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Is it time for Commercial Mortgage Brokers to be Regulated?

Guest post by: Chris Clarke

Article Overview: Proposals have been put forward by both the UK Financial Services Authority (FSA) and Treasury supporting regulation of Buy-To-Let mortgages and secured loans. It is looking quite likely that these proposals will be adopted in some form or another. But does this mean that UK commercial mortgage brokers are facing regulation too? We examine the arguments for and against commercial finance regulation.

Is it time for Commercial Mortgage Brokers to be Regulated?

The FSA rules governing mortgage code of business and "treating customers fairly" are far tougher than the current requirements placed on Commercial Mortgage Brokers and lenders. These rules are probably going to extend to cover buy to let mortgages and second charge loans, but could this mean that commercial mortgages are also going to regulated? So what would regulation mean to commercial mortgage brokers?

The argument for regulation of residential mortgages is well proven. Residential homeowner are regarded as being unsophisticated and therefore in need of protection from the sharp edges of the mortgage market. To some extent the residential homeowner needs protecting from their own lack of judgment. On the other hand one requires a certain amount of financial savvy to run a businesses and often the major borrowing decisions will be taken by more than one person, possibly with the support of a qualified accountant or solicitor.

Moreover, it is worth considering the different types of commercial finance available to businesses; leasing, factoring, overdrafts, business loans secured on machinery are just some. Where would regulation start and stop? Would a commercial finance broker faced with regulation of mortgages simply divert the funding options to another area of the business?

The argument for regulation is centered on improved business practices, but it is important not to loose sight of the small business person. Often having to resort to non-conforming or self-cert lenders they are only able to source finance through a commercial mortgage broker. These individuals are the ones that are at the mercy of the market, with limited choice and often making decisions under pressure.

There are plenty of commercial mortgage brokers who would be happy to see increased regulation within the marketplace. There are serious concerns around fraud, bad practice, lack of transparency and extraordinary broker fees. Regulation could help in driving out the worst culprits. In fact its is well known that many of the brokers forced out of the residential mortgage market have simply switched to the commercial sector.

Whilst the arguments against regulation may appear to outweigh the arguments in favour, there is no doubt that the FSA and Treasury are watching the marketplace and perhaps looking for some clear self-control. The principles of "treating customers fairly" are well established, and freely available, so perhaps the commercial finance industry can interpret regulation of buy to let mortgages and secured loans as an opportunity to force best practice in the broker community.

Commercial Mortgage Brokers are probably more important to commercial lenders than their residential counterparts. The commercial finance industry a complex marketplace but also potentially very lucrative. Collective self control amongst commercial mortgage brokers may help avoid the imposition of regulation.

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Article Tags: commercial mortgage brokers, financial services authority, secured loans, uk financial services



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