In a joint submission the FSA’s Mortgage Market Review: Responsible Lending consultation, the two trade bodies representing lenders warn that imposing capital requirements designed for deposit-taking banks on non-deposit taking lenders will effectively force non-deposit taking lenders to become banks.
The submission states that imposing overly onerous rules on non-deposit takers could force them to leave the market, seriously damaging competition.
Banks comply with BIPRU regulations, which, amongst other things, sets out the level of capital a bank must hold, and non-banks comply with a simpler set of requirements, entitled MIPRU, which reflect the fact that non-banks don’t have retail depositors to protect.
The submission argues that the FSA’s analysis of the non-bank sector does not accurately reflect the reality of the market, for example that the activities of non-banks encouraged the mainstream banking sector to undertake high risk lending.
It states that a vibrant non-bank sector, with its diversity of business models, can play an important role in increasing competition in lending markets, adding that it is wrong to equate high-risk lending with irresponsible lending.
Peter Williams, IMLA executive director, said: “We see little evidence to support the argument that non-banks encouraged deposit takers to under-price risk or take on more risk. For example, some higher risk lending categories such as lending above 100% LTV and lending on new build city centre flats did create heavy losses at some deposit takers but did not see non-banks at the forefront of the lending.
“The FSA must avoid the situation where the prudential requirements for non-banks are such that they may as well become banks. The financial system benefits from diversity, which non-banks can provide.
“We recognise that non-banks need to be adequately capitalised, but forcing them to operate under the same capital requirements as banks is overly restrictive and could make it uneconomic for some non-bank lenders to operate.”
CML director general, Michael Coogan, added: “Non-banks could play an important role in helping re-build competitiveness in a mortgage market in which lending has become concentrated in the hands of a few large banks and building societies. If non-banks are to fulfil this role, however, regulation should be proportionate and tailored to the risks associated with their business model.”
The submission argues that the FSA could achieve its policy objectives by making small amends to the MIPRU rules that non-banks currently operate under, including an increase in the capital requirement for on-balance sheet regulated mortgage assets from 1% to 2.8% to bring it in line with banks’ capital requirements for mortgages with a loan-to-value ratio of 80% or less.
