The ongoing uncertainty around the UK’s scheduled departure from the EU has epitomised an environment in which we have had to learn to expect the unexpected, which is not an ideal situation for lenders or advisers.
As we approached the end of last year, in the short-term lending market we were greeted with the news that Amicus Finance had entered administration, which, combined with the environment of uncertainty, has led to questions in some quarters about the future health of the sector.
With this in mind, it is useful to take a step back from the noise, to review the role the market has played in the past and to take an objective view of current challenges.
Evolution of sector
When the 2008 credit crisis hit the UK property market it was important for alternative finance to fill the gap left by the mainstream mortgage sector, and short-term lending became more significant for customers as it provided the flexibility they needed to achieve their objectives.
The Association of Short Term Lenders was set up in March 2008, initially with 19 members, with the dual objectives of protecting the reputation of the sector and providing a voice for lenders involved in bridging and secured lending for terms of between six months and two years.
The role of the ASTL has been to promote responsible lending, transparency and professionalism in the bridging finance sector, with members subscribing to our code of conduct, membership rules and value charter.
And we have achieved a lot over the past decade, growing our membership to more than 60 and developing an increasing influence with various bodies including the Financial Conduct Authority, the National Association of Commercial Finance Brokers, Association of Bridging Finance Professionals and HM Treasury.
The lending landscape has also changed significantly over this decade. More institutions have spotted the opportunity and new lenders have entered the market, increasing the options available for borrowers.
Competition is important for any market. Not only does it provide customer choice, but a larger number of players can raise awareness of the product and stimulate demand.
We have certainly seen new entrants into the bridging sector helping to spread the message about short-term lending as a flexible funding solution and there has been increased understanding about uses for bridging among intermediaries and consumers.
Those consumers have also benefited from another consequence of increased competition, with greater availability and lower pricing. But these benefits for consumers also provide a challenge to lenders.
A report by EY into the bridging market found that three key trends have emerged as a result of increased competition, with lenders experiencing margin compression, stretching to higher loan-to-value ratios and introducing more flexible product terms and features.
It is important for any lender to manage these risk factors, but amidst an environment of high competition and some significant economic challenges, it is important for bridging lenders to be cognisant about balancing their appetite for market share with taking on excessive risk. Failure to appropriately manage this risk can lead to casualties, as we have seen.
There are undoubted economic challenges ahead. The OECD’s stable forecast for the UK is based on the assumption that there is a smooth exit from the EU – and this is looking increasingly unlikely.
The OECD says failure to come to a withdrawal agreement with the EU is by far the greatest risk in the short term, suggesting that a no-deal scenario could subtract more than 2 per cent from real GDP over two years, and elsewhere, media speculation makes the OECD outlook appear decidedly positive, with the papers full of gloomy predictions.
Brexit is not the only risk ahead. There are many indications the global economy has passed its peak in the cycle and there have been signs of volatility in markets across the world.
It is also widely expected that there will be a property price crash in Australia, with recent data from CoreLogic confirming house prices have fallen the most in a single quarter since 2008.
History tells us the world can be a small place when it comes to economic contagion, and if banks suffer losses in Australia, they may become more risk averse in other regions.
In addition, we do not know the impact the UK’s growing mountain of debt will have during a downturn.
The country’s total debt is projected to reach £6.7tn by 2023, with households accounting for £2.6tn of that, a larger share than both the government and non-financial companies, according to analysis byPWC.
There are certainly challenges, but there remains opportunity among the danger, and perhaps reason for cautious optimism about the sector.
The unemployment rate is historically low and real average earnings have risen. These are strong economic foundations and, if the Brexit situation is resolved without inflicting significant damage to the economy, there is potential for a bounce-back.
The OECD says Brexit-related uncertainties have held back economic growth since the referendum in 2016 and so any positive outcome from negotiations could lead to stronger than anticipated results.
The key for short-term lenders is to proceed with care. Companies need to invest in people to ensure the threat of skills shortage is mitigated and to have confidence in the decisions employees make.
They also need to invest in technology to help deliver this peace of mind, so that skilled people have reliable data to work with, and information-gathering needs to be improved.
This is why it is so important that, as an industry, we are able to put aside commercial differences and come together to share expertise and best practice.
Increased competition among bridging lenders can grow our market and increase opportunity for everyone, but it also comes with risks, particularly in such an uncertain environment.
By working together we can help to identify those risks and agree a shared approach to mitigate them.
Developing this approach of mutually beneficial co-operation will be a key focus for the ASTL in 2019.
With a cautious approach and the ability to share and adapt, we believe the bridging sector will emerge from the uncertainty with greater resilience and more opportunity.
By Benson Hersch, chief executive of the Association of Short Term Lenders
Source: FT Adviser