The secured loans sector pre-dates its specialist mortgage counterpart by many years but remains, in the eyes of some, the ‘poor cousin’. But something of a sea change has occurred, and secured loans are increasingly being promoted as the next big opportunity for enterprising lenders and mortgage intermediaries.
That this should happen is not surprising. Products do not become popular or attractive purely as a result of clever marketing or PR. They do so because of a need and market opportunity. Witness the growth of the non-conforming, self-certification and buy-to-let sectors. The same is now happening for secured loans.
Size matters
In its ‘UK Secured Personal Loans 2006’ report, Datamonitor acknowledges the success of the sector over the previous decade. It pinpoints 2003 as the high point when gross new lending was said to have totalled £7 billion. Since then, according to Datamonitor, the market has contracted by 26 per cent but is expected to rebound by the end of 2006 and grow to £6.3 billion by 2010.
The report notes that secured loans lending performed badly in comparison to the remortgage and further advance sectors.
Another report – ‘UK Non-standard and Sub-prime Mortgages 2006’ – sets out Datamonitor’s market-sizing methodologies for the non-standard second charge market. It concludes that this part of the sector declined overall in 2005, but will grow over the next three years to reach £3.3 billion by 2010.
While some may take issue with the definitive accuracy of these statistics, they are sure to agree with Datamonitor’s conclusion that the secured loans market is dominated by intermediaries, and that lenders intending to enter it must first understand the broker channel. They are also likely to agree with the view that the sector offers significant growth opportunities.
Sustaining demand
There are a number of reasons why the secured loans sector has enjoyed its recent success and why it is likely to continue.
First and foremost, there is a demand from borrowers. Much is made of the high levels of personal indebtedness among Britons – currently standing at £1.23 trillion – but rather less is said about the £3.6 trillion of mortgage-free equity available to homeowners. This is equivalent to three times the UK’s annual gross domestic product, and represents a vast reservoir of untapped borrowing security.
Market data shows that increasing numbers of consumers are using equity to reduce or clear expensive unsecured debt through remortgaging or secured loans. This is likely to accelerate if interest rates continue their upward course. With total unsecured indebtedness amounting to £230 billion, or £4,000 for every adult, the potential is clear.
Given their more aggressive approach to risk, firms operating in the specialist secured loans sector are uniquely positioned to enjoy the lion’s share of rising consumer demand. They can therefore be encouraged by Datamonitor’s estimate of a rise in the non-standard population from just over nine million today to 9.42 million by 2010.
There is also growing awareness that secured loans offer a flexible and viable alternative to other forms of secured borrowing, such as remortgaging or further advances. While these remain popular, especially among prime borrowers, they are not always the best options. Secured loans appeal particularly to borrowers keen to avoid early redemption charges and other fees as a result of remortgaging, or, who by doing so, would lose the benefit of favourable fixed or discounted rates. With more than half of all current mortgage contracts now on such terms, this represents a sizeable market.
The secured loan option also appeals to customers who have acquired a recent adverse credit record and are so excluded from remortgaging or obtaining a further finance from a mainstream lender. With personal insolvencies and other debt problems on the rise, this offers another significant opportunity for secured loan providers.
Increasing numbers of mortgage lenders have seen that making the transition to secured loans need not be difficult. The application process is similar to that for mortgages but there are usually no valuation or legal fees for the customer to pay. Repayment terms are flexible – often starting at 60 months – and interest rates have generally reduced in line with the market and are now usually priced for risk. In addition, secured loans can often be completed more quickly than a remortgage.
A maturing market
Critical to the continuing success of the sector is its reputation and image. This continues to be tested – as seen in the substantial fine recently imposed by the Financial Services Authority (FSA) on a leading broker for inadequacies in its protection insurance sales process – but the industry is increasingly aware of the new regulatory realities and the need to promote itself positively.
Regulation of the sector continues to cause debate with many commentators supporting its regulation by the FSA. Presently, only secured loans worth £25,000 or less are regulated – by the sector’s supervisory body, the Office of Fair Trading (OFT). While this will change in April 2008 when the threshold is removed, secured loans will continue to be regulated under a different regime to that of mortgages.
Many observers consider this unsatisfactory and believe the industry and consumers would benefit from one regulator applying a single set of rules. This, it is argued, would bring greater efficiency and transparency.
Whether it is likely to happen soon is far from clear, although the strengthening of the OFT’s powers through the recently introduced Consumer Credit Act 2006 suggests this it is unlikely.
Nevertheless, two positive steps have been taken by the FSA and OFT pledging to co-ordinate their activities, and through the announcement that the Financial Ombudsman Service will take on responsibility for consumer credit complaints in 2007.
A further positive step has been taken through the launch earlier this year of trade body, the Association of Finance Brokers (AFB).
Replacing the now-defunct Corporation of Finance Brokers, the AFB will operate under the umbrella of the Association of Independent Financial Advisers (AIFA) and in alliance with its sister organisation, the Association of Mortgage Intermediaries (AMI). Its stated intention is to benefit brokers by giving them a higher profile and greater opportunities to influence the future of the secured loans sector.
The launch of the AFB has left in doubt the future role of the Finance Industry Standards Association (FISA). Created in the 1980s by lenders and brokers, FISA introduced self-regulation to the sector when statutory regulation was not even on the agenda. But with the AFB now representing brokers, and a tougher regulatory regime on the horizon, many have questioned its continued relevance. One option is for FISA to turn itself into a lenders’ trade body and so fill an obvious gap.
The profile of the sector continues to be raised in a number of ways but increasingly through the entrance of familiar and respected business brands more usually associated with mortgages. Prominent among these entrants in recent months is Kensington Personal Loans.
Accustomed to operating in a tightly regulated market, these businesses can be expected to bring to their secured loan processes the principles of responsible lending and ‘Treating Customers Fairly’ evident in their established mortgage operations.
A helping hand
While secured loans offer fresh opportunities and benefits, new entrants to the sector need to understand that it is a different market to mortgages and one in which many have tried and failed. They should also take careful note that forthcoming regulatory changes will reduce value creating opportunities while adding to the administrative workload.
As the sector widens and becomes increasingly sophisticated, brokers not used to secured loans will need assistance to source the best products for their customers. Technology has an important part to play in this, and we can expect to see greater use of the sourcing system capabilities – along with affordability and automated valuation models – that now add real value in the mortgage sector.
But it isn’t just about technology. Brokers entering the secured loans world for the first time have much to gain by forming partnerships with established broker-packagers, or ‘master brokers’. Many of these have a deep understanding of the processes and products and can provide hands-on support. The more forward-thinking are also investing heavily in state-of-the-art technological solutions to enhance their propositions further.
Secured loans have a positive future. While accepting they are not suitable in every case, they offer a real alternative to other forms of borrowing. As the sector matures, firms that take a responsible, realistic and long-term view have much to gain by adding this important option to their product portfolios.
To be attributed to: Bob Sturges, director of communications, Money Partners
