Five easy pieces: review of March 2017


March was a very interesting month for our industry, and just in case you missed anything we thought we’d pull together a little recap of the five most important changes we saw over the month.

The Controversial Budget…

Hammond’s latest budget was seen by many as an attack on Britain’s entrepreneurs. Perhaps if there was one quote we could use to sum up the general consensus among small business owners it would be that of Mazars’ Tim Davies, who labelled the spring budget as “not a nice budget for SMEs”. Hammond set out plans to increase Class 4 National Insurance contributions for the self-employed from 1% to 10%, whilst also reducing the dividend tax free allowances for small business owners. Not only would these changes increase the tax burden on the self employed, they would also break one of the party’s key manifesto pledges, leading to a substantial amount of criticism from some big names in business…

The Controversial U-Turn on the Controversial Budget…

After coming under fire for breaking Cameron’s “Five-Year Election Promise”, Hammond abandoned his plans, admitting they “breached the spirit of the manifesto”. Like the budget itself, the U-turn split opinion, with a number of back-benchers left embarrassed after vigorously defending the NIC changes. We must now wait until the autumn budget to find out how the Chancellor will fill the 2 Billion-pound void left by the move.

Changes in Our Insurance Cover…

In case you missed the news, we’re now offering unrestricted insurance cover for Peer-to-peer lending. Here’s what our CEO, Paul Goodman, had to say on the changes:

“This makes NACFB’s exclusive cover the only policy in the market specifically designed for commercial finance brokers which covers an unlimited amount of brokered loans with peer-to-peer lenders”

“Peer-to-peer lending is booming and it’s fantastic that our members can now use it as much as they like, safe in the knowledge that they enjoy protection arranged by NACFB Insurance Services.”

 The Rise of the Midlands…

A recent survey from Rightmove showed the East Midlands as having the fastest pace of house price rises in the UK, up by 5.7% year-on-year. The price of property coming to the market in the region is at a record high, breaking through the £200,000 barrier for the first time to £200,620. The West Midlands region has the second highest annual increase with prices up 4.2% and matches the East Midlands’ 2.1% monthly rise.

Rightmove data also demonstrates that two areas have seen asking prices fall compared to last year. In Wales, the average asking price is down 0.6% year-on-year, and in the north east of England asking prices are 1.1% down from last year.

Article 50 Was Triggered…

On 29th March we saw the delivery of Theresa May’s letter to President Donald Tusk, signalling the official triggering of Article 50 and setting the wheels of Brexit in motion. The delivery of the letter was followed shortly after by a statement from Mrs May to the House of Commons, where she stated that now was “the moment for the country to come together”. In terms of what this means for the industry, we’ll start to get more of an idea after June, when negotiations with other EU countries are expected to start.

Membership fees: what is an “RI”? February 2017

Many years ago, the NACFB charged its members according to the size of the company. We did this by counting the number of people actively working for the company, and on top of that, because we had a large number of sole traders, we asked for an indication of the company’s income, and based our fees on a combination of those two elements. It sounds magnificently equitable, given that we have to charge our members something.

Free membership would commit us to surviving on and therefore hiking up Patron fees, and then fielding inevitable accusations of being entirely in the pockets of the big banks, which we are not. Every member of our Board of Directors is an active, practising, committed commercial finance broker.

The trouble was, it was never easy to give a straight answer to the question “What’s the fee?”, so we simplified things. Brokers don’t have to tell us about their income any more. We just want to know how many people work for them – signing deals, advising clients – and we base the fee on that because there is a link between fee income generated and affordability. We also cap it so that we don’t end up quoting telephone-number fees. Now in a sense you might say this is like a tax cut for the rich, but we just don’t feel a broker should be paying the same kind of fees as a lender, so we stop counting employees at fourteen.

There is a hitch here which we have to acknowledge; it would be in the interests of a broker’s bank balance if that broker were to under-report the number of people working for the company, and in a sense we’ve made that easy to do, by treating differently the many types of staff that a broker could employ or work alongside. We use the terms Registered Individuals, Appointed Representatives, and Agents, and as of now, we charge each of them the same sum, in the same way. But as with any newfangled terminology, it’s easy for a broker to say “well, I don’t think of him/her as an Appointed Representative because (insert specific objection here).”

Let me use this space, then, like a little glossary so that we are all literally on the same page.

An employee of a firm who generates income by dealing directly with customers and giving advice will qualify as a Registered Individual. Support staff and deal coordinators will not fall within the definition of a Registered Individual.

A Registered Individual (“RI”) is our own term for an employee of the firm who generates income for the firm by dealing directly with customers and giving advice. Support staff and deal co-ordinators are not RIs.

An Appointed Representative (AR) is different. An AR is an individual (or a firm) who has been appointed by the broker firm to undertake the sale of financial products, or to give advice on financial product to commercial and retail customers. The broker firm will not need to register the AR with the NACFB so long as the AR’s primary activity is neither credit broking nor related to financial services. They must not actively discuss with, nor give advice to, the customer.

