Many assumptions are made about the commercial finance market – one of the main ones being that because it isn’t regulated by the FSA it must be somehow ‘easier’. In the interest of balance (and because if I hear the term ‘credit crunch’ one more time I will need to go and lie down in a darkened room), I have decided to round up the most common ‘truths’ about commercial finance (at least, the ones we get asked about most regularly at the NACFB office) and try to sort fact from fiction.
1 Anyone can become a commercial finance broker
This one is actually true. There is no regulation or legislation which stops anyone from setting up as a commercial finance broker tomorrow, although obviously it isn’t something the NACFB would necessarily recommend. However, unlike in the retail financial services industry, there is no statutory requirement for any qualifications, and you don’t need to register with the FSA. You don’t even need a consumer credit licence, although the NACFB insists that all its members have one as the expanding influence of the consumer credit act means that more transactions are being caught by this particular piece of legislation than ever before.
2 Commercial market is being flooded with residential brokers
This is a concern which is frequently voiced by established commercial finance brokers as they fear that an influx of advisers who are inexperienced in commercial matters could leave clients open to poor advice.
Although there was undoubtedly a flurry of interest from residential specialists at the end of last year as the market contraction began to squeeze residential brokers’ incomes, following the loss of one of the most user-friendly lenders in the spring of this year, and the second most user-friendly quietly taking a back seat shortly afterwards, the actual number of switchers from residential to commercial has been nowhere near the levels feared by some in the industry. Not only that, but those who did take the plunge last year seem to have drifted away following these lenders’ (temporary) withdrawal. Which leads me neatly to my next point…
3 Commercial mortgages are easy business
Well, they are in as far as you have a client who wants to borrow money for their business premises in your office; and commercial loans are also called ‘mortgages’. That’s where a lot of the similarities stop. Many established and experienced brokers with excellent knowledge of the market are now having great difficulties in placing deals, so a new broker with limited experience and limited knowledge has very little hope in actually finding a lender who will lend their client money unless they know how to present a deal correctly.
4 Lenders are obliged to deal through brokers
This is a tricky one. They aren’t – as many in the residential market have already found to their cost, and there has been the odd isolated incident in the commercial market. The problem for businesses is that because current market conditions mean that lenders have become more risk averse, a businesses looking for finance needs to present a deal to a lender in such a way that the lenders is reassured as to the business’s credit worthiness.
Because of lenders’ increased sensitivity to risk, it is becoming more beholden on businesses to use a broker as they will know how to represent the application properly. If a lender is saying no to the broker channel, business will suffer. But this only a symptom of a much bigger problem. Lenders aren’t saying no to brokers because of a selfish desire to banish them from the market – no matter how many brokers feel that this is the case.
Frankly, if a lender wanted to have their cake and eat it, a broker channel costs far less to manage than a direct sales force and brings in the volume. But money is scarce, and lenders simply don’t have the cash to lend. It’s to no-one’s benefit to bring in a volume of business to a lender that they have no hope of funding.
That said, in the residential sector the service levels of many lenders have left something to be desired over the years, and this coupled with the arrogant way some withdrawals from the market have been communicated to brokers has left a very bitter taste for some. But the fact remains that if you have nothing left to sell, you don’t need very many people to sell it.
5 Buy-to-let needs to be regulated/is already regulated
This one is partly true. Buy-to-let mortgage are regulated by the FSA in very specific circumstances - if the property is to be let to a member of the landlord’s family, for example. But other than that, buy-to-let is not currently regulated by the Financial Services Authority.
But that doesn’t stop the majority of lenders insisting that brokers who introduce buy-to-let business to them are FSA-registered, which can cause a problem for NACFB members, who largely aren’t. Also the consumer could be under the impression that they have protection by the FSA for buy-to-let when in fact they don’t.
The NACFB believes that buy-to-let is a commercial proposition and therefore should be treated as such by the regulator. The arguments for and against regulation are long and varied and I don’t intend to go into them all now. But suffice it to say, the majority of buy-to-let investors come unstuck because of the property they choose to buy – not the mortgage they have bought it with. So the FSA intervening on this point may well not solve the issue in any case.
6 The buy-to-let bubble has burst
Ahh – if I had a pound for every time I heard this! Ever since the buy-to-let mortgage first appeared over ten years ago, pundits have been predicting its demise with admirable regularity. But although the market is hardly welcoming to new landlord investors, experienced landlords are finding that decreased mortgage lending from banks combined with high house prices, makes a recipe for strong tenant demand.
RICS in its latest survey has also pointed to an inability on the part of sellers to offload their properties, so they are turning to the rental market instead and becoming landlords by default. With strong tenant demand and a slowing housing market, experienced landlords are in a good position, and the buy-to-let bubble looks set to survive for a while yet.
7 Commercial finance will be regulated by the FSA
Actually, I have no idea as the answer to this one. The truth is out there, but I don’t know what it is. It might happen, it might not; but the commercial market is complex, each deal is priced and assessed on its own merits, so it would be difficult to see how, in practical terms, the FSA could regulate commercial finance.
Personally, I think it’s unlikely in the near future; but a scandal would soon put paid to that. So the best I can offer on this one is ‘watch this space’ – if anything does happen the Association will work hard to make sure our members are ahead of the game. The FSA indicated some time ago that “they were happy for self regulation to continue in those sectors where it is successful” and the NACFB is a good case in point.
Ongoing discussions with future potential Governments suggest that less regulation, rather than more, is the way forward.