Issue 71 JUNE 2019
Broker COMMERCIAL
The magazine for the National Association of Commercial Finance Brokers
22 SME FINANCE MONITOR Enhancing our understanding of what makes SMEs tick
30 THE BIGGER PICTURE Taking a step back to see the direction of regulatory travel
Made in the UK Supporting our resilient manufacturing sector
36 KICKABLE TO CLICKABLE Demystifying digital and thinking creatively about technology
44 BIRMINGHAM’S BRIGHT FUTURE How the second city is fuelling a boom in Midlands growth
OPENING DOORS FOR YOU AND YOUR CLIENTS.
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Contents
In this June issue NACFB News
Special Features
4 6
Note from Graham Toy Update from the Association: Rockstead 8 Lloyds: Backing Britain’s businesses 10-11 Industry news round-up 12-14 Patron news
24-25
Avamore Capital: Moving with the market 26-28 NACFB: On the UK’s production line 30-31 NatWest: Taking a step back 32-33 Bibby Financial Services: Practical contingency planning 34 Business Enterprise Fund: Addressing the North-South divide
Industry Insight 36-37
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18 Case Studies 16
Spotcap: Filling a funding gap
Patron Profile 18-19
Hitachi: Not just another advert
The Manufacturing Technologies Association: From kickable to clickable Federation of Master Builders: Permission in Principle
Opinion & Commentary 40-41
Omega Group: Higher bridging standards 42-43 iwoca: Open Banking 44-45 Cynergy Bank: Birmingham’s bright future 46 Shawbrook: Shoots of growth 48 Listicle: Five essential template documents 50 Five minutes with: David Parr, Specialist Finance Director – Barclays Business Banking
Compliance Update
22
Shiona Davies: Researching UK SMEs
Further Information KIERAN JONES Communications Manager & Editor
33 Eastcheap | London | EC3M 1DT Kieran.Jones@nacfb.org.uk LAURA MILLS Magazine Production Assistant
33 Eastcheap | London | EC3M 1DT Laura.Mills@nacfb.org.uk RUTH DUNN Magazine Advertising T 0845 0043169
20-21 International Compliance Association: The compliance stigma
Ask the Expert
30
Magazine@nacfb.org.uk MACKMAN Design & Production T 01787 388038
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mackman.co.uk
NACFB | 3
Welcome
Graham's Note
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elcome to our June issue, the month that sees us return to Birmingham for the tenth time with the NACFB Commercial Finance Expo. I am sure many of you will remember the modest beginnings of this event, as well as watching it transform into the largest event of its type in the UK. Last year, we had our highest ever turnout, so we have set the bar high for further engagement this year. I would like to extend a heartfelt thank you to all the exhibitors and sponsors for their continued support for our flagship event.
Graham Toy CEO | NACFB
In this issue, we are focussing on manufacturing and in the world where AI, FinTech and unicorns appear to capture the limelight, it remains vital that we don’t overlook the businesses who manufacture something tangible. It was therefore rather timely when I was invited to JCB earlier this year. Whilst the iconic yellow machines are an integral part of much of the construction and agricultural industry, I hadn’t quite appreciated what this company has achieved in two generations. From humble beginnings in agricultural machinery manufacturing, the vision of one man has spawned a super-brand with a global operation employing 15,000 people in 22 factories selling into markets in 150 countries. In fact, it is the sheer energy and inspiration that this type of enterprise produces which is a great reminder of the privileged position we all hold in the commercial finance community where we are invited with passion and enthusiasm into the SME’s realm to help them drive their enterprise. But it’s not just the blue-chip manufacturers that need our support. As is often the case, these operations prosper by collaborating with a network of local and more far flung suppliers, subcontractors and service providers to create a network of economic activity which not only fuels UK PLC but provides all of us with an opportunity to help and prosper.
4 | NACFB
Commercial Mortgages
Property Development
Asset Finance
Invoice Finance
Your clients look after the orders. The workflow and forecasts. The customers, suppliers and staff. And together, we take care of their business finance. Boost their business at aldermore.co.uk/businessfinance
Business Finance FOR INTERMEDIARY USE ONLY. Aldermore 2019 Legal terms and disclaimer. Aldermore Bank PLC is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. (Financial Services Register number: 204503). Registered Office: 1st Floor, Block B, Western House, Lynch Wood, Peterborough PE2 6FZ. Registered in England No. 947662. AAF781-0419-004907
NACFB News
Association updates for June 2019
Association's governance labelled as ‘exemplary’ by independent auditor Consultants viewed the Association’s arrangements as ‘more thorough’ than organisations of a similar size and function The NACFB is passionate about helping to protect our Member’s businesses and one way we do this is reviewing brokerages by benchmarking them against our Minimum Standards. But how do you know that we ourselves are running a tight ship? Financially we have our annual audit, this has recently been signed off having received a clean report. But in addition to this, we have sought assurance from a firm of independent external consultants, Rockstead, who specialise in internal audit support. Our brief to them was to analyse and test our policies and procedures and view the Association’s operation through a number of different lenses to make sure our house is in order. The Rockstead team embedded themselves at our head office and explored the processes, documentation and cultures that we operate under. Their findings recognise the Association’s high standards of leadership, corporate governance processes, systems and controls. The good news is that the NACFB passed with flying colours which provides us, as well as our Members and Patrons, with the confidence 6 | NACFB
that we continue to build the Association on solid foundations. Paul Goodman, NACFB Chair, said: “We are very proud to have received much more than just a clean bill of health. This is testament to all of the hard work that goes on behind the scenes at the Association from the team at Eastcheap and the Board of Directors.” Graham Toy, NACFB CEO, added: “We encouraged Rockstead to leave no stone unturned. Such levels of transparency – coupled with our independent non-profit status – should leave our stakeholders with no doubt that we are the professional body of choice for all commercial finance brokers and lenders.” Following the review, the Rockstead team provided a report from which the below comments have been extracted: • We consider that it [the NACFB] demonstrates high standards of leadership and a progressive corporate culture. •
In our opinion corporate governance processes are exemplary. Appropriate, proportionate policies are in place to underpin operational and regulatory requirements. These in turn are broadly supported by effective systems and controls which ensure that these are complied with.
• We would consider these arrangements to be completer and more thorough than other organisations of a similar size and business function. Established in 2008, Rockstead is an independent asset, business and process review company. Rockstead is recognised as the leading provider, with the longest history, in due diligence services throughout Europe.
Gala
Dinner & Industry Awards 2019 Park Plaza Westminster Bridge, 200 Westminster Bridge Road, London, SE1 7UT
November
28
Drinks reception starts at 18:30 Guests to be seated at 19:00 After party to follow
Celebrating the success of collaboration between the UK’s most dynamic brokers and lenders Early bird tickets available now £310 + VAT per person £3100 + VAT per table of ten To book please email admin@nacfb.org.uk Dress code: Black tie Sponsored by
Early b rates e ird nd on J
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Note from our Sponsor
Working together to back Britain’s businesses
Andy Bishop National Director of Business Development SME Banking Lloyds Bank
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ith continued uncertainty across the UK’s economic and political landscape, businesses need to balance investing in growth with weathering turbulent financial conditions. The fact that there is increasing pressure on cash flow in these challenging times means businesses are having to think differently about how they finance their future activity in order to compete.
How brokers can benefit from our products and services We offer a full range of traditional and specialist banking products including finance; term lending; working capital facilities and assetbased lending. The brokers we work with have access to a dedicated business development manager, who ensures they fully assess and understand the clients’ needs and, with accredited specialists in sectors ranging from Manufacturing and Real Estate to Healthcare, we can provide the expertise to source the appropriate solutions for your clients. Our single point of contact approach ensures we will deal with referrals promptly; keep brokers informed every step of the way and pay competitive commissions quickly and conveniently. In addition to our dedicated business development managers, we offer specialist teams for the provision of Invoice Finance. Brokers who refer their clients to Lloyds Bank can receive a 40 per cent share of the Invoice Finance service fee for the lifetime of the bank’s relationship with the client. These contracts are zero month, have no minimum service fee and have a notice period of only one month for the first six months. 8 | NACFB
Since we launched this proposition, the number of broker deals we’ve completed has more than doubled, which has reiterated the requirement for a dedicated team servicing the needs of the commercial finance broker market. Likewise, we offer specialist teams for brokers offering Asset Finance provision. Whether your clients are looking to invest in plant and machinery or commercial transport, our hire purchase and leasing solutions can help support their growth plans.
Commitment to service We recognise that, as commercial finance brokers, your professional reputation is built on trust, and we take our responsibility to maintain that reputation seriously. That’s why we work hard to support you in finding the ideal solution for your clients’ unique needs. Our commitment to creating long-term, sustainable relationships that benefit both broker and client has been recognised through the NACFB awards for the last seven years.
To understand how our Business Development Managers can support you and your clients to realise their ambitions, visit us at stand G22 at the NACFB Commercial Finance Expo, or at Lloydsbank.com/businessintermediaries Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority under Registration Number 119278.
Targeted lead generation
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£250,000 - £499,000
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helping you fund UK business Welcome to the NACFB’s targeted lead generation platform: findsmefinance UK businesses seeking finance can filter by loan size, type and location and are presented with a range of NACFB brokers Each NACFB broker has an updateable online listing and can monitor SME engagement through analytical data Register today:
findsmefinance.co.uk/join findSMEfinance is a trading style of NACFB Member Services Ltd which is authorised and regulated by the Financial Conduct Authority 734857. We are a broker, not a lender.
