Do we need more regulation in the property finance industry?

By Jayne Kemsley, Property Partner at Thrings and Fiona Price, Property Solicitor at Thrings.

When we began writing this article several days ago, it’s fair to say we held different viewpoints on many of the issues to the ones we hold now. It might have led to a number of re-writes, but what has stayed the same is the realisation that when we emerge from the COVID-19 pandemic, our daily and business lives will be different. What that will look like we can only guess at this stage. But life will go on – and lenders will still lend and borrowers will still borrow.

Property finance is what it is, and we know this will continue. But this unprecedented period gives us all time to take stock. What do we know? How can we make practices better? How can a lender protect against the less-than-honest borrower? Indeed, how can a borrower protect against an unscrupulous lender?

Those of us working in specialist property finance know that loans essentially fall into two categories: those which are regulated and those which are not.

The majority of residential mortgages will automatically be regulated in accordance with the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001. If a loan is secured by a charge over a residential property which is lived in by the borrower, a family member or other close person, and the loan is not for the purposes of a business carried on, or intended to be carried on, you will usually have a regulated loan.

By contrast, commercial loans are unregulated with little protection for lenders or borrowers. With no formal regulations, respectable lenders may be challenged by less reputable lenders with unrealistic loan offers, resulting in borrowers being subjected to:

• unnecessary risk or less favourable terms;
• inappropriate or wholly unsuitable advice for their needs; and
• mis-selling from less scrupulous lenders or brokers.

We are seeing more and more lenders entering the market. Given this, should there be more regulations in place to protect both borrowers and lenders? It is paramount when taking out any loan that due diligence is carried out by a lender on a borrower. But it’s also essential for a borrower to do the same of the lender, particularly when taking out an unregulated loan where there are no regulations in place to protect the borrower.

As we know, lenders are competing for business, regularly reviewing the products they can offer. Consequently when taking out an unregulated loan, there are a number of things a borrower should consider to not only protect themselves but also to find responsible lenders:

• is the lender a member of a trade organisation intent on improving standards?
• how long has the lender been in operation and are there reviews online?
• what if there is a problem with the loan? And will they charge higher default interest rates?

With the expansion of short-term commercial borrowing, and with more concern about risk, perhaps we need more protection for borrowers and lenders in line with residential regulated loans. That said, increased regulation could well lead to more time being added to a transaction which may not be in either parties’ interest. There is clearly a balancing job to be done. 

None of us knows what effect COVID-19 will have on our future and how it will affect businesses. Increasing regulation in the immediate future could have a detrimental effect on our work - but in the longer term it may well benefit everyone.

For more information please visit www.thrings.com