City Watchdog Warns Of Buy-To-Let Clampdown

The City watchdog is drawing up plans to tighten its scrutiny of buy-to-let mortgage lending amid concerns that poor underwriting standards could “compromise” the integrity of Britain’s financial system.

Sky News has learnt that the Financial Conduct Authority (FCA) has written to companies for which it has sole regulatory responsibility to warn that it is considering intervening in one of the fastest-growing areas of the UK housing market.

According to a letter sent by Philip Salter, the FCA's director of retail lending, it has begun to examine whether there is a risk that buy-to-let lenders not supervised by the Prudential Regulation Authority (PRA) could sanction poorer lending standards.

In March, the PRA, the banking regulator, published a consultation paper outlining plans for new affordability tests for borrowers, including a minimum 'stressed' interest rate of at least 5.5%.

The UK buy-to-let mortgage market is worth roughly £200bn annually, with the Bank of England projecting that banks are likely to extend their lending in this area by about 20% per year during the next two years.

A big stamp duty hike and reductions to various tax reliefs on buy-to-let borrowing have acted to curb demand, but with interest rates slashed last week to another historic low of 0.25%, regulators are determined to head off the threat of a future repayment crisis when rates do ultimately start to increase again.

Mr Salter's letter to affected firms said its review would include "considering to what extent poor BTL underwriting by firms solo-regulated by the FCA might compromise the advancement of our objectives - in particular our objective to protect and enhance the integrity of the UK financial system, as well as the potential for poor BTL lending to affect the fair treatment of customers with regulated products".

"There is a risk that poor standards of lending could emerge in firms that would not be subject to the PRA's proposals," the letter, which was passed to Sky News by a market intermediary, added.

"We will actively monitor the non-bank lending sector of the BTL market to ascertain whether we need to intervene to advance our operational objectives."

A person familiar with the regulator's letter said it had been issued to firms accounting for only a small percentage of Britain's buy-to-let mortgage market.

It (Other OTC: ITGL - news) did not specify which additional measures the FCA might adopt.

The watchdog's letter was sent at around the same time as the deadline for responses to the PRA's consultation paper at the end of June, according to insiders.

The Bank of England's Financial Policy Committee had already warned that it was "alert to potential threats to financial stability from rapid growth in buy-to-let mortgage lending".

It said there was a risk of "investors… amplifying cycles in the housing market, as well as affecting the resilience of the banking system."

Some lenders have already taken steps to tighten criteria for lending to buy-to-let customers, with OneSavings Bank (Stuttgart: 2OS.SG - news) among those lowering loan-to-value thresholds for those borrowers earlier this year.

The FCA declined to comment on Wednesday.