Data from the National Association of Commercial Finance Brokers (NACFB) underlines both the size of the broker market in the UK and the challenges it has faced since the global financial crisis.
The association’s latest annual broker survey, published in September, found that small business lending via NACFB brokers increased by 25% to just under £16bn by the middle of this year, with growth across all funding categories (the first time this has happened since 2010).
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Vehicle finance showed considerable growth for the second year running, exceeding £1bn for the first time since 2008 and setting a new record at £1.2bn. Invoice finance was also up by more than 40%, from last year’s £658m to a new high of £946m, while leasing and asset finance also performed strongly, worth just over £4bn from just over £2.7bn in 2014.
Commercial mortgages registered the highest level of growth, climbing from £2.2bn to £3.4bn, an increase of 54.9%.
Lending levels by new types of business finance such as peer to peer and crowdfunding continue to rise, from last year’s level of £624m to £847. According to the association, this means NACFB brokers are on target to exceed £1bn in the alternative finance field by 2016.
Not every sector has been experiencing sizeable growth, though. The survey indicates that bridging finance and development finance have been treading water during the last 12 months. Bridging finance suffered most in relative terms, up only slightly from £721m to £727m, while development finance business levels improved to £1.2bn.
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By GlobalDataThe NACFB suggests that it is reasonable to assume that both these fields have been depressed by the move back towards more traditional property finance, as evidenced by the huge surge in commercial mortgage business. Buy-to-let finance saw a 10.1% increase to over £3.5bn.
While NACFB members were responsible for introducing almost £16bn of commercial lending over the last 12 months, up from the £12.7bn of commercial lending facilitated between mid-2013 and mid-2014, at the peak of the market this figure was £19.3 billion.
However, the figures are at least heading in the right direction – the number of lenders working with the NACFB has increased from 45 during the recession to a record 126 in 2015 and total business written by its members has risen 62% in the last two years.
As a result, the association says it is confident that it will reach the pre-recession level of lending by the middle of 2016.
The broker market is becoming more important with new (and those that previously left) finance companies entering the market, finance companies vying for greater volumes by reducing rates and also the significant interest from private equity companies.
That is the view of Bluestone Leasing managing director, Vineesh Madaan, who acknowledges that while this is a positive development for brokers, there needs to be a balance between broker and finance company to ensure the industry runs smoothly and more importantly, ethically.
"At the moment I am not sure the full impact of recent acquisitions has been felt, so what the impact will be is difficult to say," says Madaan. "It does enable the brokers in question to potentially (initially at least) provide some very low cost funding to win accounts from more ‘traditional’ brokers, but private equity companies will want significant returns so the low rates will not be sustainable and will cause some issues down the line."
He predicts further consolidation, partly because private equity companies are hungry to invest in this market and partly because owner/operators can see a way of taking a return out of their businesses now.
While Mark Picken, managing director of Shire Leasing accepts that for many years the UK market has encouraged brokers to flourish and that some funders rely on brokers to be their ‘no-cost’ sales force.
The trend for brokers to proliferate in the asset finance market started back in the late 1980s as the large clearers started to cut costs and let their employed sales force go, he explains. "Many of those sales people had established customer bases in their local region and continued to serve them as an independent broker. Often their previous employers provided broking facilities to their ex-employee and got a better return from them."
The challenger bank phenomenon post-credit crunch has continued to encourage broker business by only dealing through that channel and avoiding all the sales cost of an employed salesforce, adds Picken.
"However, it would be a brave man who would bet against all this coming full circle over subsequent years and the big banks starting up their own direct sales forces again. In fact, that may be the bet that some of the hedge funds are making in trying to consolidate the fragmented broker market in the hope that a bank will buy it all from them again in the near future."
The UK already has a strong and thriving asset finance broker market – brokers don’t traditionally have the same marketing budgets and brand power as the high street banks, but public awareness of the market is growing, which may explain why people may see this as a new progression, says Callum Stevenson, head of strategic business at LDF.
He describes the period since the beginning of 2014 as a very busy time for acquisitions and mergers. "The last 18 months have seen activity from private equity firms and funders buying brokers. Whilst there is a lot of change, it demonstrates that there is strong confidence within the broker market. Funders are keen to protect their income streams, which makes acquisition attractive."