An Agent, Franchisee, Associate or Introducer (henceforth brought together under the umbrella term of Agents) is an individual or firm that acts on behalf of the member firm and transacts business through the member firm. They may use the member firm’s trading style or they may instead trade under their own style. Agents will potentially deal directly with the customer, but utilize the funding lines of the member firm. Introducers who fall within the definition above will be treated as agents and need to be registered, but if the Agent is already a member of the NACFB under their own name, they won’t need to be registered again under the member firm. And any party which is not registered with the NACFB must not use the NACFB logo on marketing material.

Anyone who thinks they fall between cracks between any of these definitions should bring it to our attention because the fact that any of these definitions seems to mostly apply to an individual most likely means that we regard it as fair that the member firm in question ought to have this individual reflected in their fee structure.

There is also the small matter of Professional Indemnity Insurance to consider. If a member is telling their insurance provider one thing and us another, that’s not cricket, but the real risk is when someone acts in one role and reports to their insurer that they do something different.

That might undermine their insurance altogether, rendering it invalid. And we think that is too much of a risk for anyone to take.

Second Charge Mortgages from Business Money Feb 2017

Over the past five years, the number of commercial finance lenders in the UK has doubled. It is a relatively easy time to set up as an alternative lender. Ever-lower interest rates are currently inspiring high net worth individuals to think laterally when considering their investment options.

The three things any lender has to arrange are source of funds, means of accessing borrowers, and the interface to bring the two together.

The first of those has become easier of late, and a growing number of people have the technical knowhow to handle the third point. This leaves just the second as a hurdle to trip over.

Some lenders see the NACFB as being a likely conduit, given that we have marketing and overview data on the commercial marketplace. Some of those lenders, furthermore, have a grip only on the third part of the equation, and they ask us whether we can give them any help in organising the second point (where we can help) and the first point (where we can’t). Not only is the process of matching investors with lenders some way outside our remit, but it even starts to look something like a conflict of interest. You can’t be an effective regulator of business if you don’t stand at a certain distance from it.

Finally, once all three criteria have been fulfilled, the lender has to establish itself in a niche or outcompete its rivals in a busy market. More and more, they are targeting niches and that way they retain some control over their own chances of success.

To give you an example, I’ve started hearing the term “blended commercial finance” a bit more often, as one of the funding solutions our brokers might want to offer clients. Running a lead generation site we try to reach out to SMEs and listen to what they want. They never ask about “blended commercial finance”. I’ve never seen the phrase typed into the notes or heard it in the phone calls SMEs make. This does not, of course, mean that it is not one of the possible answers to the question of funding.

It can take multiple properties and multiple lenders to arrive at a satisfactory solution. Business restructuring can also add time pressures. What second charges can do is behave as a facilitating product to make the rest of the deal work. Sometimes a straightforward second charge can provide the solution to a deal that otherwise won’t fit.

Borrowers often have greater available equity in their home, and so there’s more opportunity to raise capital with regulated seconds. We’re aware of fourteen lenders offering second charge products on buy-to-let properties. There are even lenders offering non-status business loans on a second or third charge basis.

Sometimes second charges are being used to make up the shortfall when the primary restructure can’t raise the full amount required. Without the extra cash raised by the second charge, the overall deal would simply fail. Our brokers report that they are working with clients who are raising capital via a second charge loan secured on a residential or buy-to-let property for deposits on a new buy-to-let, business expansion, to settle tax bills or to repay other business debts.

A second charge bridge may work out far cheaper than taking out the existing first charge, and if affordability is not an issue, the borrower might usefully consider a second charge term loan instead. That way, they will get far higher LTVs. And not all lenders charge early repayment charges on unregulated loans.

Blended commercial finance is on offer from more than one of last year’s new intake of patrons, and each of them touts itself as an expert in the field. When new lenders’ lending strategies fail to extend much beyond “middle man”, we don’t sign them up. The middle-man strategy is short termism. It may work fine for a few months, but we ask them where their investors are coming from in 2018, or how well set up they are to deal with defaulters, or just borrowers with questions, and they don’t know.

It is simply not enough for a new lender to have a contact book full of high net worth individuals, and a little website-building skill.

The most recent changes to the market have been in the emergence of FinTech – a term that embraces any attempt to interpose user-facing technology between the client and the lender. By its nature, Fintech makes it easier for a borrower to bypass the services of a broker, and by doing so, potentially removes a source of advice and expertise from the funding process. And of course, as a trade body representing commercial brokers, we are wary of the effect such a trend would have.

This has all happened sufficiently fast that the FCA admits it is having to work hard to keep up with the pace of change it anticipates in 2017, because it’s possible to read current regulations and construct a lending strategy that falls outside of them.