November 2019
By Mark Posniak, Managing Director, Octane Capital
First and foremost, it’s important to point out that the specialist finance industry today is completely unrecognisable to what it was pre-Global Financial Crisis. Back in the early noughties, it was amateurish and undeveloped, full of niche players and, if we’re being honest, all a bit Wild West. Back then, quite rightly, the high street reigned supreme.
Today specialist finance is professional, transparent and many of the companies out there have shaken off the term ‘specialist’ altogether and evolved into established high street brands. With hindsight, the GFC acted as a schism in the financial services world, creating a whole new industry that set out to upset the traditional banking and lending status quo. And it has done just that.
We’ve seen the arrival of challenger banks, peer-to-peer and crowdfunding platforms, alternative finance providers for both consumers and business, and, closer to home, the emergence of a buoyant bridging and specialist property finance industry. When I first entered the bridging sector in 2007 you could count the number of recognized lenders on one hand.
How that has changed. In the short-term lending world today there has never been such choice and competition. The number of lenders has grown exponentially, seeing rates plummet, standards and regulation have improved a hundredfold and borrowers now see an industry that can be trusted to deliver. Specialist finance will never be mainstream but it has the mainstream’s trust.
But there is still work to do when it comes to building the reputation of our industry. While professionalism is now the norm rather than the exception, there are still a handful of lenders out there that are engaged in dubious practices, which could genuinely dent the reputation the industry has done its utmost to build up. Punitive default interest rates are a case in point.
By charging ridiculously high default interest rates when borrowers fail to meet their payment schedules and, in some cases, concealing them as standard rates of interest, certain lenders risk undoing all the good work done to date.
For example, at the time of writing in late November one lender is charging 5% when a borrower goes over term (and 5% at each anniversary of going over term), while another lender is hitting borrowers for 2%–3% pm as a default penalty. These are cowboy practices that have no place in our sector and I’m pleased to see they’re something FIBA is tackling head on.
Another area the specialist property finance industry could improve in is education. We should be doing a lot more to help the growing number of brokers looking to expand into our space gain a better understanding of how it works. That said, understanding the basics in this industry is never enough. We should also be educating brokers not just around the way short-term loans work in theory but in practice, as the practice rarely equates to the theory.
In other words, let’s educate brokers as to what happens when the chips are down, when the inevitable road bumps arise and the pressure is on, and how different lenders respond in those circumstances. Now that would give brokers the street knowledge and market nous that’s so important in short-term lending.