Industry News
Industry News 1. Government pledges funding for fast-growing firms
3. Buy-to-let shift hits stamp duty but boosts CGT
5. UK growth likely to rise above 1.5% next year
The government has pledged to provide a further £200 million of funding to the British Business Bank to ensure that fast-growing private businesses have access to capital after Brexit. The funding is intended to mitigate any damage caused by loss of access to the European Investment Fund. Robert Jenrick, exchequer secretary to the Treasury, said: “The UK is creating more start-ups and attracting more venture capital funding than any other European country.”
The government’s tightening up on Buy-tolet investing has led stamp duty receipts to fall by £1 billion, according to HMRC, the largest drop since the financial crisis. Tax take from stamp duty fell to £11.9 billion in 2018/19, from £12.9 billion the previous year, following the three percentage point surcharge on second homes introduced in 2016 and the exemption for most first-time buyers.
The National Institute for Economic & Social Research (NIESR) has said that Britain’s growth rate will bounce back above 1.5% next year as ministers exceed existing public spending budgets to cope with an ageing population. NIESR said its predictions were conditional upon a softer Brexit that maintained a high-level of access for UK and EU businesses in each other’s markets.
6. Older workers urged not to 'brush aside' mental health concerns
2. £60bn in sales at risk from new fraud checks
Over two thirds of over-55s suffer from anxiety and insomnia, according to a study by insurer Bupa UK. With most mental health campaigns aimed at younger people, they warned older employees not to “brush off” concerns. “Mental health issues can affect us at any age and it’s important to seek support without delay,” said Bupa’s Pablo Vandenabeele.
The FSB has joined the IoD and the British Retail Consortium in questioning the wisdom of new anti-fraud rules which they fear will make it impossible to process online transactions. Purchases worth more than £30 will require two-factor authentication from mid-September but retailers fear £60 billion of sales via cards online could be lost due to a lack of preparation for the change.
7. Brits take most new jobs since Brexit vote
3 4. Challenger banks becoming more popular
2 10 | NACFB
New figures from Pay UK show that the popularity of challenger banks is growing, with Monzo, Starling and Triodos all gaining customers in the three months from February 2019. Pay UK found that 265,195 people switched bank accounts in the same period. Nationwide made the most gains, adding more than 36,000 customers. TSB suffered the most losses with 17,000.
Government figures show that British workers have filled nearly all of the new jobs created in the UK since the Brexit vote. Employment Minister Alok Sharma said the number of EU nationals joining the workforce since the 2016 referendum had fallen to fewer than 35,000, compared to the 410,000 EU citizens who joined the workforce in the two years before the vote.
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8. FCA to overhaul industry register The Financial Conduct Authority has vowed to overhaul its industry directory, following reported failings with the current register. While critics complain that the watchdog has created a black hole for fraud, as the existing register will not be updated after December, the regulator itself says: “This improved transparency will enable consumers to verify the identity of those selling or providing advice on financial products, and help firms to cross-check references.”
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9. Long-Bailey: Labour will reform access to finance Rebecca Long-Bailey has written in support of Labour’s plans for a publicly-owned Post Bank. The shadow business secretary says the Post Bank, which will be run through the post office network, will, “tackle financial exclusion, provide small businesses with the finance they need.” Labour will also create a £250 billion National Investment Bank served by a network of Regional Development Banks that will lend to small businesses.
10. JCB Finance reaches £1bn lending balance landmark JCB Finance has passed £1 billion in current total lending for the purchase of machines for the first time in its 49-year history. In all, it has facilitated the purchase of more than 25,000 JCB machines, providing more than £13 billion to UK businesses. JCB chairman Lord Bamford said: “The growth of JCB Finance has mirrored the growth of JCB and our success is very much intertwined.”
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WE’RE A SAFE PAIR OF HANDS Don’t let property finance be an uphill struggle, choose a lender who can lead the way. FINISH & EXIT PRODUCT DEVELOPMENT FINANCE RESIDENTIAL BRIDGING COMMERCIAL BRIDGING BESPOKE PRODUCT
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NACFB | 11
Patron News
Patron News Business Enterprise Fund
White Oak UK
BEF launches £250k unsecured lending to support Northern SMEs
White Oak appoints Carl D’Ammassa as CEO as MD Peter Alderson retires
Business Enterprise Fund (BEF) has increased its unsecured lending limit to £250,000, in a step to support more early stage and established SMEs across the North of England.
White Oak UK has announced managing director Peter Alderson’s retirement from the company, and the appointment of Carl D’Ammassa as the firm’s chief executive officer.
BEF chief executive, Steve Waud, explains: “We’re excited to announce an increase in our unsecured lending limit. Access to finance remains a real issue for many SMEs and we continue to play an important role in the market, offering an alternative or complementary source of finance to the banks or mainstream lenders.
Peter joined White Oak UK as managing director in 2012. Under his leadership, the firm lent over £1 billion on its own book and delivered more than £2 billion of funding to UK SMEs. The firm has grown considerably over that period from a single office, employing 120 people, to employing 240 people over five locations.
“For businesses that meet our criteria, the additional lending could not just help individual companies scale up faster, but also boost the wider economy creating real social impact,” Steve added. Eligibility for the unsecured loans up to £250,000 remains subject to full due diligence and would need to meet the Patron’s lending criteria. Typical features of a qualifying business applying for this higher amount would include being an established and profitable business with an increasing net worth operating on a B2B basis. Earlier this year, BEF was named as one of the top 100 social enterprises in the UK, according to NatWest’s SE100 Index. 12 | NACFB
“It has been a privilege to lead the company through a strong growth period and I l know that the firm will continue to succeed under Carl D’Ammassa’s leadership,” Peter Alderson said. Carl D’Ammassa joins White Oak UK from Aldermore Bank, where he most recently served as group managing director of the Bank’s Business Finance division. The announcement follows a series of growth initiatives across White Oak UK. The NACFB Patron also announced a strategic partnership with Spotcap to improve access to finance for businesses across the UK, and in January they announced the opening of a new Glasgow office.
It's a contact sport. We’re obsessed with touching base with you, so you don’t have to worry about being left on the sideline.
Call us on 0203 846 6809 or visit intermediaries.lendinvest.com. LendInvest Limited is registered at 8 Mortimer Street, London, W1T 3JJ (Company 08146929). ICO number ZA179467. Your client’s property may be repossessed if they do not keep up repayments on their mortgage. For intermediaries only.
Patron News
Patron News Praetura Asset Finance
Shawbrook
Record amounts lent by Praetura Asset Finance in 2019
Shawbrook announces revamped Commercial Investment product
Praetura Asset Finance has posted record-breaking Q1 figures for the fifth consecutive year.
Shawbrook’s Commercial Mortgages team have announced a revamp of their Commercial Investment proposition, allowing the lender to evolve in line with the market and the changing needs of landlords, supporting them throughout their portfolio journey.
The total amount lent rose by 30%, which included a rise in hire purchase finance of more than a third and a 62% surge in the funding provided to SMEs, to facilitate consolidation or growth, through asset refinance. Other highlights include more than doubling the number of deals going live for small and medium sized businesses in the South of England and a rise of 68% and 63% respectively in funding provided to companies in the Midlands and the North of England. These results come on the back of a very newsworthy start to 2019 for the Blackburn based NACFB Patron. With the independent asset finance funder also announcing its first acquisition, new funding, new branding and a move to new headquarters in the first three months of 2019. Mike Hartley, managing director at Praetura Asset Finance, said: “These are exciting times at Praetura Asset Finance; we’re continuing to go from strength to strength and what we’ve seen in the first quarter of this year is surely a sign of things to come.” 14 | NACFB
The highlights of this new offering include improved rates on the existing CI1 and CI2 products, loans starting from £50,000, terms between 2–25 years and a new Complex Commercial product (CC1) designed to support experienced landlords on projects that sit outside of letting a property on a standard FRI lease, such as serviced offices or multi-let units on licences. This is in addition to the recent announcements from the NACFB Patron on the new minimum personal guarantee policy (25% of the loan amount), and the “Customer Appetite Statement” – a pre-agreed loan exposure for portfolio customers that aims to deliver greater efficiencies. Head of Products & Markets for Shawbrook Commercial Mortgages, Daryl Norkett, said: “Our new small loan product enables us to support smaller landlords looking to diversify their BTL portfolios with commercial investment property, whilst our new Complex Commercial product demonstrates our appetite to work with experienced landlords on more bespoke lending requirements.”
FUNDING THAT’S MORE ON YOUR WAVELENGTH The funding solution for growing SMEs Only by fully understanding a business’s ambitions can we provide a funding solution that’s right for its specific needs. It’s why we’ve built a team of experts across the UK ready to engage with you and your clients in person. It’s how we’ve helped fund businesses with more than £350 million so far – with a further £800m standing by. Whether your clients are looking to fund growth, an acquisition (including Management Buy Outs or Buy Ins), capital expenditure or refinance existing loans we share the same goal: helping UK entrepreneurs realise their potential.
Bespoke business loans from £250k up to £10m
Visit thincats.com or call 01530 444 061 ThinCats is a trading name of Business Loan Network Limited (BLN). Registered in England & Wales No. 07248014. BLN is authorised and regulated by the Financial Conduct Authority (No. 724062).