The NACFB declined an invitation from Leasing Life to comment on the regulatory challenges facing commercial finance brokers since the FCA assumed greater responsibility for consumer finance, although earlier this year its chief executive Adam Tyler suggested there was still confusion in the commercial finance market about what is and is not regulated.
Stevenson says the FCA’s enhanced consumer finance role has impacted LDF, but adds that the actual impact comes down to how well each business executes those changes.
"We spent 18 months preparing and implementing our new framework in order to meet the FCA’s requirements for becoming authorised and made a choice that we wished to become a ‘principal’," he explains. "Given the size of our business it wasn’t a case of just employing a compliance officer. I know that some brokers have found the changes difficult, especially where resources are limited. However, there are options such as becoming an appointed representative which can be explored."
According to Madaan, the FCA’s enhanced consumer finance role has created significant confusion. "Many brokers have not pursued their licensing and have just decided to stop doing regulated business, but I am not sure it is as simple as that since it could affect doing broking business full stop. We do very little actual regulated business but have pushed forward as we feel in the long run having a licence will become a pre-requisite."
If the definition of commercial finance brokers is asset finance brokers specifically (and does not include mortgage brokers), the FCA’s enhanced consumer finance role is a significant event for them, says Picken. "The asset finance market has been largely unregulated so the FCA bringing regulation at all was a shock. The extent of that regulation and the lack of clarity around it have scared off many asset finance brokers. Regulation was inevitable in asset finance and has been talked about for decades."
Picken reckons that the fragmentation present in the market cries out for consolidation. "Add to this an ageing broker community and I predict there will be more consolidation as some owners capitalise on a frothy market to sell out. There is also the FCA effect that will encourage small brokers to cash in and avoid the burden and cost of new regulation."
On the other hand, he expects some larger brokers who have the infrastructure in place to manage growth will see the value they can build in their businesses by writing business on their own book, so an element of fragmentation will survive.
An effective representative body is a vital support for business during times of market upheaval. The NACFB highlights its involvement in various all-party parliamentary groups including the Small Business Group and the Micro Business Group. Following on from this, in March 2012 the website findSMEfinance.co.uk was created to enable small businesses to gain access to commercial finance via an approved independent UK broker. The association has also become involved in the Business Finance Partnership and earlier this year announced a pilot apprenticeship scheme in collaboration with Hitachi Capital Business Finance.
When asked whether the NACFB represents the industry effectively, Picken observes that it has historically been a mortgage broker industry body and represents that sector well.
"During the credit crunch when funders were leaving the market in droves, asset finance brokers had nobody to talk to or represent them officially. The FLA would not accept brokers as full members unless they had their own portfolio (and still doesn’t) so the NACFB has grown exponentially on the back of asset finance brokers looking for a friend. The funders have followed them as they look to be supporting their customers. The NACFB does not seem a natural home for these bedfellows but it is becoming so. The FLA has missed a trick here and have let asset finance brokers down in the process."
In terms of industry developments, one of the issues that have been most widely discussed is block discounting. When asked whether it is setting a dangerous precedent for writing business that might not be of the highest quality, Madaan refers to it as a long established mechanism for brokers to develop their own book.
"As broker writing business with varying credits, having a block line that didn’t allow you to this wouldn’t be of much use. Also, the rates you tend to get with block lines lend themselves to writing business at higher rates which is always difficult to do when the end user covenant is stronger. The key should be the strength and quality of the broker in question to ensure that the business they write is written to ensure it will reach its conclusion and not just for a short term gain."
Picken adds that block discounting serves a purpose in supporting new leasing portfolios. "In fact, it is less risky than standard brokered business," he says. "The cover they have in the paper, the warranties from their broker and the security in the underlying paper means there are layers of added security. As long as the broker understands what they are doing and has the appropriate credit appetite there should not be a problem."
On the subject of whether direct to consumer presents a significant challenge for the commercial finance broker market in the UK, Madaan suggests that to a certain extent, any new competition forces brokers to take a closer look to try and understand the implications.
"Going direct does have its challenges and depends how the organisation is planning on running its model," he concludes. "I am sure some think ‘Let’s make it all automated with a full online system’. In the market we are in this would be very difficult – we are developing and using technology a lot but that is more to streamline our back office and processing of deals. I do think direct-to-consumer brokers will do well and create a market for themselves, but I am not sure it will totally revolutionise the industry."
