From 1st July the Council of Mortgage Lenders is integrated into a new trade association, UK Finance. For the time being, all UKF mortgage information will continue to be published on this website, and UKF member-only mortgage information will only be available here.

UK Finance represents around 300 firms in the UK providing credit, banking, markets and payment-related services. The new organisation takes on most of the activities previously carried out by the Asset Based Finance Association, the British Bankers’ Association, the Council of Mortgage Lenders, Financial Fraud Action UK, Payments UK and the UK Cards Association. Please go to for wider content and updates from UK Finance.

  1. Home
  2. News
  3. News & Views
  4. Localism: what does it mean for lenders?

Localism: what does it mean for lenders?


Published: 19 March 2013 | Author: Bernard Clarke

The Localism Act received Royal Assent almost 18 months ago. It set out to devolve authority from central government towards individuals, communities and local authorities. But what effect does local decision-making have for lenders? The Act covers a wide range of issues linked to the provision of local services, with a particular emphasis on community rights, neighbourhood planning and housing. The key measures of the act provide:

  • greater freedom and flexibility for local government;
  • new rights and powers for communities;
  • measures intended to make the planning system more democratic and effective; and
  • reforms to promote local decision-making about housing.

The Localism Act was introduced by the communities and local government secretary, Eric Pickles, who heralded it a "ground-breaking shift in power to councils and communities, overturning decades of central government control." Collectively, lenders have no strong view on the principle of localism. But there are 326 local districts in England and, without sufficient oversight or monitoring by central government, the policy has implications for mortgage and housing markets and for how firms operate. This article looks some of its effects.

Development to pay for its own infrastructure

One of the key themes of localism is that local communities should have more influence on the supply of housing, and that this should be linked to the provision of the infrastructure required to support it. The government wants to make sure that all new development, no matter where it is located, helps pay for the infrastructure it needs. 

The community infrastructure levy (CIL) was introduced in 2010 to replace agreements under section 106 of the 1990 Town and Country Planning Act as a mechanism for funding infrastructure. The CIL empowers planning authorities to apply a local charging schedule to the construction of all houses with an internal floor space of more than 100 square metres. Under the Localism Act, planning authorities may be required to share a proportion of CIL money with parish and town councils, with the possibility of ring-fencing to support specific community projects.   

From April next year, local authorities will no longer be able to use section 106 agreements to help pay for the infrastructure needed to support development. By then, each authority should have in place an agreed charging schedule under the CIL rules. This schedule is meant to ensure that developers know how much they need to pay towards local infrastructure for every house they build. 

Funding affordable housing through section 106

While CIL has been introduced to fund infrastructure, it cannot be used as a means of providing affordable housing. Developers will therefore continue to finance this through section 106 agreements, to help ensure that local communities are mixed and diverse. Whereas CIL is a levy on all development and can be used to fund general infrastructure, section 106 agreements will continue to be site-specific, requiring the provision of a certain amount of affordable housing as part of a particular development proposal.

More recently, there has been a degree of uncertainty about future provision of affordable housing after Eric Pickles said he was concerned that requirements imposed on developers by some local authorities were deterring construction. He suggested that, where this persists, it could be addressed by transferring powers from some local authorities to a centralised planning inspectorate. It has been suggested that the prospect of reduced contributions from developers towards the provision of affordable housing could lead builders to defer construction plans, particularly during a period in which the housing market remains weak.

Delegating responsibility to a local level sounds sensible, but local partners need a shared understanding of what's being delivered

The issue illustrates some of the challenges in administering localism. Critics of the local government minister argue that his intervention is against the spirit of his own localism initiative. But it can also be argued that localism needs to operate within national guidelines. For suppliers operating on a national scale – including some developers and lenders – a lack of consistency in the use of local policy tools like section 106 can create difficulties.

The lending industry is not prescriptive about devolved decision-making for the provision of housing, including affordable homes, and the infrastructure needed to support it. Lenders continue to fund housing in all tenures, and favour a planning system that is administered consistently and is effective in delivering a mix of housing that meets the needs of home-buyers and tenants. 

Section 106 and restrictive clauses

Another form of "localism" that can cause problems for lenders is the use of section 106 agreements to try to promote owner-occupation by locally-favoured groups of people. This issue pre-dates the present government’s localism policy and may involve the use of section 106 in a variety of ways, including restrictions on the ownership of property by people with local links or in particular occupations, or perhaps by linking the sale of the property to a multiple of local income.

Although this may be well-intentioned, the use of restrictive clauses like these can make it more difficult to obtain a mortgage on the property. Restrictive clauses can make it harder to sell a property, which increases the risks for lenders and borrowers. In the past, we have sought to promote the use of a template section 106 agreement to try to avoid some of the problems caused by widespread local variations. 

 A local right to build?

Localism can be a source of numerous initiatives, but this multiplicity can make it difficult for lenders to engage. One recent example was the proposal by the Policy Exchange of A Right to Build: Local homes for local people. Under this proposed scheme, councils that fail to meet their building targets would be compelled to sell building land. Local people could register an interest to buy a plot at auction, and then build and design their own home.

Some lenders already fund borrowers looking to build their own homes, but this type of lending is not as straightforward as taking out a mortgage on a property that already exists. Self-build is riskier for both the lender and borrower, and self-build mortgages may impose more restrictions on borrowers. Lenders are likely to be engaged with borrowers for the duration of a prolonged construction process. A self-build mortgage is more of a tailored product, reflecting the particular needs of individual borrowers. Funding a series of inter-linked, but individual, self-build projects would add to the complexity. 

Other issues

There are numerous ways in which lenders are affected by policies that are administered on a local scale. Examples include:

  • Landlord licensing, which has implications for buy-to-let lenders in particular. Local authorities can develop their own approach to the authorisation of landlords, specifying selective locations and types of property and setting their own charges for the licensing process. This can have widely differing implications for landlords, and lenders, in different locations. At a time when both home-ownership and social housing provision are in decline, the buoyant private rented sector has had an increasingly important role to play. Landlords, tenants, lenders and the government could all benefit from the more consistent application and central monitoring of policy affecting the private rented sector.
  • Measures to bring empty homes back into use, through schemes under which they are leased to local authorities. Different local authorities can have different lease requirements, and this inconsistency can make it difficult for lenders to participate in cases where the property is mortgaged. We are working with the Empty Homes Network to try to address some of the problems created by these inconsistencies.
  • Mortgage rescue. The mortgage rescue scheme enables qualifying home-owners who are not able to continue making mortgage payments to transfer ownership of their property to a local authority and stay on as tenants. But while mortgage rescue operates nationally, it is administered by local authorities – and some do not have the staff, skills or resources to operate the scheme. This is a risk that central government has sought to address and, if the local authority is unable to assist, a, lender is now able to refer borrowers to the National Homelessness Advice Service for help.


Lenders recognise that localism is a key component of government policy and in principle they are happy to work with the administration of services at all levels of government. But local administration can lead to uncertainty and variation in the way in which decisions are made or services are delivered. 

In theory, the principle of delegating responsibility to partners to enable policy to be tailored to local needs sounds sensible. Localism may also create opportunities for lenders, particularly for those operating at a local or regional level. 

However, localism can cause problems, even when the intention is that policy should be administered to nationally agreed standards. Local decision-making can cause difficulties for firms that find it easier to engage with policy when it is applied consistently. Many firms value being able to give customers realistic expectations that they will be treated to the same standard, wherever they live in the country. For localism to work effectively, it requires each of the local partners to a scheme to have a shared understanding of how it should be delivered, and for central government to monitor the consequences.