MMR 2012: ASTL disappointed

Sarah Davidson

October 25, 2012

Benson Hersch, chief executive of the ASTL, said: “We are disappointed that the FSA has proceeded with highly complex rules regarding capital adequacy which we feel are disproportionate and not suited to small short-term lenders.

“Whilst the ASTL accepts the FSA’s desire for lenders to have adequate capitalisation it sees no reason why these requirements should be complex and burdensome rather than simplistic and easy to implement.

“It is difficult to see how these rules will benefit short-term borrowers who will ultimately have to bear the costs of implementation.”

Under the final Mortgage Market Review rules published today bridging lenders will be subject to stronger prudential rules meaning they will have to hold more capital on their balance sheets.

The regulator said those directly involved in bridging argued strongly that the proposal to apply BIPRU requirements to these generally smaller-sized firms is not proportionate and for many firms would mean a significant increase in the capital required.

The preference by providers of capital for subordinated loans means that firms’ ability to raise share capital would be either very restricted or very expensive.

But the FSA said non-bank lenders subject to MIPRU capital requirements are significant market participants and can cause significant consumer detriment.

And it added: “Our view is that we should therefore increase the quality and quantity of capital required for them to improve their loss absorbency, which was a key failing across the market during the financial crisis.

“The same arguments apply to bridging loan firms for holding a minimum amount of share capital and reserves, which should help a firm absorb losses whilst either continuing to trade or to prepare for a more orderly wind-down and withdrawal from the market.

“We will therefore retain the requirement that at least 20% of eligible capital should be share capital and reserves less intangible assets.

“Given this, we will include bridging lenders within the scope of the new MIPRU requirements.”

Ray Cohen, director of compliance firm Jackson Cohen, said the rules were inappropriate and disproportionate for a bridging firm that may only consist of two or three people.

And he said: “Although the FSA appears to be saying that they will give some guidance on the application of the rules we do not know how long it will take nor how helpful that will be.

“They have known about this for months but have done nothing about it prior to publishing the policy statement which is highly disappointing. The FSA would not accept this type of approach from a regulated firm.

“In the meantime existing firms will have to start working out how they will meet the requirements.

“Firms about to apply for authorisation will now have to demonstrate that they are ready, willing and able to meet these requirements in the future which may be both problematic due to the complexity, and costly to find someone capable of interpreting the rules and putting systems and procedures in place.

“This move will inevitably drive up costs and will force some firms to exit the market. It will also act as an inhibiter to new entrants. All of this will be bad news for consumers who will see less competition in the market and end up paying a higher price for their loans.”

Cohen said if a short-term lender got into difficulties with losses or loss of funding it would run off its loan book in an orderly manner with no consumer detriment as the loan book is managed out.

And he added: “Even in the worst case scenario a liquidator could step in and run off the book. What would be the consumer detriment in this?

“The nature of short-term lending is substantially different to that of longer term loans where people may be trapped in uncompetitive loans or lenders find they can’t finance existing loans as they borrow short and lend long which can impact borrowers.

“The vast majority of bridging loans are on a fixed rate throughout the term. It is hard to see that the FSA have made a genuine case for their approach which is both costly and complex for short-term lenders and detrimental to consumers.”

Sign up to our daily email