The UK luxury housing market has boomed in recent years as wealthy buyers have swooped but proposed rules on loans could hit high net worth borrowers and the banks that serve them, the British Bankers’ Association has warned.

The UK luxury housing market has boomed in recent years as wealthy buyers have swooped but proposed rules on loans could hit high net worth borrowers and the banks that serve them, the British Bankers Association has warned.

The Bank of England’s Prudential Regulatory Authority, mindful of how allegedly lax borrowing standards have been a key factor in the financial crisis that hit markets six years ago, has proposed to limit the number of mortgage loans greater than 4.5 times a client’s income.

As wealthy clients can sometimes have uneven income streams – or be “cash-rich, income-poor” – such a rule could have the paradoxical effect of hitting some of the wealthiest individuals in the market, the BBA said in a note issued late last week.

“Loan to Income ratios should enhance the resilience of the UK financial system by tempering house price rises and ensuring that customers aren’t taking on too much debt,” Nicholas Smith, a policy director at the BBA said in a blog posting on the matter yesterday.

“However, that is not to say we don’t have some serious concerns about what such legislation would mean for a small, but increasingly important part of our financial services industry. I am referring to private banks – a select group of banks that typically cater for high net worth customers whose ability to repay debt is based on a combination of their assets and income, rather than income alone. These individuals typically borrow differently to most customers and have more intricate finances than most of us,” Smith wrote.

“They include people who may choose not to pay themselves a salary from their business for many years – and then one day choose to sell their venture for several million pounds. We’re also talking about people who perhaps have large earnings from companies overseas, but choose to settle in the UK even though they accrue little of their earnings here. Many of these people also use loans secured against their properties to finance their businesses,” Smith wrote.

“It’s important to note that these people are not a peril to our economy. Default rates on these loans are miniscule – far less than for conventional lending,” Smith noted.

This publication is in contact with a number of private banks as to how they view the matter.  James Fleming, chief executive of Arbuthnot Latham, the UK bank, is concerned that smaller banks will be hit disproportionately hard by such a rule. 

"We fully support what the regulators are trying to do. However, there is a consequence here for the smaller banks.....this rule will affect the smaller institutions. The potential impact on the smaller banks could be potentially quite significant and could restrict them from providing some elements of their banking services which are important to their clients," he told this publication. "In a period when the government is trying, it says, to stimulate competition, it seems strange that they should have a one-size-fits-all approach [to regulation]," he said.

Typically, he said, HNW individuals have a range of assets that a bank considers before making a loan, rather than simply looking at income, which is only one indicator. The ability of some of the smaller banks to operate will be made more difficult, he added.

In recent years, organisations in the private client industry have told WealthBriefing that HNW and ultra HNW borrowers sometimes struggle to persuade banks to provide loans due to a “box-ticking” approach brought about the impact of tougher capital rules. Last year, for example, Cordea Savills, the UK-based international property investment manager, held a final closing of its Prime London Residential Development Fund. This fund was created at a time when conventional bank lending had become difficult to obtain.

The BBA’s Smith went on to state that the PRA has recognised “the need for some proportionality in their proposals”;  this means that under its plans, some 15 per cent of a bank’s lending could exceed the 4.5 times LTI ratio and firms with a low volume of total lending would also be excluded.

But Smith warned that private banks, however, will be “unfairly penalised” because significantly more of their customers typically want to borrow in excess of the proposed 4.5 LTI ratio and the value of the loans they provide are typically much higher than the average.

The Bank of England has stated that its consultation paper on the issue is “relevant to banks, building societies, friendly societies, industrial and provident societies, credit unions, PRA-designated investment firms, and overseas banks in relation to their UK branch activities. The proposed rules also require these firms to apply the rules at UK subsidiary level in relation to firms not already caught by the rules”.

The consultation process ended on 31 August.