New FCA consultation reviews loophole in consumer buy to let

A consultation has been launched that will review a regulatory loophole, which makes the Financial Services Compensation Scheme (FSCS) liable to compensate claims made against brokers who advise on consumer buy to let mortgages.

As it stands currently, while the Financial Conduct Authority (FCA) does not regulate the consumer buy to let market, brokers still need permission to advise on consumer buy to let cases.

However, the FCA has discovered that if regulated mortgage brokers advise and sell consumer buy to let products without the correct permissions, this could lead to the Financial Services Compensation Scheme being liable to cover claims made against brokers.

This discovery was highlighted as follows, in the FCA’s CP16/17 consultation paper, which was published last week.

“Consumer buy to let (CBTL) activities carried out by firms that are registered under the [Mortgage Credit Directive] Order are not regulated activities under the Financial Services and Markets Act 2000, which means their CBTL activity is not covered by the FSCS.

“However, we have become aware that, contrary to our policy intention, some CBTL activity is potentially within the scope of the FSCS.

“This could occur if an authorised firm carries out CBTL intermediation, in breach of the order, but has not registered to do this.”

The FCA is therefore consulting on whether to remove all consumer buy to let activity from the scope of FSCS protection, as outlined in the handbook.

The consultation paper states:

“We propose amendments to the handbook to ensure that all CBTL activity is outside the scope of the FSCS.

“This includes CBTL activity carried on by an EEA firm through an establishment in the UK where the firm has chosen to top up any cover provided by a compensation scheme in its home state for its mortgage activities by obtaining cover from the FSCS.”

A spokeswoman for the FCA added:

“In the drafting of the rulebook, it gives some CBTL customers FSCS cover when they shouldn’t have it, so we’re closing that loophole.”

Apparently, the FCA and the FSCS have not yet come across brokers selling consumer buy to let products without permission. But it could have been happening under their radar and before the situation escalated to an FSCS claim.

David Whittaker, managing director, Keystone Property Finance and Mortgages for Business said that it is a lender’s responsibility to check brokers’ consumer buy to let permissions.

“If the FCA says brokers can do CBTL only if they have registered to do so, what are the lenders doing if they take an application on CBTL? They should be checking each and every one against the FCA register.”

Bob Young, chief executive, Fleet Mortgages agreed that lenders should be conducting due diligence on brokers’ permissions.

While Fleet does not deal with consumer buy to let, he added:

“We would make sure they had the right permissions. If they were with a network, they would have the permissions. If they were an individual, we would make sure they had what they needed.”

Responses to the consultation should reach the FCA by 12 August. David Whittaker has said that the watchdog should ask lenders to vet brokers more thoroughly up until the consultation closes.

“They should say to the lenders ‘every piece of CBTL business you do, you must check, for the time being, that the broker has the relevant permissions’.”

Bob Young added:

“I can’t speak for the industry but my guess is lenders would always welcome clarification. 

“I’m a big fan of the FCA. I know it is easily knocked by brokers and lenders but I’m a great fan and this is an example.

“If what it’s doing is saying ‘This could be a problem, let’s sort it out now’, that’s much better than waiting for it to become a problem.”


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