Retained interest and the FSA: Calculation is the key

Retained interest and the FSA: Calculation is the key


The FSA has emphasised its demand for responsible bridging lenders to demonstrate that they have reflected the true cost of borrowing in their loan documentation in a letter it sent to firms active in the bridging market dated 27 July.

The message of the letter – which raises the regulator’s concerns with the presentation of retained interest calculations – however, appears to have been widely misinterpreted to suggest the FSA is addressing the use of retained interest.

The regulator’s objective is to gather information on how the interest method is communicated to the borrower in keyfacts illustration (KFI) documents, underlining the importance of disclosure and transparency within the bridging industry.

The FSA is only gathering information about retained interest – utilising Section 165 of the Financial Services and Markets Act 2000 – as opposed to taking action on this charging method.

By gathering information from lenders directly and welcoming feedback from the bridging community, the regulator will have a better understanding of the retained interest product; a step in the right direction for the industry’s relationship with the authorities and consumers alike.

The FSA has recently authorised to carry out regulated business bridging lenders who use this interest method; a move which is unlikely to have occurred if the FSA objected to the use of retained interest products.

The FSA is instead concerned that the headline rate quoted in lenders’ literature may be unclear because, simply put, the borrower pays interest on interest when using retained interest calculations.

Here, there is potential for headline rates to produce different loan costs if the interest rate is applied in different ways. 

This is because the retained interest product is based on the borrower borrowing a large upfront sum (the net loan plus fees) on which monthly interest is accrued - which should be fully explained to the borrower.

Clearly setting out the cost of borrowing is the FSA’s intention; APR should be used to provide a way to compare the cost of loan with any other provider.

It is the intermediary’s responsibility to determine that the product is suited to the borrower’s needs but rate and total cost may not be the most important issues in placing it.

It must be emphasised that once the FSA has gathered necessary information from the questionnaire, should it decide to propose changes to the retained interest charging method, a consultation period will need to follow.

A consultation period could take a number of months so redress is unlikely to be an immediate outcome of this communication to bridging lenders; lenders are likely to amend their practices – if they are found to fall short of the FSA’s standards – before they are called to redress.

It is therefore important to highlight that those currently operating retained interest models will not have to stop doing so and this communication from the FSA should not affect bridging business.

The overriding positive result of this is that by gathering information the FSA will be better equipped to deal with bridging regulation, consequently leading to better informed consumers and ultimately shaping a better mainstream perception of the bridging industry.

Leave a comment