FSA gets tough on bridging lenders

Wednesday 8th August 2012

The FSA has fired a warning shot over the bows of regulated bridging lenders by launching a probe into the practice of ‘retained interest’.

It has written to every regulated firm identified as being active in the market, requiring them to explain how they calculate their interest rates.

The firms are also being asked how long they have been using that method, how many customers have been involved, and how they plan to compensate any customers who may have been overcharged.  

The letter warns that using ‘retained interest’ calculation methods is unclear, unfair and misleading.

According to the FSA, a retained charging structure involves quoting one interest rate upfront, but actually charging more by calculating interest again on the whole amount plus the interest.

As an example, it gives a £100,000 bridging loan required for six months. The interest rate quoted is 1.25% per month – or 7.5% over the six months.

The FSA says that by the time this interest is added to the loan, and this sum re-calculated for interest, the true interest on the loan is 8.108%.

Using retained interest calculations are a common practice in the bridging industry but the FSA says this potentially misleads borrowers and contravenes the Mortgages and Home Finance Conduct of Business Rules.

The firms are now required to supply answers to the FSA’s detailed questions within 20 working days.  

The Association of Short Term Lenders said: “This is an important issue and our members are obviously studying it with their compliance contacts, but certainly we will co-operate with the FSA in due course.”

An FSA spokesperson said: “We want the firms involved to take steps to identify where they are in breach and implement changes where necessary. Furthermore, if appropriate, they should pay redress to customers. We will be closely monitoring how bridging firms respond to this letter.”