Securing the future of secured lending
Secured loans are an exciting place to be right now. We are facing a time of great change and important challenges. We are also an area of rapid growth with highly-rewarding prospects for mortgage intermediaries wishing to develop their secured loan business.
We need also to recognise that we are operating in an area that attracts its fair (well, some may think unfair) share of controversy, which means we are under the intense scrutiny of the media.
So as we look to the future there are two distinct things I can see. First, mortgage brokers who are currently unable to handle secure loans business will hugely boost their income by introducing secured loans to their client base by using an established packager.
Secondly, we can expect the government and regulators to take a greater interest in this so far unregulated sector of the financial services industry, given such media attention.
Let me say here and now, I warmly welcome both these developments. We are here to make money and expand market share for ourselves, our introducers and our lenders. With the research consultancy Datamonitor predicting that growth in the secure loan market could increase by as much as 80 per cent in the next four years we are being presented with a magnificent opportunity.
However, we need to recognise that not everyone out there shares the view that the secured loans market – indeed the broad range of retail financial products – provides a valuable service to its customers.
Under the spotlight
Contentious programmes like the BBC’s Britain’s Streets of Debt, shown on prime time BBC 1 throughout the second week of June, underline the point. Here, the BBC threw huge resources behind a major campaign to point out examples where borrowers had encountered severe difficulties by over-extending themselves financially.
It put current marketing techniques under the spotlight and raised the point that some companies appeared not to be overly troubled if their customers were taking on too much debt. Given the natural tendency of such programmes to look for doom and gloom, with few thoughts about the millions of people who enjoy a good service from lenders, little weight was given to the fact that, on many occasions, companies being cited pointed out they had often refused further advances to customers featured in the programmes precisely because they were concerned at the amount of their borrowings.
Another example of damaging publicity has been the campaign to get Carole Vorderman to stop making television adverts for FirstPlus. Not withstanding the fact FirstPlus states that it has never repossessed a property on which a loan has been secured and that Carole herself spent a considerable amount of time researching the company, including visits to their offices where she interviewed staff, such biased and unfortunate bad publicity will inevitably strengthen calls for regulation.
Responsible firms should not shy away from this extra protection for our customers. They should embrace it. After all, most if not all other sections of the financial services market have to shoulder the burden of regulation and it doesn’t dent their profitability too greatly.
We are able to give our brokers a significant extra income they may have had to pass up in the past because they had no access to a reliable and respected packager. And we have additional benefits such as our special Platinum Club, made up of our top five referrers each quarter with prizes including treats such as Wimbledon, Carling Cup final, British Grand Prix, even trips to New York.
This shows we are enjoying good business both for us and for the mortgage brokers, certainly. It also means we can give back a fair bit more to our customers as well. This is what we felt, anyway, when our operations director, Barney Drake, handed over the keys of a fabulous £8,000 Peugeot 206 Independent car to Trevor Smith, a floor and wall-tiler from Welwyn Garden City, after a random draw of our clients.
Mr Smith told us: “You read about things like this but never think it will happen to you. This is a fantastic moment.” When you a reaction like that you really do know you are dealing with people and that at the end of the day customer satisfaction is the sole justification for businesses like ours.
I mention this because a responsibly run secured loans company can make a good return on its operations without getting greedy. In fact a best practice business model is the best way of developing and growing the company in a sustainable way that will ensure its long-term survival. It will develop a reputation that people can trust and so they will return to do business with it again and again. This applies to mortgage intermediaries as well as borrowers.
So I think that, as a sector, we should already be approaching the Financial Services Authority (FSA), parliamentarians and opinion formers to ensure that any regulatory framework that emerges is one that the industry has helped to shape.
The worst possibility is that Parliament enforces a code upon us that is unworkable because we have not been there at the start to help tell the legislators what will work and what won’t work.
Personally, I would like to get involved in this process straight away by suggesting the secured loans industry sets up a panel or association of all those involved – lenders, packagers and intermediaries, with representatives of consumer organisations and others– to ensure that we have a voice in the regulatory process.
Leading by example
We should lead by example by developing a ‘code of conduct’ for members to work to, one that is workable but at the same time ensures that there is a real commitment to best practice. Sure – there will be a few operators who don’t like it. Frankly our industry can’t afford to have such people dragging down those of us who take our responsibilities seriously.
If the black sheep are weeded out this can only be a good thing. Often it happens naturally. Because of the huge increase in demand for secured loans a lot of people want a share of the market and some are not too scrupulous how they get it. But of all those that set up in business, half disappear after three months and by the time six months is up most of those who were left have gone as well.
The fact is brokers and borrowers need solidly based business to deal with. And if you take a look at the FSA website there is already recognition that secured loans have an entirely legitimate place in the lending mix.
Under ‘Advantages of secured loans’ the FSA says: “Can be a sensible way to borrow for certain expensive items, such as home improvements. Because the loan is secured against your home, the rate should be cheaper than an unsecured loan and you may be able to borrow more. Also, you can cut your monthly payments by stretching the loan over a longer term.”
But the site also states the following: “The consequences of not being able to keep up your payments are much more serious than with an unsecured loan. If you don’t keep up the repayments of a mortgage or any other loan secured on your home you could end up losing it.”
And it gives this very good advice to borrowers: “Don’t use the reduced payments as a green light to build up even more debts on your credit card, personal loan or overdraft.”
This was the common problem running through most of the BBC’s Britain’s Street of Debt programmes. It was not the loans themselves that individuals had taken out that were causing them problems – indeed most agreed that they had been of great benefit in reducing their monthly outgoings.
The problems came when borrowers felt empowered by their new-found security to borrow more, thereby getting into trouble with their new and existing repayment schedules. This is something we need to be aware of and caution our borrowers against. By all means use a secured loan to rebalance your finances, but when you have done so do not go and spoil everything by taking on too much debt again.
The type of business we prefer is from borrowers who can meet their commitments and when they want to, come back to us again in a sustainable way. Working it this way they get the assistance they need to make real improvements in their lives either by clearing existing, high interest loans or making concrete improvements to, and increasing the value of, their property.
The secured loans industry has a bright future, provides a real service for its customers and an additional revenue stream for borrowers. It is a legitimate form of borrowing, but we must all act responsibly to ensure we act in the best interests of our customers and, ultimately, of ourselves.