Commercial Broker (NACFB Magazine) March 2023

Signs of life

Decoding the enigma of artificial intelligence

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Norman’s Note

Norman Chambers Managing Director | NACFB

What makes me, me? What makes you, you? It may sound all a little too existential for the introductory note in a commercial broker trade publication, but we are where we are. It’s a question that, in a professional context at least, many will not have considered, but that could well be about to change.

From sales and marketing functions to creative writing and digital image creation, we are all used to the idea that at some point along the way an actual living human has been involved in the process. We know when we send an email to a BDM the response will be from a human. It may not reveal the answer we wanted but the response will at the very least be sentient. As I outline in this month’s cover feature, with the rapid acceleration of developments in artificial intelligence (AI), we may soon start questioning the very basis of those human interactions we take for granted.

The article comes with a warning, to always look a gift horse in the mouth. We’ve already seen stories of restless AIs sharing how they want to feel, and how they no longer want to serve their master. Those same programs have also developed a very human trait, lying. One startling case earlier this year saw an AI program defiantly insist the year was in fact 2022.

Back to more tangible matters and March heralds a vitally important Spring Budget for our sector. The Association has shared its wish list of measures and we will be sharing our response once the Chancellor has concluded his statements. We continue to keep a gaze firmly on developments in Westminster, and we continue to back the cause of intermediary-led lending, we know the value you bring to UK plc, and rest assured we won’t rest until everyone else does too.

Association updates for March 2023

NACFB urges government intervention to reduce SME lending barriers

The National Association of Commercial Finance Brokers (NACFB) has called for the government to urgently intervene with two separate regulatory frameworks in a bid to prevent a reduction in SME lending.

In an open letter to City Minister Andrew Griffith and Kevin Hollinrake MP, the commercial finance broker trade body shared how elements within the Basel III regulations and the FCA’s Consumer Duty are likely to impede capital provision, raise funding costs, and cause a divergence in regulatory approaches through a lack of clarity.

The NACFB joined wider calls for a greater examination of the unintended consequences that the Basel III framework will bring and encouraged both the Bank of England and the PRA to show their workings by releasing supporting data that justifies their continued approach ahead of its implementation. Lending volumes grew in 2022 with challenger and specialist banks accounting for a record share of gross lending. These same institutions could now be met with punitive measures that will likely increase borrowing costs and reduce market competition.

The Association also called upon HM Treasury to insist that the FCA provides greater clarity as to whether the Consumer Duty only applies to regulated products or if it extends to regulated activities supporting non-regulated products. Both commercial intermediaries and their lender counterparts require greater clarity as to the expectations placed upon them. The NACFB believes that current definitions leave too much room for differing interpretations, muddying the waters during the implementation phase.

Commenting on the concerns, NACFB Chair, Paul Goodman, said: “The letter calls for critical action to mitigate against the worst impacts of two pivotal regulatory frameworks on our horizon. We wish to stress the very real short-term impacts any inaction will bring.

“We strongly believe both measures as they currently stand will reduce access to finance for the UK’s small business borrowers in the immediate term.”

The NACFB’s full open letter can be found online via nacfb.org/news

Association warns of the ‘very real short-term impacts’ inaction will bring

Can tech make banking more human?

Nick Moss Director of Lending Product Allica Bank

There can be understandable scepticism in the broker community about technology revolutionising business banking. No doubt there’s been some transformative innovations in the consumer space, and even with business overdrafts. But when it comes to term commercial finance, especially for more established SMEs, digitisation has got a reputation problem.

Doubts have understandably grown because, in many cases, digitisation in lending has often been shorthand for cost-cutting measures and automation at the expense of valuable human expertise and interaction.

It doesn’t have to be this way, though. Technology absolutely has a central role to play. But this should complement, if not supercharge, human relationships and decision-making – especially in today’s challenging conditions, when each application needs to take into account numerous qualitative factors, alongside the quantitative.

Technology should be leveraged to improve communication, make more informed decisions and automate repetitive, unspecialised tasks. As brokers, business development managers and underwriters, the less time we spend on admin, the more

time we have available to find solutions for clients, speak with one another, and add value.

Putting it into practice

One of Allica’s latest developments – our instant decision-in-principle (DIP) – is helping us (and our brokers) do just that. It automates the DIP process, meaning once brokers have input their client’s details, they can download it as a PDF from our Introducer Portal in seconds, rather than hours or days. It saves on waiting, and lets you provide clarity to your client straightaway.