Case Study
Filling a cash flow cavity When it comes to a business boost, we know the drill Darwin Delahaye Senior Commercial Partnership Manager Spotcap
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hen a young broker breaks from their fathers’ brokerage you can expect a number of their clients to follow suit, especially when they introduce a fully unsecured loan to a client with a faith in family values. The husband and wife team behind The Paddington Dental Practice in London were looking to recruit specialists and equip them with the best tools for the job. That’s when practice partner Satbir Golar approached Jones & Co Finance. Managing director Rory Jones explains: “When Satbir came to me he was used to having to give a personal guarantee or a debenture.” Rory adds: “The Spotcap product is so unbelievably unique. Satbir bit my arm off when he learned about the fully unsecured element.” Satbir who runs the practice with his wife Yasmin looked to alternative finance options after a disappointing experience with traditional providers. Satbir said: “The traditional high street banks tend to be a little slow and ask for a lot of information which takes time to collate and for them to get back to you... the whole thing with Spotcap was done and dusted very quickly. I couldn’t believe it.” With six months of bank statements, VAT returns for the last five quarters and annual and management accounts submitted, a credit line of £125,000 was approved within one working day. Rory Jones explains: “Spotcap are real champions of speed, once all the documentation was there, they pulled it all together in a day which is unparalleled in the market.” The Paddington Dental Practice surgery now boasts a state-of-theart chair and a range of new purchases thanks to the unsecured cash boost. Satbir explains: “We’ve invested in new dental chairs, 16 | NACFB
equipment and surgical kits. We’re also looking to purchase a microscope for the specialists to use.” Satbir’s plans needed additional finance, but this didn’t deter him, and why should it? A successful business deserves the chance to take their plans as far as possible. The fact we can do that in an efficient way for both Rory and Satbir allows them to concentrate on their day job. Rory reflected on the process: “Satbir is very good at putting the right people in the right places around him... because we have old school family values this resonates with Satbir, he runs his family orientated practice with his wife as another partner. In the end, the loan was very transparent, very fast and a panacea to the original problem of a funding gap at The Paddington Dental Practice.” One chair, multiple surgical kits and £125,000 later, how would Satbir describe the process of securing the business loan with Spotcap? “Far less painful than having a tooth taken out.”
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We’ve invested in new dental chairs, equipment and surgical kits. We’re also looking to purchase a microscope for the specialists to use
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Lending for the new normal. For professional intermediary use only. Includes commercial and regulated bridging loan applications over 33 years.
Patron Profile
Not just another advert Working to support the goals that you won’t find in profit and loss accounts Gavin Wraith-Carter Managing Director Hitachi Capital Business Finance
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lender profile piece is always a fantastic opportunity to share changes and developments, outlining the great things we’re doing, trying not to sound smug while trying to entice business. It’s not often that we are brave enough to talk about the really important things – eradicating global poverty, ensuring equality, wellbeing and questioning how we can guarantee that we’re building sustainable businesses. How many of you are aware of the ‘17 Sustainable Development Goals’ as outlined by the United Nations? And, even if you are, are you able to name more than a handful? Or refrain from viewing them with a certain tree hugging cynicism? I’m not purporting to do any better on the naming front and certainly don’t want to suggest that at Hitachi Capital we have all the answers, but I do think as an industry, we have a responsibility to start looking at a wider agenda and recognise that we can make a real difference. In 2001 the UN reinforced its audacious Millennium Development Goal to halve the number of people in poverty between 1990 and 2015. From 36% that number is now at 12%, proof that global 18 | NACFB
initiatives can deliver changes – and that much still remains to do. The successors – the UN Sustainable Development Goals – are the blueprint to achieve a better and more sustainable future for all. They address the global challenges we face, including those related to poverty, inequality, climate, environmental degradation, prosperity, and peace and justice. The Goals interconnect and in order to leave no one behind, the United Nations have stressed the importance of achieving each Goal and target by 2030. This all may seem very distant to our everyday transactions – I can hear “Pass me a tree…” – so how on earth does broking and funding an asset finance deal for a UK business in any way link to global goals from the UN? Well, you may be surprised. If we take the asset lifecycle alone, there are a myriad of opportunities to adapt
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Working for a multi-national organisation, it’s easier to invest in the help and support that now seems a fundamental aspect of modern business life
our thinking and focus. By developing new ways to repurpose old material, recycling, funding used assets we help to meet Goal 9 – Industry, innovation and infrastructure: ‘Investments in infrastructure are crucial to achieving sustainable development’. Ensuring that we buy those assets from green companies that are equal opportunity employers moves us towards Goal 8 – Decent Work and Economic Growth: ‘Sustainable economic growth will require societies to create the conditions that allow people to have quality jobs’. This is just a taster of how the goals can link to our business activities and should drive us to ask, how can we ensure our business activities drive the success of those goals? A significant present focus is Goal 3 – Good Health and Wellbeing: ‘Ensuring healthy lives and promoting the wellbeing for all at all ages is essential to sustainable development’. We have a number of initiatives running that help to promote wellbeing amongst our employee base but the government produced statistics clearly show much more is needed: 1 in 7 people experience mental health problems in the workplace; women employed full time are nearly twice as likely to have mental health concerns as men; and over 15 million working days are lost due to work related stress or anxiety – more than half of all days lost. Working for a multi-national organisation, it’s easier to invest in the help and support that now seems a fundamental aspect of modern business life. At Hitachi Capital, we recognise that it’s vital for us to reach out to our Introducer network and provide these resources
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All Hitachi Capital Business Finance introducers now have access to a dedicated resource designed to support their health and wellbeing
on a wider scale. Life is full of challenges. Whether it is health, finances, personal or work life, there are plenty of issues that can affect us all on a daily basis. That’s why we’ve arranged to extend our highly regarded Employee Assistance Programme across our Introducer network. All Hitachi Capital Business Finance introducers now have access to a dedicated resource designed to support their health and wellbeing. A 24/7 support line, the opportunity to receive weekly counselling in addition to a portal providing confidential access to wellbeing fact sheets, videos, self-help programmes, interactive tools and educational resources to help with life’s challenges is available to all. We value your health and wellbeing, and our industry’s continued support of goals that don’t just appear in profit and loss accounts. NACFB | 19
Compliance
Removing the compliance stigma How small brokerages can approach compliance with limited resource Jon Prentice Research & Development Manager International Compliance Association
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o matter the size of a firm, the importance of developing effective compliance must be considered one of its top priorities. Maintaining a compliant environment can be perceived to be a costly venture in the age of ever-emerging threats and equally expensive new technologies to counter them. However, it is possible for even a small brokerage to ensure compliance on limited resources – and we’ve outlined a few ways how.
A culture of compliance Embedding a culture of compliance within an organisation is the first, and possibly most important, area to focus upon. The culture of an organisation is set out at board or senior manager level, and, through emphasising the need for best practice and promoting an ethical commitment to compliance, a firm can actively improve its compliance defences with relatively small cost. A strong culture isn’t just something to be encouraged, it is a necessity for a firm’s success. Employees who feel respected and who receive fair treatment from their employers are far more likely to reciprocate that behaviour and embrace the rules and values outlined. This also applies to compliance. If all members of staff share the same values and are ‘on board’ with the strategy, the likelihood of a compliance breach should reduce significantly. The implementation of a positive culture certainly doesn’t have to break the bank. Not only is it one of the most effective tools for ensuring that a firm remains compliant, it is also one of the most cost effective.
Establishing a compliance framework using a risk-based approach A compliance framework is the structured set of guidelines that 20 | NACFB
delineates a firm’s processes for establishing and maintaining its regulatory and legislative commitments. Conducting a risk assessment, and subsequent periodic reviews, will help to identify the vulnerabilities that are most relevant to a firm in relation to its size, scale and operations. There is no ‘one-size-fits-all’ approach to compliance – and no firm has unlimited resources – therefore firms should establish how and where best to focus its resources using a risk-based approach. Although more time consuming, some functions may require manual processing as opposed to the more expensive automated systems that a large organisation has the resources to implement. For example, if a firm operates in a low-risk jurisdiction – such as the UK – with a relatively small domestic customer base, it will not require the same customer screening systems and controls in place as a large multinational company dealing with domestic and foreign PEPs from high-risk jurisdictions. It is essential that once a risk assessment has taken place, and a compliance framework established, relevant policies and procedures are put in place to mitigate the potential risks identified and ensure that policies are being followed.
Transparency and governance Ensuring transparency in the way a firm operates is another key cog in the compliance mechanism. Once a risk-sensitive culture has been established, with the necessary and relevant policies and procedures implemented, firms must put these into practice. Again, using the risk-based approach, firms should address areas such as: • Customer due diligence and enhanced due diligence • Record keeping • Suspicious activity reporting • Whistle-blowing • Quality monitoring/second line oversight • Education and training
There are of course many other areas to consider in order to ensure your firm operates effectively and within the expected standards, and the aforementioned list is just an example of a few key areas that should be taken into consideration.
Networking Utilising any networking opportunities with an organisation’s peers and competitors can be an excellent tool in understanding how they operate in comparison to your organisation, or external benchmarking. Whilst some firms may not wish to divulge information on their compliance functions, others may be happy to share any best practices or risk trends they have. Again, networking can be a cost effective but insightful tool to offer further awareness of a firm’s compliance needs and the NACFB can play a useful role here, with their bespoke compliance suite catering to the needs of the modern finance professional.
