I do think that all of the implications should be carefully considered ahead of any action,” he says. He believes there is a chance the FCA could regulate the whole market, and it would seek to do that if it saw bad practice that led to customer detriment.
“All participants in the market therefore have a responsibility to collectively adhere to the highest standards of professionalism and customer focus to demonstrate that we can and do act in the best interests of our customers without the need for intervention.”
Of course, for business bridging to become regulated the BTL market
would likely have to lay the first card.
“Bridging will become fully regulated only if BTL becomes fully regulated first,” says Thomson. “Even if this does happen, I’m sure there will be some private bridging loans available outside regulation because there are so many private lenders that issue loans under the radar.
“The FCA will probably move to full regulation only if there is a big issue
with a bridging lender that hits the headlines.
“Measures to regulate a market are usually in response to a lender or a segment of the market doing something catastrophically wrong so that it’s reported on widely, and the regulator or the government then feels it has to react.”
Tall order
Groothaert does not expect to see regulation of the market.
“It would push a large part of the credit managers and
syndicated lending out of London,” he says. Indeed, without any visible malpractice it is difficult to see where the push for regulation of the commercial side of the sector would come from.
The differing workings of the business and residential worlds would make it tricky to regulate both markets in the same way, creating a huge task for an already busy regulator. This is therefore unlikely to be high on the FCA’s priority list.