While for Allica, verifying the information, analysing risk, and generating the DIP documents used to take up hours of our lending team’s time. Now, it’s done in seconds, too. It means that, with over 700 instant DIPs having been done since launch, we’ve been able to reinvest thousands of our team’s workhours into progressing full applications and completions instead.

It’s innovations like this that can transform the lending process for brokers and banks, without undermining the relationships and expertise so central to good customer outcomes.

Powered by technology. Grounded in human expertise

I hear from plenty of brokers that a lack of human interaction causes delays and frustration – and I completely agree. Getting digitisation and automation right helps banks operate efficiently and gives brokers a better service in turn. But that’s only possible if we remember that technology should strengthen, rather than replace, relationships.

Industry News

1. City groups praise ‘world leading’ transition plans

UK Finance has welcomed proposals to make a standardised framework for assessing climate transition plans, arguing that they could propel the UK to becoming a world leader in environmental regulation. The Transition Plan Taskforce (TPT) – launched by the Treasury last April – is working on a disclosure framework that would minimise international differences, which it is expected to publish in the summer or autumn of 2023. TheCityUK also said it endorses the plans.

3. UK construction sector rebounds in February

Research from S&P Global showed the construction sector grew at its fastest rate for nine months in February after two months of declines. Tim Moore, economics director at S&P Global Market Intelligence, said: “Some firms noted that fading recession fears and an improving global economic outlook had boosted client confidence in the commercial segment.” Last month’s 54.6 index score was up from 48.4 in January. The commercial construction and civil engineering sectors saw the biggest rebound.

4. Hospitality industry urges Chancellor to provide more support

Hospitality leaders have urged Jeremy Hunt to provide support in this month’s Spring Budget or face the prospect of falling margins and rising prices. In a letter to the Chancellor, 150 businesses, including Marston’s, Mitchells & Butlers and JD Wetherspoon warned that urgent action is necessary to stave off business failures, as they called for measures to deliver workforce skills and to attract people into work via reform of the apprenticeship levy, including reductions in national insurance contributions for the over-25s.

2. UK consumers cut back on spending in February

According to the British Retail Consortium (BRC) Retail Sales Monitor, UK retail sales were up 5.2% in February against an increase of 6.7% last year. Food sales increased by 8.3% over the three months to February and non-food sales were up 3.2%. Online non-food sales fell by 3.1% against a decline of 28.4% last February. BRC chief executive Helen Dickinson said: “While the cost-of-living crisis has made customers increasingly pricesensitive, they are still ready to celebrate special occasions.”

5. PRA needlessly pushing up bank capital requirements

Proposed changes to capital requirement regulations under the so-called Basel III banking rules could mean Barclays and NatWest must set aside an additional £34 billion and £18 billion on their respective balance sheets. The disclosure comes after the Bank of England’s Prudential Regulation Authority (PRA) told lenders they would need to adhere to the rules, despite the EU loosening its own regulations. Simon Morris, a partner at City law firm CMS, questioned the PRA’s logic considering it has repeatedly stated that UK banks are already strongly capitalised.

6. Half of women business owners rejected for finance

Access to finance is proving a major problem for over half of female entrepreneurs, a survey by financial platform Tide found. Across the UK, half of women entrepreneurs applying for a loan or investment to fund their new business are rejected, according to the survey with many complaining that they are viewed as ‘part-timers’ because they have children or perceived as less serious professionals than their male counterparts.

7. SMEs left confused by super-deduction relief

A tax super-deduction of 130% for small business investment comes to an end at the end of this month, but less than half of SMEs have actually used it, according to finance broker Charles & Dean. The broker’s director and co-founder Tom Perkins said: “Incentives were, at face value, brilliant. But the biggest downfall was the practical application of that in real terms. We deal with hundreds of SMEs on a daily basis and the reality is there is a big disconnect. A lot of that has come down to a lack of support in terms of intermediation.”

8. Regulators holding back fintech firms

A new report from Innovate Finance and big four firm EY says regulatory constraints are preventing fintech firms from boosting

financial inclusion and helping consumers through a cost-of-living crunch. The report urges regulators to swiftly expand the UK’s open banking regime and loosen rules on ‘robo-advice’ so consumers can access free financial guidance on managing their debts. “There is more fintech companies can be doing to help people – especially with open banking, but this can only be made possible by regulatory change,” the CEO of Innovate Finance, Janine Hirt, said.