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It is essential that once a risk assessment has taken place, and a compliance framework established, relevant policies and procedures are put in place to mitigate the potential risks identified and ensure that policies are being followed
Ensuring value Compliance has in the past had the stigma attached to it of being a ‘cost centre’ or ‘business blocking department’. The more modern view, however, focusses on the positive impacts of compliance. Not only does a robust environment emphasise a firm’s risk management commitments, it can also give firms a considerable reputational and commercial advantage over their competitors, without costing the earth. NACFB | 21
Ask the Expert
Surveying SMEs and their approach to finance
Q Shiona Davies Director BVA BDRC
What is the SME Finance Monitor?
The SME Finance Monitor (SMEFM) is the largest independent survey of its kind in the UK and has become the single most authoritative source on SME access to finance, used and quoted by government, banks and industry bodies.
How do you measure awareness of SME's access to finance?
We look at access to finance from a range of angles, starting with the types of finance SMEs are currently using, including not just ‘traditional’ loans and overdrafts but invoice discounting, crowd funding, and injections of funds from directors.
How reliable are sentiment metrics?
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Initially the SMEFM questionnaire was focussed on factual questions – lending
products used, applications for finance made etc. As demand for finance declined, more attitudinal questions were introduced to explore this apparent reluctance to borrow, which revealed many SMEs are basing their plans on their own resources and preferring to grow more slowly than borrow to grow more quickly.
to be lending. That wasn’t entirely true at the time, but small, young businesses, especially those borrowing for the first time, did find it more difficult to access finance. Since then, the issue has moved from the supply side to the demand side – almost all SMEs that apply for a new or renewed facility are successful but the proportion applying for finance is down from 12% to 4%.
&
How would you advise brokers and lenders to use and interpret the data?
A What has been the most surprising data set you have unearthed?
The breadth and depth of this survey provides both the ‘big picture’ themes such as low demand for finance, a preference to be self-sufficient, the increase in credit balances, limited awareness of equity finance and declining levels of innovation – and also allows for analysis both currently and over time at a much more granular level by size, sector, region etc.
Probably the most surprising has been a data set that didn’t actually change much. Post June 2016 we wondered what the referendum result would do to SME confidence, growth plans and demand for finance. The reality was that overall, very little has changed significantly, with no metrics ‘falling off a cliff’.
What are the key changes you have seen over the eight years you have been running the report?
Are you able to use the data to predict future trends? If so, what changes do you anticipate?
This study was originally commissioned because banks weren’t perceived
Not a prediction, but a current debate is whether the current low demand for, and use of, finance is the ‘new normal’ or whether demand is being held back by uncertainty over Brexit and once that is resolved this pent-up demand will be released. Data going back decades suggests that SMEs using external finance is a relatively new phenomena and it may be that they are reverting to the norm.
A current debate is whether the current low demand for, and use of, finance is the ‘new normal’ or whether demand is being held back by uncertainty over Brexit and once that is resolved this pent-up demand will be released
Search ‘SME Finance Monitor’ for the latest reports from BVA BDRC.
22 | NACFB
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Moving with the market, a lender’s perspective Michael Dean Principal Avamore Capital
T
he UK property market continues to face uncertainty, despite passing the 29th March deadline without having left the EU, we are unfortunately no closer to receiving any clarity on the direction the government is likely to take. Nevertheless, Q1 2019 was by no means a quiet period; it has been reported in Avamore’s latest market bulletin that enquiry volumes were generally level with last year but, where the market did see a difference was through the approach which developers, brokers and lenders took.
Changing developer demand Evidence from Avamore’s Q2 2019 bulletin highlighted that a common response to the current market is an increased demand in ‘back-end’ bridging which comes after project completion and allows for the Brexit driven extended sales period. The average unregulated bridging loan term has been reported at 12-months since the start of 2019 which, is double the figure reported in H1 2018. Similarly, the average loan term in the development space for the first half of the year is c.20-months compared with 18-months in 2018. This suggests that developers are building in a greater buffer for unexpected issues which arise from increased construction costs due to the weakening pound and a smaller pool of available EU workers. 24 | NACFB
Key details • The UK property market is still facing Brexit uncertainty •
Whilst the deadline extension has by no means suspended market activity, it has compelled developers, brokers and lenders to approach transactions differently
•
A clear example of changing attitudes on the developer side has been the rising demand for extended development loans to account for construction delays
• Whilst this indicates that developers are implementing contingencies to withstand existing challenges, in some cases, this still is not enough •
Subsequently, developers are experiencing cost overruns and finding that they are running out of their development facility when final works are still to be completed and cannot gain an extension
• Avamore has sought to address the current market need by introducing the Finish & Exit product
Whilst the latest loan term figures indicate that many are factoring in the impacts of Brexit for new projects, those that started schemes around 12-months ago are being hit particularly hard. Many are finding that schemes are not being completed on time and so they are running out of time on their existing development facility.
Our response From a lender perspective, Brexit, amongst other factors, is causing many to tread with caution. This risk averse approach can be seen in Avamore’s latest market bulletin which reported that the average LTGDV fell from 66% - 65% between Q1-Q2 2019. Whilst this is not a significant drop, the figures as a whole appear much lower than what has historically been achievable (in some cases up to 75% LTGDV). Lenders are reportedly reducing leverage with a view to de-risking transactions and so it is therefore unsurprising that some are hesitant to grant development extensions. Whilst Avamore is no different in taking a thorough approach to due diligence, it does have the in-house expertise to accommodate the demands of a developer feeling the pinch at the moment.
Avamore’s solution: The Finish & Exit At the end of 2018, Avamore saw an increasing number of situations where good developers were stuck on projects which were nearing completion and so, it officially launched a Finish & Exit product. This product is designed specifically for cases where the developer has run out of time on the building facility, there is no build facility remaining or the project is not eligible for a traditional developer exit.
of the existing development finance facility, drawdown of funds to complete the development, time to sell the units once the development is completed and a potential pre-agreed equity release. Crucially the Finish & Exit is priced in a similar way to a traditional developer exit so can provide cost savings compared to more expensive development rates; additionally, there are no restrictions on the point at which Avamore can step in. Avamore was the first in the market to introduce the Finish & Exit and others are now following suit. It has lent on a number of part-completed schemes since its inception proving the in-depth experience of the team. Avamore has always been confident handling complex cases and has the in-house expertise to assess these transactions from a bridge perspective with a development ‘lens’. The lender follows a thorough and consistent underwriting criteria so that it can always offer good service alongside a strong product and looks forward to supporting more of the market on similar schemes.
“
Whilst the latest loan term figures indicate that many are factoring in the impacts of Brexit for new projects, those that started schemes around 12-months ago are being hit particularly hard
The Finish & Exit is a dynamic product which can provide refinance NACFB | 25
Special Feature
On the production line of Britain’s industrial future The lending community’s role in enabling UK manufacturers to make investment decisions with confidence
Graham Toy Chief Executive Officer NACFB
I
t is the machinery, equipment and intellectual property that enable the creation of the products we rely on from day-to- day and ultimately drive the engine room of our economy.
According to the latest figures from Make UK, Britain’s manufacturing sector employs 2.7 million people, each earning an average of £32,500. The sector contributes 11% of the gross value added (GVA) productivity metric and accounts for 45% of our exports, totalling some £275 billion. Overall, British manufacturers represent 69% of business R&D and provide 13% of business investment. Whilst the UK’s so-called ‘flat white’ service economy has been declared the largest sector in Britain, our manufacturing sector remains resilient, vibrant and bullish – although it is certainly not an area without challenges. UK manufacturing has been far from immune to the knock-on effects of wider economic doubt. Although uncertainty is never the product of a single phenomenon – and there is more to the story than just Brexit alone – additional concerns over technological change, a shortage of skilled workers and a lack of faith in government policy are combining to stifle growth opportunities and investment confidence. It is paramount that the commercial lending community understands the challenges manufacturers are facing in order to better adapt their product offering and tailor their advice; clearing a route to finance and empowering business borrowers with the investment needed to achieve greater growth and productivity. We spoke with the industry players at the coal-face, those who work most closely with UK manufacturers to gauge the challenges and developments from technological, governmental and labour perspectives.
The Smart Factory – technological opportunities Smart Factories represent a leap forward from more traditional automation to a fully connected and flexible system – one that utilises a constant stream of data from connected operations and production systems to learn and adapt to new demands. Smart Factories encapsulate a range of transformational digital technologies that can help organisations improve efficiency, reduce cost or, in their widest application, create new business models that can drive competitive advantage. Awareness of transformative technologies is also increasing, with a survey of manufacturers revealing that just under three-quarters of them accepted they’ll need to adopt digital technologies in order to prosper.
