Lenders are exploiting a legal loophole by offering high-risk mortgages that allow homebuyers to get a loan without having to prove what they earn.
Money Mail can reveal how British businesses are setting up in Eastern European nations such as Estonia as a way of skirting around tough UK laws on lending money.
From January, Selfcert.co.uk, which has been founded by a British businessman in an unnamed Eastern European country, will offer self-certification mortgages to UK borrowers.
These types of deals, where the homebuyer’s income is not checked by a bank, were dubbed ‘liar loans’ following the banking crisis because borrowers fibbed about how much they earned in order to get a bigger mortgage.
High risk: Deal in which homebuyer’s income is not checked by a bank, were dubbed ‘liar loans’ following the banking crisis because borrowers fibbed about how much they earned in order to get a bigger mortgage
Today, these deals are effectively banned in the UK by the City watchdog, the Financial Conduct Authority (FCA), but 36-year-old Graeme Wingate, who owns Selfcert.co.uk, says EU rules allow financial institutions in other nations to offer their products to consumers in the UK without applying for permission from the British regulator.
The only condition is that the company must pass the lending rules of the country in which it has based itself. It is also not allowed to have a property or a branch in the UK.
Selfcert.co.uk will not be the first firm to get around the rules this way. Some peer-to-peer lending firms, which act as middle men between savers and companies that want to borrow money, are already based in Estonia but offer deals here.
Mr Wingate is the former owner of Barnsley-based payday-loan company Quick Loans, which shut down following a crackdown by the FCA in 2014. It reopened as a loan broker.
Before the watchdog capped the cost of payday loans, the firm offered deals at a rate of 4,559 per cent.
Selfcert.co.uk, which is backed by £30 million from internet entrepreneurs, will lend to UK customers who struggle to get mortgages because they cannot meet mainstream banks’ requirements.
Mr Wingate says he conducted a tour of European regulators over the summer to find the country which would be best for business. He refused to name where it was for fear his firm’s licence to operate there might be revoked.
Mr Wingate has boasted to Money Mail that skirting the City regulator’s rules was so easy that he could not understand why more firms were not doing it.
‘We looked for countries with rules that were the most workable for us and which were less strict than in the UK,’ he says.
‘Most people would not realise how easy it is to sidestep the FCA. Part of me feels it is a good thing, because it is easier to set up business. The other part of me feels this is a loophole which could be exploited by dubious firms.’
Any company that wants to offer financial products in the UK has to apply to the FCA for a licence. It must be regulated so that if anything goes wrong, consumers are protected by the Financial Ombudsman Service and the emergency bail-out Financial Services Compensation Scheme.
However, there is an exception for firms which operate in the UK, but are based in the EU and do not have branches here. Provided they have a licence in their own country they can sell products in the UK.
The danger for consumers is that if the organisation goes bust, borrowers could be left without vital protection. Their complaint about the firm must be made in the country where the company is based.
Self-certification mortgages were effectively banned following the banking crisis after thousands of homebuyers could not repay the vast loans they had been handed.
In principle, these loans were a good idea; allowing the self-employed, workers who received large bonuses and those in part-time work, to get mortgages when otherwise they would be refused.
This is because they did not need to produce bank statements or payslips. Instead, they merely had to sign a declaration stating what their income was.
However, investigations by newspapers found rogue brokers and unscrupulous lenders handing out huge mortgages to people who lied about their income. Often, they were encouraged to inflate their pay to get a mortgage.
Selfcert.co.uk interest will be two percentage points higher than the Bank of England base rate, now 0.5 per cent.
The maximum loan will be £500,000 and lenders must put down a 15 per cent deposit. There will be an administration fee, expected to be less than £1,000.
Mr Wingate says the firm will run credit checks on some potential customers but will also rely on information from their Facebook, Twitter or Instagram accounts.
He believes checking a customer’s photos for the kind of clothes they wear or Facebook for updates about a new job would help him to decide whether to lend or not.
He says: ‘The regulators in the country we chose seemed to be really keen to have us. They gave us an English-speaking liaison officer and helped us to open a bank account. We could have been set up within a month.’
Estonia is thought to be a hotspot for financial firms who want to target British customers.
Iain Anderson, executive chairman of public policy firm Cicero, says: ‘Closing this loophole is an issue David Cameron should tackle when he goes to renegotiate Britain’s EU membership.
People say the FCA’s rules are too strict, but they are stringent for a reason. Rules across the single market need to be consistent in order to properly protect customers.’
The FCA confirmed that under an electronic commerce directive, a firm located in the EU but lending online from that country was not FCA regulated. ‘The FCA would not be able to intervene if something went wrong,’ adds the spokesman.
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