A recent survey of mortgage brokers shows that eight out of ten fear buy to let mortgage regulation and although the Council of Mortgage Lenders [CML] may be “disappointed that the Treasury has found it necessary to make a U-turn on buy to let” the reality is that it is coming! As a result, all those involved within mortgage sales, distribution and administration need to prepare for the future rather than fight against it. Fundamentally, control of our own destiny (in respect of buy to let mortgage regulation) is not in our own hands. As is the case in many of these matters, European regulation will dictate the regulations that have to be adopted within the UK. Our choice is how implement those regulations. Sadly, the hope that the UK would be able to achieve the necessary framework through voluntary mechanisms has been quashed by the most recent HM Treasury consultation paper. Put simply, the Government now believes that to comply with the European Mortgage Credit Directive, which has to be implemented by March 2016, it has no choice, but to impose national law on part of the buy-to-let market.
The regulatory challenge in the buy to let sector has always been the identification of a vulnerable ‘consumer’ that needed to be protected.
The reason for the passionate debate against buy to let regulation lies within the historical development of mortgage regulation. Essentially, mortgage regulation has been developed to protect consumers and any changes to retail mortgage regulation have been designed to enhance consumer protection. UK mortgage regulation has not, to date, involved the regulation of commercial business decisions by borrowers hence buy to let mortgage regulation has always been ‘carved out’ of UK mortgage regulation. The regulatory challenge in the buy to let sector has always been the identification of a vulnerable ‘consumer’ that needed to be protected.
An important aspect of the Directive is that it applies to individual consumers. This means that the UK is not obliged to put in place any requirements where the mortgage is being taken out by a company, or where it is taken out by an individual acting in the course of their trade, business or profession. So once the dust has settled, may be the HM Treasury proposals will make sense as they only plan to regulate the part of the buy to let market where borrowers can be identified as “accidental landlords”, i.e., consumers. It is argued that as these borrowers do not fall into the category of making a business decision to invest in property and rent it out as a commercial activity they could be considered ‘vulnerable consumers’, who need to be protected by statutory regulation. Typically, accidental landlords are classed as those who previously lived in a property and being unable to sell it decide to let the property instead or those who inherit the property and again decide to let it rather than sell it. Often such borrowers are not making commercial business decisions, but are forced into letting property as a result of the state of the mortgage market at a particular time.
Although it is clear that regulation is coming to a specialist part of the buy to let lending market, it is not clear what the regulation will entail. Those involved within the sector have the chance to shape government thinking by responding to the consultation paper. The full details of the consultation can be found on the gov.uk website under the ‘consultations’ heading. Responses to the consultation have to be submitted by the end of October, so by the time this article goes to print those wishing to respond need to do so quickly. If eight out of ten brokers fear buy to let regulation they can only shape the regulation placed upon them by responding.
Nick Baxter is a Partner with Baxters Business Consultants. Baxters Business Consultants is a business consultancy offering training, marketing and expert witness services within the lending industry.
