For some time digital platforms, red tape and AI have been eating into the offerings of UK asset finance brokers, then along comes Covid-19. Alejandro Gonzalez considers the current battlegrounds facing brokers.
The asset finance broking industry has been facing a number of hurdles over the last few years, so the specific challenges that have resulted from the coronavirus pandemic could not have come at a worse time.
In June, broker-introduced finance fell 30% against June 2019 and the three months to June 2020 saw a 48% fall in new business, while the year to June saw a 14% decline, according to industry figures from the Finance & Leasing Association (FLA).
As the leasing sector gets back to work after coming out of lockdown, their broker-partners have emerged from hibernation feeling sidelined by government Covid schemes, some of which have largely excluded them from playing a role in the economic recovery of their bread and butter clients: SMEs.
Brokers already had reason to feel besieged by a number of factors threatening their livelihood before the lockdown hit: from the ongoing threat from automation and AI, to the City regulator’s red tape and competition from digital platforms.
Conversely, the trade body for commercial brokers, which includes equipment leasing brokers – the National Association of Commercial Finance Brokers (NACFB) – is reporting a rise in member numbers, perhaps as brokers feel the need for some additional protection in hard times.
In July the association reported a historic rise in membership for both individual brokers and commercial finance firms in 2020.
The association now has 1,104 commercial finance firms on its books, which represents a 9% increase on last year, and over 2,000 registered individuals, which is an 11% increase on this time last year, the highest membership the association has ever had in its 28-year history.
The non-profit association said in a statement: “The NACFB has grown by an extra 90 membership firms in 2020 alone, ensuring that it remains by far the largest independent trade body dedicated solely to commercial finance professionals.”
Nicholas Murphy, the NACFB’s business engagement officer, says new joiners typically cite member benefits and the kudos that comes with the brand.
Particularly since 2014, when the Financial Conduct Authority (FCA) took over regulation in the commercial space, the regulatory burden on brokers has increased significantly. “We responded to this by creating an in-house compliance division, with dedicated staff, to support members who don’t have their own FCA compliance team,” says Murphy.
The NACFB ethos is that “those with the broadest shoulders should bear the biggest weight”, says Murphy, which, in the midst of the Covid-19 lockdown, saw the association offer its existing brokers a four-month moratorium on fees (April to July), “in recognition of the difficult times we were facing”.
This is why, as a member-led body, the fee waiver applied to broker members and not patron members (finance providers) and why the association did not use the fee moratorium as a way to drive new membership, says Murphy.
“Even so, we’ve been able to grow membership, which goes to show the work we are doing during Covid-19,” says Murphy.
Norman Chambers, the NACFB’s managing director, said membership growth demonstrated two things: “Firstly, that resilience is not just a by-word for riding out a challenging period, our members truly have the staying power to service their clients in the toughest of times.
“Secondly, it is clear that more and more brokerages are appreciating the value of being recognised and accredited by a national and independent trade body.”
According to the NACFB, 24% of its commercial broker firms have indicated their primary business activity is leasing or asset finance.
This growth in professional association registration for the NACFB coincides with a collapse in new business written by asset finance brokers, on the back of the coronavirus pandemic alongside a historic decline in broker numbers, which predates Covid-19.
The year-on-year fall in broker-introduced finance for June reported by the FLA, mirrors a decrease in new business across asset financing as a whole. June’s total sales of approximately £2bn represented a fall of 41% for the month compared with June 2019.
Compared to other channels, this decline is not quite as steep as the direct finance channel for June (-45%) but is steeper than June’s fall for the sales finance (ie, vendor-introduced finance) channel (-26%), keeping in mind that these two channels manage values considerably larger than the broker-introduced channel.
New business broker-introduced finance came to £398m in June, compared with £814m (for direct finance) and £628m (for sales finance).
The decrease in business is reflected in a larger trend of falling numbers of asset finance brokers over the last few years.
There are around 450 firms currently active in the asset finance space in the UK, of which 350 are specialist asset finance broking firms, according to the UK broker directory compiled by Asset Finance Policy.
Julian Rose, the AFP’s director, who began compiling the directory in 2014, says the listing takes account of brokerage firms (not individual brokers) and excludes firms “operating without websites or individuals acting as agents or appointed representatives of other brokers, but most other firms are included.”
The number of broker firms has dropped from 500 specialist firms six years ago, says Rose, which represents an attrition rate of 25 firms per year.
“To some extent, this is to be expected due to the demographics. Many brokers are former senior regional banking professionals who left the banks 15 to 20 years ago. Inevitably some of these highly experienced professionals have retired,” he says.
Rose has several concerns about falling broker numbers across the UK, including the loss of their face-to-face support and specialist knowledge “that is so lacking elsewhere in the financial services industry,” he says.
