Commercial finance is one of the few areas in the UK financial services market which doesn’t (yet) fall under the jurisdiction of the FSA. There are movements afoot to include buy-to-let let (an area previously unregulated in the majority of cases) which is a commercial proposition, but pure commercial mortgages remain untouched.
Part of the reason for this is is the complexity of any commercial deal. As I have explained before in many articles, a commercial deal shouldn’t just start and finish with a commercial mortgage. And, even if that is all your client requires, the commercial mortgage market is one where there are no commercial mortgage products, no income multiples, where criteria and terms vary depending on the property you want to buy (a single lender’s underwriting criteria will be hugely different for a care home than it will be for a petrol station) and every deal is assessed on its own merits. Difficult, then, to introduce a regulatory scheme where each solution for each client is bespoke.
That’s not to say that some form of self regulation or at least the encouraging of best practice shouldn’t be encouraged. That was, in fact the whole reason the Association was established in the first place back in 1992. The National Association of Commercial Finance Brokers was established to improve the reputation of the honest commercial finance broker who had suffered from the actions of a few in the industry being less than honest with their clients.
A Code of Practice was drawn up for brokers who, by becoming members, volunteered to adhere to this as proof of both their honesty and quality. A logo was also introduced to be used by brokers so they could be identified as having made this step. The logo was a mark of distinction; the broad brush tarring of all brokers due to the unscrupulous actions of the few could be combated by a badge that announced to both the lender and the client: “I have volunteered to commit to abide by the Association’s Code of Practice. I am an honest broker.”
But the current squeeze on funds and the reluctance of many lenders to actually lend any money means that cases of ‘fraud’ or, at the very least sharp business practice, are beginning to surface now as it becomes more and more difficult to make a living as a broker. Speaking to members across the whole industry, brokers are reporting the same problems: plenty of interested clients, but nowhere to place the deals. Without lenders willing to open their doors again brokers are finding it increasingly difficult to make a living. And some are becoming less than honest in their business practices.
I would like to point out at here that the problem does seem to be small – at least in terms of the number of brokers who seem to be involved. In the complaints we have received here in Exeter the same names turn up again and again. The procedures for dealing with an Association member who breaches the Code of Practice are well established, and the potential end result can mean the member is cast out of the Association and other members and Patrons (the lenders) are notified as to why.
However, things have always been difficult if (as in the vast majority of cases) the broker is not an Association member. Our jurisdiction doesn’t stretch to those who haven’t signed up to our Code of Practice. But the potential impact of the rogues operating outside both the Association, and in many cases outside of the law, represents a serious threat. A good reputation is a very fragile thing, and once lost is very difficult (if not impossible in some cases) to regain.
And, as I mentioned at the beginning, the tendency for both lenders and the consumer to tar all brokers with the same brush is very strong. In a way it can be seen with the actions of some in the leasing market who have decided that because some broker introduced business has a higher incidence of fraud, they will no longer accept any broker introduced business and instead insist that all customers must come direct. The expression of throwing the baby out with the bathwater springs to mind, but you can’t blame people for being cautious – especially given the current market and exactly how we got to be in this position.
So although the problem itself may not be huge at the moment, let’s not underestimate its seriousness. The impact of one or two brokers acting in a dishonest way will be felt by everyone in the industry. Because of this, the Association is looking both to set up a new committee to investigate these complaints about potential fraud. And the ultimate aim is that this committee will be able to look outside the NACFB membership to make sure that those brokers who have not voluntarily signed up to a Code of Practice perversely can’t use this an a defence against prosecution for fraudulent practices.
And let’s be clear about this, we are talking about potential prosecutions. Any case assessed by the committee and deemed to be fraudulent will be referred to the OFT or to the police if necessary. The committee will consist of representatives from the Association, but also representatives from the police and legal services. This is all about preserving the good name of the NACFB and of commercial finance brokers in general. Needless to say that any member found to be acting in a dishonest way certainly won’t receive any kind of preferential or lenient treatment.
This is our aim. We won’t be able to stamp out these practices over night, but like the six founder member brokers back in 1992 we want to make sure that the reputation of the honest broker is preserved. Lenders are already beginning to differentiate between NACFB and non-NACFB members as part of their current flight to quality business. But our aim is to drive this from two directions simultaneously: not only do we want to offer our own members training and development opportunities to keep the quality of the business they introduce high and to offer them insights into potential opportunities in the market; but also we want to tackle those in the industry who see it as an easy, unregulated opportunity to make a quick buck from SMEs struggling to find funding in an illiquid market.
Back in 1992 the word ‘broker’ was an anathema to many lenders. That’s one piece of history we don’t want repeating itself.