Why shouldn’t buy-to-let be regulated, asks Guy Garrard, head of business development at Tiuta
Earlier this year we saw the Turner report propose some measures aimed at improving the banking system in the UK. Included within this well-publicised report was the possible intention to regulate the buy-to-let market.
Looking back what seems like an eternity now, the mortgage market came under statutory regulation in October 2004 under the guise and fanfare which amounted to ‘M Day’. Lifetime mortgages and home reversion plans were also incorporated within the FSA’s regulatory regime in the years to come but buy-to-let still sits outside the regulatory structure even though it has long been expected to be brought into the fold.
The pros and cons of buy-to-let regulation have long been debated but from a personal perspective I would say that the majority of the industry would welcome regulation if, and this is a big if, it was integrated properly. Indeed there appears to have been a bit of a shift in opinion regarding this issue over the past few years. Many lenders and intermediaries previously thought that buy-to-let mortgages would probably remain unregulated. There was a view that buy-to-let was essentially a commercial transaction undertaken by informed investors capable of assessing the risks involved. As such there seemed little need for extra protection. However, due to funding issues, house price falls and troubled economic conditions buy-to-let is now perceived, somewhat unfairly, as being ‘risky’ in the eyes of the government and regulator. This is mainly due to the numbers of ‘amateur investors’ that entered the buy-to-let market in the boom housing period of the mid-nineties through to 2007. It is these amateur landlords that the FSA is looking to try and protect.
A couple of months ago research from Exact reported that over half (54%) of mortgage brokers believed buy-to-let should be regulated. Exact polled 549 mortgage intermediaries and two out of every five brokers revealed that at least 90% of their buy-to-let clients were amateur landlords. A majority (63%) said more than 75% of their buy-to-let clients were amateur investors. This made interesting reading and helps illustrate the changing view of intermediaries perceptions and indeed the buy-to-let market as a whole.
Regarding the actual practicalities of regulation it is important to point out that the proposed statutory regulation of buy-to-let mortgages refers to the advice and sales process. This should concentrate on protecting buy-to-let borrowers to give them the same rights and redress as all mortgage borrowers. It certainly should not make the whole process of obtaining a mortgage or becoming a landlord more cumbersome.
Of course many lenders already treat buy-to-let as a regulated market as their systems and processing are all set up to comply with FSA principles anyway. Intermediaries that operate across the residential sector as well as the specialist ones, generally speaking, also treat their buy-to-let cases in accordance with their regulatory status. As such the introduction of regulation will only really affect those unauthorised buy-to-let specialists who have had no need to gain authorised status and it is these firms that will experience the most upheaval should the sector fall into the watchdog’s regime.
There is a persuasive argument that a regulated buy-to-let market would have a positive impact upon the industry as a whole and any positivity is more than welcomed amidst these tough trading conditions. As I alluded to earlier for this to work properly the rules will have to be clear and make sense. It is vital that the FSA shows sufficient cognisant of the industry’s needs to ensure this helps rather than hinders the future of the market.
At the moment the whole regulatory scenario is up in the air and when this is the case it inevitably breeds speculation. There is currently rumour and conjecture that if an individual has one or two buy-to-let properties then they will be regulated but if they buy a third then maybe that won’t be. That makes no sense. If he/she buys in their own name it might be regulated but if he/she uses a tax efficient limited company vehicle, it won’t be. Good grief, I’ve even managed to confuse myself and I haven’t even started on the subject of whether the FSA will look at this market retrospectively and the huge can of worms that could open.
Of course it makes sense to have a single regulatory regime in place which encompasses a broker’s entire mortgage advisory portfolio. But let’s just underline again that the implementation of a clear, simple yet effective set of rules is vital to regulatory success. If these are in place, understood and valued by all areas of the industry then great. If any further cost incurred by additional regulation are fully justified and worth it then great again. However, any intervention from the FSA must ensure that it boosting the market rather than deflating it but for one I’m not holding my breath that this will be possible.