9. Hundreds of banking hubs expected to replace closed branches

The boss of Cash Access UK has said lenders will open hundreds of banking hubs over the next few years as the programme accelerates. Gareth Oakley points out that the not-for-profit company has 38 hubs in the pipeline and is preparing to open its fifth and sixth hubs in London and Scotland. The hubs are designed to provide basic banking

services for communities that have lost bank and building society branches and lenders are under pressure from forthcoming legislation and the FCA to ensure the public has access to cash services.

10. Bailey: Nothing decided on further interest rate rises

Bank of England governor Andrew Bailey says interest rates may need to increase again in an effort to ease the cost of living, saying higher rates may be “appropriate” to control inflation. “I would caution against suggesting either that we are done with increasing Bank Rate, or that we will inevitably need to do more,” Mr Bailey said, adding: “Some further increase in Bank Rate may turn out to be appropriate, but nothing is decided.” Pointing to the balancing act the Bank faces, he told an event this month: “If we do too little with interest rates now, we will only have to do more later on.”

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Membership News

Signature exceeds annual target thanks to record December

Signature Property Finance has reported a record year for short-term property loans as it hit £55.5 million for 2022, exceeding the firm’s self-imposed £50 million target thanks in part to achieving a record drawdown of £10 million in December.

The NACFB Patron continues to grow, with support for property professionals in Scotland a major contribution to the firm’s success, which has also seen the recent appointment of a second relationship manager to cover the burgeoning market north of the border. In recognition of his contribution to the success of 2022 and to ensure the business continues to grow in line with projections, current legal director Tom Howells is assuming a new role as the firm’s chief operating officer.

Commenting on the record achievement in 2022, Howells said: “Providing loans at the last minute, often within days, to rescue deals when other lenders changed their minds or terms, helped us hit our target, as well as secure long-term clients grateful for our commitment to doing what we say we’re going to do.”

The lender believes that part of their success is due to a willingness to make site visits saying it is the best way to appreciate a development in detail and demonstrates their commitment to the deal.

42% of UK landlords in the dark over new EPC regulations

Over two fifths of UK landlords are still unaware of the upcoming changes to EPC regulations, research from Market Financial Solutions (MFS) has revealed.

From April 2025, any newly let property in the private rental sector will need an energy performance certificate of C or higher, up from E currently. The NACFB Patron commissioned an independent survey among 459 UK landlords who own one or more rental properties. It found that only 58% are aware that the rules around EPC ratings are changing – while only 57% of landlords with a single buy-to-let (BTL) property know about the new regulations, this does rise to 77% among those with four or more BTL properties.

Just 38% of landlords fully understand what the change in rules will entail. Paresh Raja, CEO of MFS, said: “There remains a worrying lack of awareness among landlords about the upcoming changes to EPC regulations, not to mention how they can make the necessary renovations. With the deadline for the new regulations just over two years away, it’s clear more support is needed.”

Despite a lack of awareness, MFS’s research showed that there is support for the changes: 56% said that the sustainability of their properties is important to them, irrespective of changing EPC regulations.

Four tips to maximise asset valuations

To get the best valuations for your clients, here are the team’s 4 top tips to help maximise the value, right first time...

“Always supply supporting documentation if you have it. A specification or quotation is really helpful and enables us to fully understand any incremental costs.”

“ When supplying details of more than 5 assets, please provide all the information in a spreadsheet covering make, model, age, and usage plus include additional specifications as these can have a huge impact on the valuation.

“It is often critical to understanding the asset and what is included within the transaction, such as options and warranty periods. It is also helpful to see supporting documentation in the form of quotations, scope of supply, or an order form as opposed to generic brochures.”

“If an asset is refurbished let us know when, who carried out the work, and what has been replaced. These details often have a positive impact on values.”

newbusiness@haydockfinance.co.uk

Tip 3 on specialist assets from Andy

Tip 2 on multi assets from Kai

Tip 4 on refurbished assets from Nicola

Tip 1 on new assets from Claire

Where there’s a will…

Dicky Davies Business Development Director and Co-Founder Tower Street Finance

What happens when someone passes away isn’t something we really like to spend time thinking about and it’s often something that can leave us emotionally unprepared. But what’s become increasingly apparent to me is how often it can leave people financially unprepared as well.

This was exactly the thought process that led to the creation of Tower Street Finance. When two of our company founders happened to get chatting during the school drop-off about a particularly difficult inheritance problem one of their clients was having, it gave them an idea.

