Regulation. Regulation. Regulation?

By Tomer Aboody, Director of MT Finance,

A great deal of industry focus and debate has been spent in recent times on examining the various benefits and disadvantages of the prospect of further involvement on the part of the Financial Services Authority in the bridging finance market.  At MT Finance, we have often debated whether those bridging finance loans which presently fall outside of the scope of the FSA should and/or should not be brought under their umbrella.  The debate continues.

The expense and administrative burden of maintaining regulatory status, coupled with a perceived perception of shifting, difficult regulatory hurdles, has led some other lenders to shy away from seeking FSA Authority to offer regulated loans and/or from becoming a regulated entity in their own right.  We watched with interest recently when a regulated bridging finance lender announced that it would be scaling back its involvement with the FSA. 

After winning our first award as Best Newcomer to Bridging Finance Lending at the recent Bridging and Commercial Awards, we found ourselves reflecting on the health of the market and the number of new entrants coming into the space.  Once again, we again found ourselves asking whether it really makes sense for the FSA to assume responsibility for this market at this time. 

The most relevant and overriding justification for FSA Regulation of the bridging finance market is consumer protection.  Indeed, this is one of the four statutory objectives of the body as set out under the The Financial Services and Markets Act 2000. 

At a time when each week seems to bring with it the launch of a new bridging finance lender, the increasing number of participants in the industry create a downward pressure on pricing. The increase in competition means consumers and brokers alike benefit not only from better rates, but also from the creative products and innovations which are born out of the need for competitors to distinguish themselves from one another.  It is a massively positive environment in which finance providers, such as ourselves, are working for the consumer’s business. 

Supplemented by the authority of the legislative framework, consumers’ best interests are in part protected by, and advanced by, the vibrant competition.  A concern must be that a move on the part of the FSA to bring presently unregulated loans under their supervision would have a significant consequential impact on the number of bridging finance companies coming into and/or remaining within the space.  A drop in participants means a drop in competition, and encourages a more sterile and less innovative environment. Is there a really a compelling corresponding upside for consumers in this space?    

One would expect that as lending rates and thus capital returns decrease, the number of opportunistic lenders (such as hedge and income funds) in the market with also gradually decrease.  A fragmented market should move closer to a consolidated core group of professional and committed bridging finance lenders, who, like MT Finance, by and large embrace the need for transparency and ethical lending practices and who belong to bodies such as the Association of Short Term Lenders, the National Association of Commercial Finance Brokers and the newly established Association of Bridging Professionals.

To summarize, any fear of a large opportunistic market which must be regulated in order to protect consumers, may be unfounded under circumstances where consumers are protected by the range of choice and ever increasing customer services.  The liquidity bubble will not last, but why pop it preemptively whilst it is servicing demand and benefiting consumers? 

Eventually, the market will contract into a more manageable and historic form in any event. 

Although this article by no way addresses the entire spectrum of what is an important topic of conversation, it is designed to provoke debate as to whether a move by the FSA to impose further regulation upon this industry in the interests of consumer protection, may in fact be detrimental to the commercial interests of those consumers and may offer minimal additional protection to that which is already afforded by the Consumer Protection Legislation, Office of Fair Trade, and the sterling role associations such as the astl already play within the industry. The debate continues.