Aren’t Unregulated Bridging Loans Unsafe or Unlawful?
‘Unregulated’ is a daunting word. For many people, it implies lawless, cowboy business that could land them in a lot of trouble. In fact, we posed this question to our Facebook followers: “When you hear the word “unregulated” in relation to bridging finance, are you concerned that it means “unsafe” or even “unlawful”? 35% of voters responded “yes”. Currently over half of the bridging finance industry is unregulated, so it’s the norm rather than the rarity, however this misconception may be shrouding the true benefits of utilising bridging finance to scale your property portfolio.
Bridging loans, in short, are short term finance facilities that are secured against the value of a property. For a comprehensive explanation, read our Essential Guide to Bridging Loans.
To understand what makes a bridging loan ‘unregulated’, it first makes sense to understand why some are ‘regulated’. A bridging loan will be ‘regulated’ when the loan secured is against a property that is currently occupied, or will be occupied in the future, by the borrower or any member of their immediate family.
These loans are regulated by the Financial Conduct Authority (FCA), the conduct regulator for financial services firms in the UK, which functions to protect consumers, promote fair competition and to ensure the integrity of the UK financial system. The regulation offers consumers a heightened level of protection against unscrupulous behaviour on behalf of either the lenders or finance brokers.
What makes a bridging loan ‘unregulated’?
Currently all commercial bridging finance is unregulated, which means that the FCA extends no protection to this area of the industry. A bridging loan is ‘unregulated’ when the property used as security is for business or investment purposes which will never be occupied by the borrower or any member of their immediate family. If you are securing a loan for an investment property, a commercial building or for a buy-to-let it will not be regulated. Most second charge loans are also unregulated with certain exceptions. Also, any loan taken out by a limited company as opposed to any individual will be unregulated.
What about the lenders, are they regulated?
Actually, a lot of alternative lenders are not regulated by the FCA. Many establish themselves with the sole purpose of providing loans for business purposes, so they have no need to become regulated. Often, as their business grows, they will want to offer a more diverse product range. It may be the case that they then look at regulation, but many choose to stay in their field of expertise providing solutions for business people only. There are many experts in the world of finance who continue to work in the non-reg sector. The non-reg sector brings a much wider array of options for fast and creative finance and is a great thing for the property industry. The regulated entities try to offer similar products but the processes involved often damage the suitability of a product. A bridging loan taken through a regulated bank can often take two or three months to complete which will eat away far too much time for a property developer.
To conclude, the word ‘unregulated’ in relation to bridging finance is nothing to be afraid of. It simply means that the property used as security for the loan is for business or investment purposes and therefore does not require the FCA’s protection as a consumer is not personally involved. Whilst unregulated finance remains a necessity for large swathes of the market, due diligence is always essential. Make sure you completely understand the charges and the terms and conditions before you go through with anything.