Non-deposit taking lenders could be forced out of the market if the Financial Services Authority presses ahead with plans to force them to hold even more capital, the Intermediary Mortgage Lenders’ Association has said.
Under Mortgage Market Review proposals on responsible lending published in CP 10/16 last week the FSA says it is forcing non-banks – mortgage lenders that do not hold retail deposits – to hold more capital on their balance sheets.
But such a move could lead to a squeeze on profits, forcing smaller players out of the market as well as stifling competition and innovation.
Currently non-bank lenders must hold 1% of balance sheet assets plus total undrawn commitments of £100,000, whichever is higher under regulation outlined in MIPRU, the Prudential Sourcebook for Mortgage and Home Finance Firms, and Insurance Intermediaries.
But the FSA is proposing to apply BIPRU capital requirements to non-banks under the new MMR regulation, which would see non-banks forced to hold similar proportions of capital to banks, building societies and investment firms.
Non-banks are concerned that if the capital requirements were set too high, it would make mortgage lending prohibitively expensive for this type of lender, effectively barring them from the market and stifling innovation.
The FSA consultation paper said: “We expressed concern in DP09/3 that the procyclical entry and exit of non-banks in the UK market produces market sustainability issues, reinforcing our view that, collectively, non-banks bring instability to the market.”
It is for this reason the FSA says it wants to introduce “a risk-based capital requirement for non-banks [that] would support the overall objective of encouraging stronger risk management.”
The paper also suggests that non-banks should hold capital against operational risk.
Peter Williams, executive chairman of IMLA, said the proposals still lack clarity and there remain questions about how non-banks are defined. He said depending on the definition, there could be up to six lenders which would be affected by these proposals.
Both Paragon Mortgages and Precise Mortgages are non-banks, while lenders such as Platform and Kensington could fall outside this definition because their parent companies, The Co-operative Bank and Investec respectively, are banks.
“This seems very heavy handed regulation and it’s yet another example of an MMR proposal that will prevent even more people from entering the mortgage market,” Williams said.
“Our question would be whether we need prudential regulation alongside the mortgage market regulation.
“In IMLA’s view this will be too much: it will restrict innovation, entry and choice. Something doubly frustrating because the FSA could have policed entrants to the market better in the first instance.”
Williams said IMLA was concerned that non-banks were being held wrongly responsible for much of what caused the credit crisis.
He added: “There has been so much misdiagnosis of what caused the problems. It seems to be firmly in people’s minds that it was the fault of the non-banks but the irony is that the billions used to bail out the country’s failed banks were paid to deposit takers.
“The FSA says there is an appetite to retain non-banks because the regulator recognised that they want the edge and innovation that these lenders bring to the market, but I have to say, right now it doesn’t feel like that’s true.”