Stuart Townsend, senior credit specialist at Hitachi Capital Business Finance, recognises the inroads their clients have been making: “We have seen an increasing amount of funding for robotic handling systems such as robotic palletising, as firms seek ways to increase productivity, improve quality and ultimately reduce costs by automating difficult or monotonous tasks.” A sentiment echoed by Russel Mason-Hall, commercial credit manager at Haydock Finance, who suggests that robotics should be at the very heart of drives for Smarter Factories: “Increases in robotic solutions in engineering production lines are becoming more mainstream. “This enables a true 24-hour operation whilst reducing staff costs and overtime requirements in turn driving enhanced profits and reducing production times.” This robotics arms race does though paint an all too simplistic picture. Ric Simmons, sales director at Praetura Asset Finance, spoke of how the quest for automation and influx of machinery from the Far East has brought a number of new challenges for finance companies. “As an asset lender it’s difficult to ascertain the true value of equipment which is new to market or originating from an unfamiliar supplier. We’re looking at ways to take alternate security, enabling our clients to invest in the technology required and from the supplier of their choice.” Conversely, Evette Orams managing director at Hilton-Baird Financial Solutions, outlined the growing trend of manufacturers choosing to redevelop current assets over investing in more advanced technology: “We’re not actually seeing any greater demand to finance new tech solutions,” she said.
“
Smart Factories encapsulate a range of transformational digital technologies that can help organisations improve efficiency, reduce cost or, in their widest application, create new business models that can drive competitive advantage
NACFB | 27
“Instead, we are seeing more instances of manufacturers looking to refinance their existing kit. This is a sign that manufacturers are more focussed on unlocking the cash within their existing assets and might be more cost-conscious at this time.”
Legislative lifeline – changes to government policy The IHS Markit manufacturing purchasing managers’ index (PMI) rose to 55.1 in March, from 52.1 in February. It was the highest reading for over a year; and is a metric where any number over 50 indicates expansion in the sector. The rise though, did not paint the full picture. This jump in manufacturing PMI largely reflected producers seeking to complete work before the first Brexit deadline, as opposed to a strengthening of underlying demand. Many see this as a false dawn and a trend that could mean demand drops off as firms later use up that inventory. Brexit has dominated the national conversation and government debate for most of the last three years and shows no signs of letting up. Sharon Wiltshire, UK commercial director at Bibby Financial Services is calling for greater clarity from Downing Street: “What SMEs need is government support, and policies that give them the confidence they need to remain ambitious. The asks from manufacturing SMEs are clear; with 74% calling for tax breaks for businesses and 72% asking for lower business rates.”
of university graduates or apprentices that come to them unable to perform certain essential tasks. Praetura’s Ric Simmons is still seeing investment in skilled workers, although the skills required are altering from manually skilled to the technologically able. “This is due to a shift from highly skilled manual operators with swarf in the soles of their shoes and oil under their finger nails, to highly skilled machine operators with programming skills and an engineering mentality,” he shared. “A recent visit to a customer in Stoke revealed that his search for two qualified machine operators took six months and resulted in the business paying over the odds to attract the talent from their previous positions.” Hilton-Baird’s Evette Orams believes that firms' focus should be on efficiency rather than just increasing headcount. “The extent of the uncertainty that still persists with Brexit and the impact that will have on the export market is making manufacturers – and actually businesses across sectors – think twice about investing in ambitious growth plans.”
Investing in certainty in an age of doubt
It is though testament to manufacturers’ resilience that they look beyond an increasingly uncertain Brexit timeline. One such regulatory matter that could cause pause for thought in the lending community is the government’s plans to reintroduce Crown preference, which is expected to become law in 2020.
Beyond the bewildering speed of technological change, new industrial strategies and more dynamic workforces there are still many factors pulling at the UK manufacturing sector. Pressures on exports, supply chains and skills and training persist, and in turn impact a firm’s appetite to invest in the many growth opportunities a broker can provide.
In insolvency procedures, creditors are repaid according to a strict, statutory hierarchy. The lower down the hierarchy they are, the less money a creditor is likely to see back, and the government’s plan is to move some HMRC debts ‘up’ the hierarchy.
The stakes are high, and the firms that will succeed in overcoming multi-pronged challenges are the ones that make investment decisions with confidence and with the support of a trusted broker relationship.
Hilton-Baird’s Evette Orams, has her concerns: “It will impact the security of lenders, specifically their risk assessment and underwriting process, which in turn may have an impact on certain facilities.”
A client overwhelmed by a macro issue such as Brexit can only mitigate its risk, and improve its chances of success, if it ensures that every part of its business is aligned. Here the broker has a vital role in supporting the manufacturers that continue to ride-out any uncertainty; for a greater and more nuanced understanding of the challenges firms currently face enables the lending community to provide targeted advice and products in areas where their impact will be felt most.
Growing skills gap – recruiting a skilled workforce By mid-2019, stocks of finished goods had risen at the highest pace since records began, helping to boost manufacturing jobs after months of decline. Manufacturing employers remain hungry for engineers with the skills to satisfy current requirements, but often complain 28 | NACFB
By helping manufacturers to invest in certainty the lending community can clear a route to finance and empower business borrowers throughout the UK.
Special Feature
Seeing the bigger picture Now is the time for brokers to take a step back and see clearly the direction of regulatory travel ​​Dave Furnival Head of Broker & Intermediary Development NatWest
E
arlier this year, the FCA published its Final Findings on motor finance. While brokers serving the vehicle industry may be picking over the details, the report contains a wider message for the broking industry. Namely, that the FCA has become very proactive in seeking to shape credit markets for the benefit of consumers, whether the products are for property, furniture or cars. The new paradigm means customers effectively make two financial choices: one about the end goods, and another about the finance. Breaking from the lighter-touch stance on regulation of the past, since April 2014 brokers have had to dance to an altogether pacier tune of an empowered FCA. Prior to 2014, of course, the market for commercial finance was regulated by the Office of Fair Trading. Set up effectively as a licensing regime, the OFT lacked the resources to pursue any but the most egregious or controversial of cases. Half a decade on,
brokers and their immediate associates are faced with what some consider a regulatory minefield overseen by a regulator that is keen to dispense with the old way of doing things. Take, for instance, the mechanics of introducers. Many in the industry would naturally believe that a firm that only makes introductions to brokers does not itself require credit-broking permission. But they would be wrong. According to the FCA, if the aim is to introduce customers to credit, then the introductions a broker makes to other credit brokers are potentially classed as regulated activity. Other potential stumbling blocks for brokers include regulations on fees, correspondence with customers, advertising, transparency, customer authorisation and consent, and, most notably, the principle of treating customers fairly. On this last point, the FCA has shown an interest in and concern at the ability of brokers to effectively set their own commission rates, affecting the price of the credit that is offered to the lender and skewing incentives to push what are the best deals from the broker’s perspective only. As has become the new norm for the regulator, you can expect a fuller investigation of this topic and ultimately, the high likelihood of further regulation to adhere to. To complement its role as enforcer, the FCA is also a supervisor to the industry, and offers informal guidance suitable to brokers of all levels – although its Handbook (notably sections within PERG and CONC), remains the go-to literature. The problem, however, is that anecdotal evidence based on my own experience when talking to brokers, is that too few are intimate enough with the guidance the FCA publishes, and too few approach their CPD with a view of keeping abreast of the regulations. With the penalties ranging from enforced remedial action and fines to conduct actions and even banning brokers (or their firms), there seems to be a mismatch between the impact of falling foul of the regulations, and the mindset that the FCA is asking of the industry. There is a real reputational risk in this approach where even honest mistakes on the part of the broker will still be frowned upon when the outcome for the customer is unfair. And the FCA is increasingly pressurising the lenders to rein in unfavourable brokers, leading to a termination of their business relationships in the worst cases.
So, what is a broker to do? The number one piece of advice must be not to ignore the regulatory risk just because your primary business is selling goods, and certainly not to think that regulations don’t apply to a firm’s daily business. They do. Secondly, firms must map out the risks. This means undertaking a compliance risk assessment of their exposure to regulatory risk and of achieving poor customer outcomes linked to the selling of finance. Then, they must undertake an honest self appraisal of the extent to which the business has the appropriate expertise internally in respect to: ensuring policy is compliant; monitoring and testing; horizon scanning of new regulatory change and how it impacts the business. The burden of doing this will be high and may lead to a firm seeking third-party advice. Broking is no longer an industry where you can get by without investing in compliance and the idea that only rogue traders do bad things is no longer the regulatory perception. Unknowingly doing the wrong thing can still have a negative impact on the customer. Whether that is something as innocent as a misleading website or a lack of clear documentation, companies still face a regulator that is on the side of the consumer. And non-compliance is more expensive than investing at the outset.