Falling numbers are also linked to difficulties in selling brokerage firms, with many brokers choosing to retire and wind up their businesses without finding a buyer. “There aren’t many professions where it’s quite this difficult to pass on a well-established business,” notes Rose.
Brokers cite excessive red tape as helping to drive them out of business, although Rose adds: “Most independent brokers find that the FCA regulation isn’t too time-consuming and delivers some benefits too.”
Rose’s review of the UK asset finance brokerage sector during the pandemic identifies encouraging signs of revival too, including evidence of newly founded firms “often by experienced people from asset finance lenders” and developments that show “many brokers have successfully diversified, offering a wider range of SME finance options, whilst retaining their asset finance roots”.
Taking credit for this diversification is the sector’s unrelenting pace of technological change, forcing many a broker to broaden their product offering just to stay competitive.
Traditionally, asset finance professionals had very little to do with loan products, but this changed when digital platforms offering loans began doing business through commercial brokers. This, in turn, led to changes in broker (and SME customer) behaviour so that loan products became gateways to leasing products and vice versa.
Today, with financial services products becoming more commodifed, brokers are having to shift their focus toward servicing broader consumer needs to remain commercially relevant.
The Covid-19 crisis has been tough on brokers, says Rose, “with firms working incredibly hard to support their existing clients with little prospect of earning commissions for some time”.
Rishi Sunak, the chancellor of the exchequer, who took the decision in March to channel the Government’s Covid emergency funds for SMEs via its preferred channel, the government-owned British Business Bank (BBB), was coming under pressure to accelerate lending as the BBB process was proving to be slow going.
By 23 April, less than half of the approximate 36,000 applications made a month earlier for the Government’s flagship SME scheme – the Coronavirus Business Interruption Loan Scheme (CBILS) – had been approved, prompting HM Treasury to come up with a fix-around called BBLS (the Bounce Back Loans Scheme) to help expedite loans to cash-starved small businesses.
Adrian Langford, managing director of Rivermore Asset Finance, described BBLS as “revolutionary” at the time, as the scheme offered a simple application process (with borrowers self-certifying their eligibility), at low cost to the borrower (2.5% fixed rate), and at low risk to the lender (100% underwritten by the Government).
UK businesses “adversely impacted by the coronavirus” are eligible to apply for loans of up to 25% of turnover (but not exceeding £50,000) over a six-year term, with the first year’s interest and fees paid by the Government.
The BBLS proposal, however, came with one significant – and entirely avoidable – disadvantage for commercial brokers. By pricing the scheme at below commercial rates, brokers were denied any commission-earning potential.
Stephen Bassett, an independent lending consultant, welcomed CBILS but described BBLS as “undermining the lending industry for the next five years or so. “The Government has effectively excluded brokers, small finance companies and non-bank lenders from being able to be involved in BBLS,” Bassett said in May.
One government critic, who asked to remain anonymous, told Leasing Life this month that, had BBLS lending rates been set at 4.5% over the BoE base rate, then the take-up rate would have been the same as the 2.5% product, but crucially would have kept vexatious applications at bay and allowed commercial brokers to get involved.
To date, 1.17 million small companies have received BBLS funds valued at £35.5bn. This figure is expected to reach £53bn in November, when the scheme is closed.
The Office for Budget Responsibility (OBR – an independent body with a mandate to provide analysis of the UK’s public finances) is forecasting losses of £16bn on Bounce Back loans under its central scenario, under which GDP regains its pre-crisis peak in late 2022.
“This is a high price for keeping brokers locked out of Bounce Back loans,” one observer said to Leasing Life.
“The value for money from the BBLS comes from keeping companies trading and employing, but if in the fullness of time, businesses are closed and loans are not paid off, then this can only be seen as a huge failure,” according to another government critic.
Some broker sources reported that some funders have marketed CBILS direct to the customers that were originally introduced by their brokers and completely excluded the broker from any participation or commissions.
One independent lessor suggested that November this year – when the Government’s SME Covid-19 schemes closes for new applications – will signal a return to work for UK brokers.
In his outlook for the brokering sector, Rose concludes by urging the industry to consider what can be done to help retirees sell their brokerages, reduce the barriers to entry and attract new blood into asset finance brokering.
Rose makes a clear connection between the future of leasing in the UK and the wellbeing of its community of specialist brokers.
He concludes his review saying: “It’s concerning that numbers of broking firms are steadily falling, and this seems set to continue without a concerted industry effort.”
What may be worth adding is that if lessons from the early response to the Covid-19 pandemic are to be learned, the survival of the UK asset finance sector will also require Government to play a role in not obstructing brokers’ path to market participation.