Just Because A Private Lender Is Licenced, Does That Make It A Safer Investment?
“Is an un-licenced pilot safer than a licenced pilot?”
Mortgage law expert Matthew Bransgrove from Bransgrove Lawyers discusses aspects of private mortgage lending.
In this video you will learn;
- What the regulatory environment is for private lenders
- How a mortgage is managed from an investors point of view
- How to know whether to trust a licenced lender
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Watch the video and/or read the transcript below
Question: What makes you so highly qualified to discuss aspects of
private mortgage lending?
Matthew: Well, private mortgage lending is our bread and butter. It’s
what we’ve been doing for many years. It’s the backbone of the
firm. I’ve been studying all aspects of the law in relation to
my chosen field, mortgage lending, and I’ve written a textbook
called “The Essential Guide to Mortgage Law in New South Wales.”
I write a lot of papers. So I keep up with all the law.
We have a lot of mortgage enforcement matters, so we spend a lot of
time in court at the [core phase]. So we have both practical and
theoretical honing of our skills on a weekly basis.
Question: Is mortgage law a very specialised field?
Matthew: It depends how deep you want to go. A mortgage is a vanilla
product. It’s like the conveyance of a land. Every time someone
buys a property, it gets conveyed to them 90% of the time. They
gear it so there’s always a mortgage.
However, when you go beyond just a mom and dad loan from a bank,
things do start to get complicated. Construction finance is very
complicated. Mezzanine finance can be quite complicated. I’m not
talking about the actual mechanics of it. The mechanics are
quite simple. But the subtleties of the law can be quite
One minefield, for example, is guarantees. It’s settled law that if
you interfere with a guarantee, let’s say you let off one of the
guarantors and you don’t tell all the other guarantors, that can
actually act to release the other guarantors. Now, if one of
your security properties is reliant on a guarantee that you’ve
accidentally released not meaning to, then you can actually lose
your security, which means you’ve lost your investment.
So when you get into private mortgage lending, it’s not the sort of
thing you’d want the solicitor who did your grandma’s will who
works above the fish and chips shop, it’s not the sort of thing
you get him to do.
Question: What is the regulatory environment for private lenders?
Matthew: The industry has multiple layers of regulation coming from
different angles, if you like. So there’s a lot of consumer
protection regulation which is designed to protect borrowers.
But there’s also a whole lot of investor protection regulation
designed to protect investors.
That said, we live in a free country. So if a person who has a chunk
of money they want to invest chats to someone at the golf course
who wants to borrow money, there’s no regulation whatsoever.
They can lend to that person and just have a solicitor draw up
So the regulation from a lender’s perspective, in other words the
investor has to worry about is the consumer protection type
regulation. The best thing to do is avoid consumer loans at all
costs. Consumer loans are not for private investors. So once you
make that resolution, that deals with all the consumer
protection regulation, and you’re left just with the investor
protection regulation. That’s really invisible to the investor.
If the investor were dealing with a promoter who wasn’t
licensed, it wouldn’t mean he doesn’t get his money back. It
wouldn’t mean his mortgage is not enforceable. It would be the
problem of the unlicensed promoter.
Question: As an investor, can I have someone else manage the mortgage for
Matthew: The regulation is designed to catch promoters of investment
schemes, and if you’re a promoter of an investment scheme,
you’re obliged to be licensed. The way they catch them is they
say, “Is the day-to-day management of this investment with the
person who’s promoting the investment?”
So if I were a private investor and I decided to lend on a whole
bunch of construction projects and I wanted someone to look
after that for me and I got my accountant to look after it, my
accountant would be managing that investment, but he wouldn’t
have promoted it. He wouldn’t have put me in. So everything
would be fantastic.
If, on the other hand, I got a call from my accountant and he said,
“I’ve got a guy who wants to borrow money. How about you invest
with this fellow and I will manage it? I’ll collect the interest
and so forth.” That would be an unlicensed managed investment
scheme. That would be an illegal scheme.
Interviewer: But it’s possible for him to promote that investment to
you if he’s got a license.
Matthew: Yeah, if he’s got a license, he can both manage and promote the
Interviewer: Just because he’s licensed, though, does that make it a
Matthew: Well, ASIC have a straining effect, if you like. Is an
unlicensed pilot safer than a licensed pilot? The answer is yes
and no. If your licensed pilot shows up to the airport and he’s
got alcohol on his breath, that wouldn’t get on board the plane,
license or no.
Bt, then again, generally speaking, you tend not to get your license
unless you can satisfy ASIC that you have the skills necessary
for what you’re undertaking. ASIC have two licensing regimes.
One is for wholesale investors, and one is for retail investors.
But the key test is exactly the same. Does the licensee have the
skills necessary to do what they’re proposing to do?
So if they’re dealing in derivatives, do they have the skills
necessary to deal in derivatives? If they’re promoting a
mortgage scheme, do they have the skills to promote a mortgage
scheme? And that comes down to experience. They give a CV to
ASIC, and ASIC review it.
That said, you shouldn’t rely on a regulator to decide whether or not
your investment is a good idea. It’s more a straining element.
It keeps out the worst of the riff-raff. Let’s put it that way.