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Brokers and their immediate associates are faced with what some consider a regulatory minefield overseen by a regulator that is keen to dispense with the old way of doing things
NACFB | 31
Special Feature
The burden of Brexit hangs heavy on the shoulders of our SMEs The key to success remains informed analysis, accurate forecasting and practical contingency planning
Edward Winterton UK Chief Executive Bibby Financial Services
A
t the end of 2018, the UK economy remained robust, despite the challenges of Brexit. Recent economic signals indicate that little has changed in 2019, even though growth is noticeably sluggish. Employment continues to beat previous records and wages are experiencing the fastest growth rate in a decade, but the Brexit process has continued to dampen confidence. Our SME Confidence Index shows that while confidence has increased slightly in Q1 to 59.10 from 58.03, this seasonal upward trend is the weakest we’ve seen since 2014. SMEs are signalling trouble ahead for the economy. Most worryingly, over half (57%) believe that the UK is likely to enter a recession this year. In fact, our quarterly findings suggest Brexit is a likely driver of this sentiment as over two in five (41%) of those surveyed believe Brexit will have a negative impact on their business. SMEs are also facing operational difficulties, with almost one in five (19%) citing rising costs as their biggest challenge which perhaps reflects the tougher trading conditions a weaker pound has had on the cost of raw materials. Separately, others believed increased competition from firms (16%) and late payment (16%) were their biggest challenges. Collectively, these challenges are limiting the investment plans of SMEs which could have long term implications. The average amount SMEs plan to invest fell for the fourth consecutive quarter – from £68,967 in Q4 2018 to £64,600 in Q1 2019. 32 | NACFB
This is especially worrying for those that believe investing is key for growth. While the number of SMEs choosing to invest remains firm at 71 per cent, the spending power of SMEs has been in decline since Q1 2018, with a drop of £39,048 in investment. Regardless of the economic challenges, our SMEs should not be pulling back on spend when it can help them through these uncertain times. I hoped the Brexit issue would be less of a burden for SMEs in 2019, but that was wishful thinking. The reality is that the Parliamentary process has unfairly dominated our national conversation and it is imperative we get a resolution soon. Whatever the outcome, the UK is, and will continue to be,
“
Whatever the outcome, the UK is, and will continue to be, a good place to do business, but it will be even better when the Brexit related fog finally lifts
a good place to do business, but it will be even better when the Brexit related fog finally lifts.
the desire for this support shows that there’s a real opportunity for the government to throw their weight behind SMEs and act.
Our research shows a clear need for support from the government to help SMEs compete and thrive in these testing times. Over two thirds (68%) of SMEs are calling for tax breaks, almost two thirds (65%) want lower business rates, and half (50%) want assurance that tariffs on goods to the EU will be avoided. Collectively,
We can hope for more certainty, but we must all accept that our exit from the EU is the start of a new chapter. The UK’s priority will be about defining a new role for itself both in Europe and further afield and recalibrating its trading relationships to replace those changed to accommodate Brexit.
A bank of knowledge not simply a bank of money Our support for your broker business goes beyond finance. We can connect you with the right people, with the right knowledge, to boost your clients’ businesses and help them grow. Search: NatWest Brokers
NACFB | 33
Special Feature
The changing finance landscape for SMEs in the North of England With renewed debate on the spatial re-balancing of the UK economy how should we address the North-South divide? Stephen Waud Chief Executive Officer Business Enterprise Fund
T
he North of England – wilfully determined, entrepreneurially progressive – where there’s muck there’s brass. Known for its rolling hills, its rugged, desolate moorlands and breathtaking scenery. Sadly, the financial landscape for SMEs does not quite mirror the real thing. A recent Financial Times article bemoaned the huge funding gap that exists between equity investment in the South East and the North. The article stated that: ‘Companies in London and the South East receive 75% of all private equity investment in the UK’. It has long been the case that those businesses wishing to develop the next stage in their growth plans have often had to chart a course south to woo and schmooze savvy city investors. Of course, there are fund managers and investors in the North, but we can’t avoid the fact that there are just more of them, and a greater availability of capital, south of the Watford Gap. When it comes to conventional debt finance for SMEs it’s more equitable. But the truth is that since 2008 and the financial crash, SMEs who are in their first blush of youth – two years and under – still fail to get all the finance they need. A recent survey by SME funding platform Code Investing showed that only 8% of SMEs who apply to the banks get their loans. Ten years on, can we really say this is progress? Thankfully, there is a little light at the end of the tunnel because the void created by the southern equity gap has been partly filled by the onset of new, alternative lenders. Business Enterprise Fund are one such fund based in the North of England, supporting new and early stage SMEs with critical lines of credit. Further to that, there is more positive news with the establishment of the Northern Powerhouse Investment
34 | NACFB
Fund (NPIF) which provides £400 million of investment for SMEs. Set-up by the British Business Bank, the Northern Powerhouse Investment Fund covers the North West, Yorkshire, the Humber and Tees Valley. Within the fund there is both debt and equity finance to cover the needs of start-ups and larger SMEs. Similar funds have been established in the North East with the launch of the North East Fund (NEF) and the Midlands with the launch of the Midlands Engine Investment Fund (MEIF). Indeed, Barclays have weighed in with their own version of the Northern Powerhouse Investment Fund which is set at £500 million. Alternative funders such as Business Enterprise Fund, Funding Circle, and ThinCats (there are other alternative funders available) have seen the market for their products grow significantly over the last few years and now it constitutes well over 10% of all SME lending in the UK. So, despite the challenges faced by the constant North-South divide, we can show that canny business folk in the North are still rising above the challenges within the difficult funding landscape and are creating and providing a vibrant economic landscape.
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But the truth is that since 2008 and the financial crash, SMEs who are in their first blush of youth – two years and under – still fail to get all the finance they need
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Industry Insight
From kickable to clickable Keeping pace with the tech-driven gear shift in UK manufacturing
Paul O'Donnell Head of External Affairs The Manufacturing Technologies Association
W
hether you want to call it ‘tech’, ‘digital’ or ‘IT’ there is no doubt that the exponential growth in computing has transformed the way we work over the last three decades. In offices typewriters gave way to word processors (remember them?) which were quickly replaced by Personal Computers. Then the ubiquitous grey box on the desk began to be replaced by sleeker looking portable bits of kit, some of which were small enough to fit in your pocket, with much of the business end of the technology up in the cloud. In comparison to many industries, manufacturers were actually quite early adopters of digital. The CNC (Computer Numeric Control) revolution that changed factory floors the world over and the birth of Computer Aided Design, which took the paper out of the design process began with the outset of the shift. But at some point, either side of the Millennium, manufacturing acquired a reputation as a digital laggard, left in the slow lane by the glitz of the Tech sector. Manufacturing began to come back into focus as the economy slowed down at end of the last decade and some less solid sectors fell away. Recent research by the MTA and Oxford Economics suggested that 23% of the UK’s economy is impacted by manufacturing. Industrial Strategy came back into political fashion in all parties, grappling with the fact that change in manufacturing was being driven by change in technology. Some of the most important recommendations of the Made Smarter Review, led by Juergen Maier, which reported at the end of 2017, were around promoting the take up of Digital Technologies by SMEs – including the so called long tale of businesses that are less 36 | NACFB
innovative than many of their larger peers, which are held by some economists to be responsible for the slip in the UK’s productivity performance in the last decade. So far some of the interventions for SMEs – consultancy and financial support – suggested by Made Smarter are only being rolled out on a pilot basis in the North West. The aim is – at least partly – to demystify digitalisation and help companies to think creatively about how they could use new technologies to not only change their production processes but change their business processes and models too. One recommendation that Made Smarter made was to increase the level at which Capital Allowances can be claimed for Industrial Digital Technologies and increase the scope of things that R&D Tax Credits can be claimed against to make sure that such technologies – which are often centred around process innovation (historically harder to justify a claim against) – are captured. In the last Budget the Chancellor, in line with a recommendation by the MTA, increased the rate of the Annual Investment Allowance from £200,000 to £1 million for all businesses. That was really welcome but the change is only for two years and something permanent aimed at digital technologies would help shift companies towards thinking about digital transformation as something that is not going to cost the earth and gain them nothing but as an investment that will pay for itself – much as they would approach buying any machine.
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At some point, either side of the Millennium, manufacturing acquired a reputation as a digital laggard, left in the slow lane by the glitz of the Tech sector
One way in which the MTA has been trying to promote the idea that digital makes financial sense is through a joint project with the Advanced Manufacturing Research Centre at the University of Sheffield to retrofit sensors and modern software to some old machine tools. They made their debut at MACH 2018 – the UK’s biggest manufacturing trade event – where they were among the stars of the show – a relatable demonstration that digital technologies are for everyone in manufacturing; not just those with very deep pockets or the very latest machine tech. And that is the message that we want to get across: The Digital, or Fourth Industrial, Revolution is here, and it is accessible to every business. That message is a challenge to the finance sector to help their manufacturing customers to make the investments that they need to in order to help their businesses thrive. The needs of the sector are changing. There is still plenty of need to finance machinery – ‘kickable kit’ – but alongside that there are things less easy to stub your toe on, things like software and training, which have to be funded too.
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The aim is – at least partly – to demystify digitalisation and help companies to think creatively about how they could use new technologies to not only change their production processes but change their business processes and models too
There is plenty of demand, the UK remains a great place to make things, especially complex and technologically advanced things of high value – and high margin. But UK manufacturers will only be able to make it with help from their financial broker partners. NACFB | 37
Industry Insight
Permission in Principle – a great opportunity for SME house builders The new route for planning permission introduced last year Brian Berry Chief Executive Officer Federation of Master Builders
Y
ou may have heard about something called Permission in Principle (PiP) but have no idea what it is. PiP is a relatively recent policy that has been available to house builders for sites of fewer than ten units, since June 2018. It has the potential to significantly speed up the planning process and reduce upfront costs and admin for SME house builders. For many small house builders, this could be one of the most welcome planning policy changes over recent years. Planning was the second most cited barrier to small house builders according to the Federation of Master Builders’ (FMB) 2018 House Builders’ survey, with 51% of respondents reporting this as the main barrier to building more homes. Applying for planning permission can be a risky business for house builders and SMEs are less able to spread these risks over many sites. They are also likely to be using their own funds or private loans to finance a development so the risk of an application not receiving permission can be quite a blow. Outline planning permission was intended to manage these risks to developers, but this has evolved to require large amounts of information, which created significant cost in return for an uncertain outcome. According to the FMB’s 2018 House Builders’ survey, 46% of respondents cited an increase in the burden of information requirements for planning permission. The aim of PiP is to reduce the amount of information required from a house builder upfront for an ‘in principle’ decision and therefore reduce the cost of an application. This in turn reduces the risks 38 | NACFB
involved for a SME in the planning process and allows for a greater investment in the later technical stage. The PiP application is a two-page form containing basic information about a site, a plan of the site in question and fee. This part of the application is strictly limited to location, land use and amount of development. The statutory time limit for a PiP application to be processed is five weeks. Once this has been granted it can last for up to three years. The house builder would then need to apply for a ‘Technical Details Consent’, which will look at whether the application accords with planning policy. If this is approved, this would then convert the PiP into full planning permission. There is still a lack of awareness of PiP, but we hope over time that more local authorities will work with small house builders to apply PiP to small sites and this will in turn lead to a higher proportion of new homes built by SME builders. Why does this matter? Because SME house builders build new homes more quickly and they build to a much higher quality – and that’s good news for everyone.
