Does the industry expect more brokers to launch lending propositions?

Investment houses could look to invest cash in brokers with large distribution, resulting in the creation of more lenders launched by brokers, according to one specialist finance broker.

Earlier this month, investment from Cabot Square Capital saw the creation of new lender Lendco by the group behind specialist finance brokerage SPF Private Clients. 

The specialist finance industry has seen similar structures before, with Enterprise Finance, Vantage Finance and West One Loans all part of the Enra Group, while Mortgages for Business and BTL lending brand Keystone Property Finance are owned by the Property Business Group. 


Do brokers have the resources required to launch a lender?

Simon Knight, managing director at Lendco, explained that a whole-of-market broker had the massive advantage of seeing every product available for customers at any one time.

However, he stated that it took significant investment to launch a lender from scratch.

“I think brokers can be an attractive opportunity for an investor who understands lending and sees the distribution and market expertise that a broker has. 

“I suspect there are only a few brokers with the size of balance sheet required to originate loans on to, so I would imagine it would need to be a partnership in most cases. 

“This can take a number of forms, ranging from through lending directly on to a partnering institution’s balance sheet to securing warehouse funding in your own right with a view to subsequent securitisation.”

Chris Whitney, head of specialist lending at Enness, added: “Many brokerages will be in a position where they procure the business, undertake the due diligence a lender would and manage the whole implementation process as well as handling things such as arrears and managing the exit process so I think such an organisation would have the necessary resource to do this successfully and responsibly.”

Dale Jannels, managing director at AToM, said that when it launched a lender back in 2006/07, it was hard work.

“I think any good broker will spot a sector of the market where there might be a gap, but finding the demand for the supply, and matching that with consistent funding, could be a challenge.”


What are the potential dangers of brokers launching lenders?

Vishal Dixit, head of business development at Pivot, said there were two main dangers.

“The first is what underpins this industry – doing right by your client and conflicts of interest may well arise with brokers launching lending arms. 

“The second is not having the necessary expertise to operationally run a lending business. 

“This can include not having the necessary expertise to underwrite risk effectively; funding problems, especially when markets incur a downturn; treasury function inefficiencies and embracing technology to employ efficiencies when increasing scale and volume.”

Chris Gardner of Amicus Finance PLC felt that the skills required for broking and lending were quite different. 

“If a broker is considering a lending line, then they need to understand those differences and the deep financial commitment they are making. 

“The same should go for any investor considering using a broker as a new lending platform.”

Steve Brennan, director of credit at ActivTrades, claimed that the clear and obvious danger was that all leads could be directed to their own lender.

“Of course, if they are offering regulated loans, there will be a full fact find, but it would appear that the majority [of lenders] are doing unregulated.”

Russell Martin, founder and managing director at Finance 4 Business, added: “I do fear for clients who are lent money by inexperienced broker-lenders who have an eye on immediate returns as opposed to building a sustainable book of debt.”

However, Simon added: “People talk about conflict, but many lenders have both direct and intermediary arms and manage that risk extremely well, and have done for a very long time.”


Does the industry expect more brokers to launch lending propositions?

“Yes, along with other HNW individuals and cash-rich companies,” felt Steve.

However, Rob Jupp, CEO at Brightstar, added: “It’s unlikely that many more specialist distributors and brokers will be able to follow suit as transactions like this are both complex and expensive to put together, but perhaps we should expect to see several more over the months ahead.”

Whitney also expected to see more brokers launching lending propositions.

“I think we will, but on the whole these in my view are likely to be smaller, niche propositions with relatively low profiles to start with.”

Russell said that with interest rates still at a low level, investors were seeking alternative vehicles in which they could gain a larger return on capital.

“These funds need to be utilised to receive a return and many investment houses are awash with cash. 

“It stands to reason that they will look to invest this cash in brokers with large distribution and as a result I do foresee the creation of more broker-lenders.”

Dale concluded: “There is funding out there, but becoming a lender is a huge commitment and regulatory drain on resources.  

“Therefore, anyone going down this route will need to do their homework to ensure their budgets do not run away from them.”

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