In a letter seen by Mortgage Introducer the Financial Services Authority has said bridging lenders must stop using retained interest calculations on regulated bridging and actively seek to redress customers unfairly charged this way in the past.
A spokesman from the FSA said: "We have written to regulated bridging lenders because we are concerned that some of them are using retained interest calculation methods that are in breach of our rules. In particular, we are worried that these calculations produce an interest rate that is unclear, unfair and misleading - and are therefore likely to result in consumer detriment.
"We want the firms involved to take steps to identify where they are in breach and implement changes where necessary. Furthermore, if appropriate, they should pay redress to customers. We will be closely monitoring how bridging firms respond to this letter."
Bridging lenders are now expected to review their systems and advertising for regulated loans and begin complying immediately.
Lenders which received the letter are also being told to identify customers who were charged using this method and could have suffered detriment as a result in the past even if they have not yet complained about the charges.
The FSA has urged lenders to “consider action to identify the scope of customer detriment and make redress where it is fair and reasonable to do so”.
Last week the FSA wrote to all regulated bridging lenders in the market telling them the “interest rate produced by this calculation method does not accurately reflect the product interest cost and is unclear”.
The letter said the regulator was concerned this method misled customers by quoting one rate of interest but charging a higher rate because interest is charged on rolled up interest added to the principle before it is required.
In its view this method of interest calculation is in breach of MCOB 2.2.6 R (1) and MCOB 5.4.2 R.
Dragonfly Property Finance announced it had become fully regulated in June joining Lancashire Mortgage Corporation (part of Blemain Group), United Trust Bank, Cheval, Masthaven, Bridgebank, Affirmative, Precise Mortgages and Mayfair.
Robert Sinclair, chief executive of the Association of Mortgage Intermediaries, said: “As AMI has been saying for some time there are genuine concerns about some aspects of the bridging market which the regulator is now beginning to address.
“I see this as the start of wider activity and therefore all regulated firms should ensure they deal with lenders that operate within the rules.”
The Association of Short Term Lenders declined to comment.
While market consensus suggests between 5% and 15% of all bridging is regulated the FSA told Mortgage Introducer in June this year it expects regulated bridging lenders to behave with “the same high standards” on unregulated business they transact as on regulated business.
A spokeswoman for the regulator said at the time: “Even though the business may be unregulated we still expect the same high standards to be applied to it if the lender is a regulated entity.
“If you see low standards elsewhere in the business you might expect it to be seen in the regulated part. This is certainly something we will be looking out for.”