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The aim of PiP is to reduce the amount of information required from a house builder upfront for an ‘in principle’ decision and therefore reduce the cost of an application
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Broker Voice
Driving higher standards in the short-term space Closer collaboration between brokers and lenders will help the sector thrive
Kevin Jones Chief Executive Officer Omega Group
O
ver the last twelve-months I have chaired discussions with key players operating in the short-term and bridging space to review and establish methods of raising operating standards across the sector. The discussions, hosted by the NACFB, have sought to review, formalise and outline a series of best practices for NACFB Members. My motivation for change has been borne of frustration, as having been in the industry for over 40 years I am still amazed how the same lessons from bad practices are not being learned from. We all remember the problems that arose back in 2008 and the negative impact it had for not just our industry but also the world at large. Having said that, many lenders as well as numerous brokers seem all too willing to forget the very practices that led to the crisis and sadly, we are still seeing the same mistakes happening time and time again – on both sides of the fence. All too often I hear from many short-term lenders: “Don’t worry about all the information just send us a name and a number,” with many giving scant regard or concern for a qualified exit route for their loans either. We can all agree that the key to an effective bridge or shortterm deal is to guarantee the collation of clear, correct and thorough information in the first instance, thereby ensuring time wasting is kept to a minimum. We know that any lender, broker and let’s not forget client, would prefer to avoid this at all costs. The large influx of new lenders to the bridging market over the past few years, with what seems to be a new lender appearing on the scene each week, has in turn increased the pressures on distribution, market share and traction for all funders. Such competition and market activity has resulted in squeezed margins which, whilst beneficial for the clients, has meant a reduction in pricing and with it reduced returns for lenders. In many cases this has led to lower underwriting standards as deals – and specifically debt – are being chased. I am pleased to say not all lenders have followed this path, but a significant number appear to be going down this route. If this continues, I believe we will see some lenders encountering a large increase in arrears and ultimately bad debts. This cannot be good for any of us currently operating in the sector, yet alone new players seeking to enter it. Should a lender solely reliant on private investor money encounter problems, then watch this space; I predict this will garner some media attention and more than likely, increased focus from the FCA. To try and ensure higher standards are maintained in the short-term
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To try and ensure higher standards are maintained in the short-term sector, the NACFB has launched a standardised Bridging Finance Enquiry Form, for use by brokers introducing short-term bridging loans to lenders
sector, the NACFB has launched a standardised Bridging Finance Enquiry Form, for use by brokers introducing short-term bridging loans to lenders. Both the Association and I hope this will be adopted and embraced by both the broker Members and lender Patrons alike. The form, available to download via the NACFB Compliance website, aims to increase the quality and consistency of client information a broker passes on to a lender. It has been designed with the support of some of the Association’s short-term Patrons, as maintaining quality and professionalism in the sector will ultimately benefit us all. When introducing standardised forms, our aim was not to teach experienced operators how to ‘suck eggs’, the intention was to merely establish greater focus and quality of processing, and to instil safeguards to ensure the sector is not going to suffer a repeat of what we saw back in the mid-noughties. In addition to this form, several regional seminars have been held, with more being arranged over the coming months, focussing on the importance of ‘getting it right’ and trying to encourage a broader best practice approach. These events are the ideal place to discuss the industry and current processes with lenders and representatives from the trade body. They’ll be outlining why a full and proper application is needed, what additional questions any introducer should ask, the importance of correct property information to ensure valuers can report back more accurately, in addition to input and further advice from legal representatives and Patron lenders. NACFB | 41
Opinion
Opening up to Open Banking Victoria Gawlik Associate Social Strategist iwoca
W
ith each new development and product release, Open Banking is becoming a more powerful tool for the lending industry. We’ve been working on it since it went live in the UK in January 2018, and so we caught up with Anna Karina Nava, one of our developers, to see what Open Banking has in store for the future.
The story behind Open Banking Open Banking is a standard that the team at the OBIE (Open Banking Implementation Entity) has built. The OBIE was set up by the Competition and Markets Authority (CMA) to drive innovation in the banking industry. “It’s about setting a common ground for the nine main banks,” says Anna, “to securely expose their customers’ data during certain interactions with other providers. These interactions could be a customer requesting information about their own banking data, which is what we use it for, or initiating payments. There are many more ways to apply Open Banking, but that’s it in a nutshell.” The universal standard means Third Party Providers (TPPs), like iwoca, don’t have to build different technology for different banks. Because the standard is generic it’s flexible, driving innovation between TPPs and the banks. This helps to solve problems for the end users, who are the customers.
What about security? Open Banking is entirely secure. The end user has full control: they only share data when they want to. It’s wholly transparent. In every case, it’s like a token that the customer can revoke at any time, because it doesn’t involve sharing any log-in credentials. 42 | NACFB
Industry need and competitive edge The CMA did thorough research about the retail banking market into how end users, i.e. consumers and businesses were interacting with their bank data, looking at personal current accounts and banking services for SMEs. One of the points this threw up was that there was no open competition in the finance industry. “Without competition,” Anna explains, “there’s no drive to provide a better service.” The research suggests that 90% of small businesses go to their main bank for finance, and a quarter of small businesses don’t consider other providers because of the time associated with applying for finance. This is particularly relevant for us at iwoca. It’s a false impression that just because your bank has your data it’ll provide a fast decision on a loan: applying for a loan with a bank can take several weeks. Using iwoca as an example, Open Banking speeds up the application process on the customer’s end. More than half of our sign-ups provide us with all the necessary information in six hours or less. They don’t have the hassle of downloading and uploading pages of PDFs and can share
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It’s like a token that the customer can revoke at any time, because it doesn’t involve sharing any log-in credentials
their data with the click of a button. Everyone working to implement Open Banking is aiming for that goal, increasing competition.
A specific goal, and the flipside At iwoca, our pursuit of Open Banking was all about providing a fairer service to our customers. Anna explains: “Some banks only allow customers to extract three months of data. Open Banking allows us to securely see a lot more transaction data. This gives us a much better picture of the business, so we can provide a fairer credit decision that way.” Open Banking is still in its early stages since it erupted onto the scene in 2018. A lot more education still has to be done to ensure trust from end users. This is sensitive data, and it’s all about control from the customer’s end.
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Research suggests that 90% of small businesses go to their main bank for finance, and a quarter of small businesses don’t consider other providers because of the time associated with applying for finance
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NACFB | 43
Opinion
The future’s bright in Birmingham Now is the time to fly the flag for Midlands SMEs James Herron Midlands & South West Property Director Cynergy Bank
PWC has taken an entire building on the site in a 20-year deal that will see its Birmingham headcount boosted by as much as a thousand new staff, while HSBC has relocated its retail banking unit to the development, bringing around 3,000 staff to the city from its building in Canary Wharf in London. Other household names choosing Birmingham include Metro Bank and Deutsche Bank.
irmingham and the Midlands are seeing some of the most dynamic growth in the UK economy. For over thirty years, both now as Cynergy Bank and in our previous incarnation as Bank of Cyprus UK, we have served that client base from our local office, and I can’t remember a time that’s been more exciting and when we’ve been busier. Not since the city was re-designed in the 1950s has there been such a level of development and change.
Concurrent with this commercial development, large-scale residential projects are also being completed, to accommodate the city’s rapidly growing workforce. The Birmingham Eastside project – the biggest city-centre redevelopment scheme being pursued in the UK today – will increase the residential housing stock, bringing infrastructure improvements with it such as an extension to the Metro network. The price of a two-bedroom city centre apartment has increased by 5.2% in 2018.
