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What value-for-money looks like

How closely do you look at supermarket shelves?

Supermarkets these days have to display a “price per 100g” (or per litre or equivalent) under the unit price of certain goods. It gives the shopper the option of being guided by price, or by value. They can choose what’s important, but the unit price is invariably bigger than the cost-per-weight because I suppose deep down we’d all prefer to judge by price, not value.

Warren Buffet’s famous quote “Price is what you pay, value is what you get” works to disassociate the two nouns. But even after you’ve left the supermarket it’s price, rather than value, that grabs the attention of the buyer.

In part, that’s because price is easy to compare across a range of providers; value is harder to pin down. You can go to an artisan market and pay four pounds fifty for a loaf of bread; its value is defined as much by its location as by anything else. The NACFB regards its membership as something like the artisan loaf, but at a Co-op price. We are now charging an attendance fee for some of our events (specifically, the Compliance ones). This puts us in new territory and sometimes leaves us explaining to our members why we feel the fee constitutes good value. Which we do, because we’ve been independently told that’s the case.

What the FCA makes clear is that shopping by price alone is not smart. To be fully compliant, a broker can’t simply demonstrate that he or she has chosen the cheapest option up front, nor the cheapest in the long term, necessarily. “Best” doesn’t even have to mean “best value” … because loans are not sold by the gram……. Is this loans or loaves?

The Compliance events charge comes about because we’re adding these on top of the usual annual programme. They don’t replace anything we would otherwise have been doing. They’re added on, and as such, the usual events budget won’t cover them. And they’re designed to help our brokers, directly and specifically. We can tell them exactly where they are falling short, by highlighting the most likely areas and checking those first. For example, some require help around Training & Competence and evidencing client outcomes. So you can see that these are being tailored specifically for the need of the Broker.

This is due to something we might call “racehorse in a zoo” syndrome. The kind of person who has a passion for his or her brokering business is unlikely to be creatively inspired, or even satisfied, by sitting down with someone else’s training programme. Or drawing up template documents for events that probably won’t happen. Or reading a 248-page book for what appears to be a tangential qualification … one which your client might not attach any meaning or weight to. If you put an entrepreneurial individual in a repetitive administrative role – even if only for a few hours per week – you won’t get them at their very best. So, they are going to need a nudge, or a focused event, to get it right.

Tailored advice for each broker is key, in exactly the same way as a broker needs to tailor his or her advice to each and every client. This means that when push comes to shove, the good broker will have no choice but to disassociate “price” and “value”. There are days for the value 800g white loaf, and there are days for the hand-baked spelt-and-rye. Whether it’s the NACFB selling a product to a member, or the member sorting out a loan for a customer, the fit is everything.

The NACFB Blog 1/6/17

Two years on from the FCA taking over from the OFT and I am still hearing the same phrases.

Some brokers say, I don’t need to be regulated. I am a Commercial Finance Broker and everything that I do is unregulated; all the products are unregulated.

While its true that most of the products are unregulated, it’s the activity that is regulated. In PERG (2.7.7E) and the FCA’s Definitions, the FCA provides a broad outline for Credit Brokering. This outline makes it clear that anyone effecting an introduction to an individual, which includes sole traders or partnerships of 3 or less for finance, needs to be FCA Regulated. They must hold as a minimum some level of credit brokering permissions.

So, what about the lenders and funders? How well have they adapted to Regulation? Some have opted not to be regulated and when I ask them about that decision, they explain to me that everything they do is unregulated and that all their products are unregulated. That is when I ask them who introduces business to them and what due diligence they undertake. Surely they need to make sure brokers are not trading illegally?

The most common response I receive is that the lender will only lend to limited companies, which means that lending is out of scope. Then we address the hypothetical issue: if an unregulated broker is introducing limited companies to one lender but then introducing regulated deals to another funder, or to a broker who is regulated is this not illegal?

You might not know that here at the NACFB we still receive enquiries from individuals wishing to join as Unregulated Members because all they do is introduce business for limited companies, yet when questioned about their activities it becomes clear they are looking to avoid adhering to the rules of the regulator. Unregulated Brokers having a website that says they can provide lending solutions to SMEs can be misleading.

Take a look also at Invoice Discounting and Factoring Brokers; yes, I know this part of the market is not regulated, but when a sole trader deal is introduced to a funder; you cannot then subsequently introduce the clients banking requirements which includes outstanding loans. Equally the funder should not be accepting this if the broker is not regulated.

We humans are fascinated with trying to bend the rules. How often do footballers try to steal a few extra yards for a throw in when the ball is kicked off? We are now in Wimbledon season where the standards are that players must play in whites but there will still be players pushing the boundaries with different shades of colours in the hope they can get away with it! These acts of rule-flexing are relatively visible. Brokers have less obvious ways of pushing at the boundaries of what is acceptable.

Let’s look at accountants that are not part of Designated Professional Bodies (DPBs); they still believe they can introduce clients who are sole traders and partnerships direct to lenders because that is what they have always done. Well the simple fact is that they can’t do that, because it’s a breach of regulation. They must hold Credit Brokering Permissions and what’s worse some funders continue to accept the business. The same can be argued for surveyors and valuers who are not part of DPBs.

While you’re here on the new website, please have a look around and let us know what you think. A few features you are used to seeing have been hidden away for the short term so we can finish building them.

If you need anything that’s not there, we have an office full of staff who can help and send you what you need or guide you to it. We also have Phase 2 plans, so if you ask us for something that isn’t there, we might be able to make it happen.

Warm regards, Norman Chambers, MD

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.

Annual Survey Results 2016

More than 1600 members were asked to detail the business they had written between 1stJuly 2015 and 30th June 2016. The total figure is up by almost 30% on last year’s figures.

Members should now have received a hard copy of our Annual Report & Accounts in the post. Let us know if you haven’t, by sending your desired postal address to admin@nacfb.org.uk, and we will send you a copy.

The headlines are:

  • Buy-to-let lending up 39.1% to £4.9 billion over the past 12 months; no apparent sign of a hangover from the Stamp Duty hike
  • Invoice finance and equipment finance lending up 22.8% and 10.5% in the past year
  • Traditional long term commercial property lending up across the board; with commercial mortgages up 54.8%
  • Signs there’s been a switch back to traditional lending with 14.4% drop in new forms of business finance
  • Lending totalled £20.7bn during the survey period
  • Over the past year, lending to SMEs has exceeded the pre-recession high of 2007.
  • It’s also the seventh consecutive year that total lending to small businesses has grown.

This was a phenomenal and record breaking twelve month period across the commercial finance sector. With the UK’s SME community showing a real appetite for growth, we have seen small business lending at levels above even those registered before the financial crash.