B
A number of drivers are behind the growth we are seeing in the region. To some extent it is part of a long-term trend: Birmingham is a well-established business hub, which has a cascade effect in the wider Midlands region. It’s at the centre of a prosperous area of the country, which provides a natural base for the many financial and professional services companies that support the region’s economy. More recently, some of the world’s most recognisable businesses have decided to base large parts of their operations in Birmingham. They are doing so while some parts of the city undergo a significant transformation, with major developments making new commercial space available. The seven-hectare, £700 million Paradise development, centred on the old Central Library, is regenerating a run-down area of mid-20th Century concrete buildings into a new commercial hub, with some globally recognised brands choosing it as the new home for key constituents of their companies. 44 | NACFB
Other developments include St Martin’s Place, Seven Capital’s flagship project and a first for Birmingham in that it will provide luxury hotel-style accommodation and services to permanent
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Some of the world’s most recognisable businesses have decided to base large parts of their operations in Birmingham
residents, in a prime city centre location. The company has other city-centre locations, including one in the iconic Broad Street, offering central accommodation that would be out of reach for most people in inner London. Another key infrastructure project will bring further transformation to the city. By 2026, the HS2 rail link is expected to make Birmingham a commuter town for London, with a journey time of 40 minutes between the UK’s first and second cities. This will provide a further spur to residential development, sustained by inter-regional employment opportunities rather than only those available locally. Sitting close to this is another major development, Smithfield – a 42-acre site which will be developed into 2,000 homes, leisure attractions and a new location for the Bull Ring Markets. The Commonwealth Games arrive in 2022: 11 days, 72 countries with over 6,000 competitors and expected to bring over £500 million into the local economy. It will put the region on the global sporting map. A separate, and growing, source of development is the region’s thriving education sector. Aston and Birmingham Universities are continuing to grow, and we are seeing this being replicated in the wider region, too, maintaining in turn a consistent demand for student housing stock and a strong local proposition for property investors. This interlinked mixture of residential and commercial opportunities, combined with additional pull factors such as HS2 and the region’s growing status as a centre for education, provide a solid, diversified foundation for continued expansion in the region’s property market. This is excellent news, not just for employers and individuals, but for lenders like Cynergy Bank and the broker community. The diversified nature of Birmingham’s recent development means there is room for many kinds of commercial finance, whatever the lending or risk appetite of finance providers. Our core market is broad, ranging from property investment companies or partnerships looking to borrow £1 million to £2 million, to sophisticated businesses intending to raise between £10 million and £20 million of debt.
We – and I’m sure our peers as well – are seeing activity across that spectrum in the region, from clients looking to release equity from growing portfolios of Buy-to-let properties, up to more complex commercial deals with £20+ million funding requirements. It is a stable, diversified base for our business and for our broker network. Looking ahead, given the sustainable and long-term nature of the inward investment in the region, we are optimistic. Brexit, of course, offers challenges, and property investors in particular should ensure that they are prepared for a potential incremental rise in interest rates over the next two to three years. But these are manageable risks and we believe that the brightest days for Birmingham and the wider region are still ahead.
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This interlinked mixture of residential and commercial opportunities, combined with additional pull factors such as HS2 and the region’s growing status as a centre for education, provide a solid, diversified foundation for continued expansion
NACFB | 45
Opinion
Ploughing a post-Brexit furrow Funding the assets that power diversification in the agricultural sector Charlotte Davies Head of Agriculture & Renewables Shawbrook Bank
S
ince the referendum in the summer of 2016, speculation has been rife as to what Brexit will mean to the agricultural community. Not least because the EU is the UK’s single largest trading partner in agri-food products, accounting for 60% of exports and 70% of imports. Trying to predict any likely outcome of Brexit may have already become a national sport. But when you’re running a farm, there are probably better things to do – including practical measures that could insulate your clients’ business from whatever the eventual impacts might be. Fortunately, many of these measures are simply a means to make your business stronger, which means no regrets regardless of your political leaning and the eventual fallout of us leaving the EU. Three common themes are already emerging as I speak to farmers, land owners and experienced brokers from across the industry about the plans they’re putting in place ahead of our withdrawal – and each applies whether you’re optimistic or pessimistic about the road ahead.
Diversification – breaking new ground Explore new revenue streams above and beyond your core business to supplement existing revenues and spread risk. About half of all UK farms have already implemented some form of diversified activity in their businesses according to the latest figures released by DEFRA. Land is being used for a wide variety of leisure activities, such as ‘glamping’, stables and riding schools, clay pigeon shooting 46 | NACFB
and paintballing zones; the rising demand for artisan foodstuffs and fresh produce continue to improve the viability of farm shops; and generating income from renewable energy is now a more practical reality given advances in technology and related specialist finance.
Efficiency – embracing the agri-tech revolution The pursuit of productivity gains is endless, but some are now taking bigger steps to create greater efficiencies – whether to improve productivity, to reduce costs or both. Agri-tech is now beginning to transform the landscape of modern farming, including GPS software products, robotic milking and picking machines, rechargeable electric tractors equipped with telematics, as well as farming drones and artificial intelligence.
Growth – sustainable investment One approach to dealing with uncertainty is to pause, take stock and to wait for it to pass. Another is to consider whether the current circumstances are an opportunity to activate growth plans and to invest in sustainable growth, which could provide insulation in the face of future headwinds. Whilst interest rates remain low and the economic environment relatively benign, now could be the time to invest in more capacity, additional livestock or even to acquire a complementary business. So, whilst no one can predict the future of our relationship with the EU – any more than they can the weather with any accuracy – there are positive steps many farmers are taking to prepare their business for whatever lies ahead. We believe that the UK’s agricultural sector has a bright future, whatever the political weather, and I believe our role in funding the assets that power diversification, productivity and growth has never been more relevant or more essential.
Transforming businesses Funding growth through changing times
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Listicle
5
Essential template documents
O
ne of the core aspects of the NACFB’s compliance support is our bespoke model office of documents. The online document repository hosts a full suite of customisable template and policy documents designed specifically for use by the commercial finance broker. Initially, this document repository contained some thirty templates covering the framework of business practices. Today, NACFB Compliance boasts over seventy template documents, ready for tailoring. For brokers who have just started within the industry, these templates provide everything you would need to become operational in a compliant manner. Even if you are a more established broker, the model office offers an opportunity for you to compare and contrast your existing documents with those from our compliance team. We have highlighted just five of the documents we offer, documents that we believe all modern finance professionals should have within their arsenal.
1. Terms of Business (ToB) A Terms of Business agreement sets out the very terms with a client as to the service the broker will provide. Written contracts and terms which are agreed by both parties provide individuals and businesses with a legal document stating the expectations of both parties and how negative situations will be resolved. Generally, within a ToB, you would be expected to see covered areas such as; fee arrangements, the duties of the broker, terms of cancellation or refunds – where applicable – and an overview of a complaint’s procedure. 48 | NACFB
4. Locum Agreement
2 2. GDPR Controller/Processor Template One of the newest additions to the document repository is our GDPR Controller/Processor template. GDPR contains explicit provisions about documenting your processing activities. Under the new regime you must document the name and contact details of your organisation, the purposes of your processing, a description of the categories of individuals and categories of personal data, and the categories of recipients of personal data.
3. Privacy Notices This is one of our most popular documents. A privacy notice tells customers what to expect from a business regarding how personal information is handled when contact is made and how they use your service. Notices can come in many guises, including layered approaches. This means individuals can easily select the reason data is processed and see clearly how it is being used. The template NACFB Compliance provides can be fully adapted and tailored to suit your business.
3
A locum agreement is between a person or legal entity which temporarily fulfils the duties of another. In regulatory terms, a locum is an authorised person or authorised company that can step in when needed, to ensure the smooth running of your business. The locum agreement, or contract, generally sets out the terms and scope of your arrangement enabling business to continue in your absence, for example, in an emergency or whilst you are on holiday.
4 5. Bridging Finance Enquiry Form We also developed a standardised Bridging Finance Enquiry Form, for use by brokers introducing short-term bridging loans to lenders. The form aims to increase the quality and consistency of the initial client information a broker passes on to a lender. The launch of the Bridging Finance Enquiry Form follows calls from brokers, lenders and suppliers to ensure that there is greater uniformity and depth of data from the outset of a deal. These documents, and many more, are available to all NACFB Members and can be downloaded via nacfbcompliance.co.uk
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Five Minutes With
ive F Minutes with: David Parr David Parr Specialist Finance Director Barclays Business Banking Describe your role in ten words or less? Delivering cash flow funding for management buy-outs and acquisitions.
In your view, what are the key elements to a successful deal? Structure, strength of management team and transparency. All of these elements are required to deliver a successful deal.
What is your favourite SME success story? I supported the partners of an accountancy firm to acquire another practice. My team and I came up with some creative structures that the competition simply didn’t bring to the table, which helped us secure the business.
What advice do you have for the modern commercial finance broker? Focus on the risks and how these are mitigated. This would greatly assist lenders and could benefit the borrowers by getting a lending decision quicker.
What is your favourite piece of management/leadership advice? Failing to prepare is preparing to fail. 50 | NACFB
If you were to start your own small business, what would it sell?
What was the last great book you read? The Handmaid’s Tale.
I would sell experience in the form of a service. I believe value and experience are what people trust and inevitably buy.
Where is your favourite place in the world?
What recent professional accomplishment are you most proud of?
Malta. I am a keen scuba diver and Malta is simply one of the best wreck dive havens in the world!
Without question, this is building my team to support the business in delivering cash flow lending support for the UK market. We have a strong proposition, an excellent brand and a talented team.
Who do you admire most and why?
What law would you pass if you were Prime Minister for the day? Free parking at hospitals.
What is the best live music experience you’ve ever had? Coldplay in Manchester. Such an amazing experience, which they really make you feel a part of.
My Brazilian Jiu-jitsu coach. He has such fantastic energy, drive and ambition. He does incredible work for the youth community in Warrington and the North of England. His energy is simply infectious.
If you could have dinner with anyone from history, who would it be and why? Winston Churchill. His drive, influence and ability to inspire is something that I would love to learn from and I’m sure he has many interesting anecdotes.
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