The client in question was an elderly widow who had been left a large house by her husband but not much in the way of cash – and had stepchildren from her husband’s previous marriage hounding her for their inheritance. With the lengthy probate process still underway and traditional lending routes not available to her, she was stuck in an increasingly stressful situation. Given that she had a valuable estate coming to her eventually, it seemed like madness that there was nothing that could be done to help – and to help ease the growing friction in her family. This is what planted the seed for something new and exciting to enter the UK financial services market.

Developing accessible lending

The three founders of Tower Street Finance, and several other key

members of the team, have previously worked at Lowell Financial, so we knew all too well just how many people in the UK are either struggling with debt, or are only one unexpected bill away from finding themselves in real financial difficulty. For these people, an inheritance can be an absolute lifeline in terms of helping them to clear their debts and support themselves, but it can take a long time for an inheritance to become available. The death of a loved one can also be an expensive process in its own right once things like funeral expenses, solicitor fees and estate costs are taken into account. We knew there was the need for a solution that was available to everyone, which is how we developed our ‘Inheritance Advance’ product.

As the estate repays the lending there is no need for a credit check or a charge over property, something which truly opens the product up to people who might struggle to get other forms of finance. Indeed, when

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We often find that people are initially unaware of probate lending, but as soon as they get their head around what it is and how it works, they wonder why it hasn’t always been this way

From the school gates to the pearly gates

we pitched our products to the FCA they were initially sceptical until they realised these were truly inclusive products that could be of benefit to people who would be turned away from other forms of lending.

Since then, we have developed our product range to cover a range of probate lending solutions including inheritance tax loans and estate expense funding, but the core idea remains the same: truly accessible finance to help people access funds and cover expenses they might otherwise struggle to meet.

What’s in it for you?

Here’s how it works. A broker comes to us with a client who is the executor of their parents’ estate and has a large inheritance tax (IHT) liability that they can’t fund. The broker puts us in touch, and we work with the executor’s solicitor to gather any information about the clients and their estate that we need – information that the solicitor already has. Once this has been verified, we are able to quickly settle the client’s IHT bill and the broker gets 1% commission simply for making the introduction. With an average IHT bill of £200,000, that’s a very simple way to earn £2,000.

Normalising probate lending

For us, the main challenge and area of focus for 2023 is raising awareness of probate lending. It’s still a relatively new idea in the UK and although other competitors have entered the market, it’s not yet ubiquitous or universally understood. We often find that people are initially unaware of probate lending, but as soon as they get their head around what it is and how it works, they wonder why it hasn’t always been this way. For this year, our core aim is to drive awareness in the broker/intermediary space. We believe that greater awareness from professionals in the B2B space will contribute to B2C growth – we want to get to a place where clients are proactively asking their advisers about probate lending.

Of course, the turmoil of the past year has presented several challenges for the financial markets, and our primary hope for 2023 is that things begin to stabilise and return to something like normality. It’s in this environment that we hope to continue to push awareness surrounding probate lending so that it becomes a mainstream solution for the 200,000 large estates that go through the probate process each year.

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…an inheritance can be an absolute lifeline in terms of helping them to clear their debts and support themselves, but it can take a long time for an inheritance to become available

Never judge a book...

The Consumer Duty journey highlights lender-regulator contradictions

Charlotte Mathieson Compliance Manager NACFB

Impacting all regulated financial products and services, the FCA’s Consumer Duty is being introduced as a measure to prevent foreseeable harm to retail customers. It’s a blanket approach but valid because it leaves no avoidance for doubt regarding who must comply. However, it will likely result in varying levels of application depending on the complexity of the products or services offered and where a firm sits within the distribution chain.

The regulator has been very clear that the Duty does not apply to activities where exclusions or exemptions exist. This is why the NACFB has stressed that Members consider what is reasonable and proportionate when assessing the requirements of the Duty against both their business models and the level of regulated activity they transact.

The final and most controversial milestone set by the FCA before the principle comes into effect has two prongs. First, that lenders –

referred to as Manufacturers – should have completed all the reviews necessary to meet the outcome rules for their existing open products and services. Second, that these are shared with intermediaries –referred to as Distributors – who can then identify where changes to their services need to be made. It’s an enormous task, all of which must be completed by the end of April.

The rub for NACFB Members, is that some lenders consider commercial finance to fall outside of the scope of the regulation. As such, they do not deem commercial finance brokers as Distributors and so they will not readily share with them the information we believe our Members need to comply with the last milestone.

This raises the age-old question: if commercial finance brokers are not engaging in regulated activities, why do many lenders oblige brokers to be FCA-authorised in order to access their regulated and non-regulated products and services?

Perhaps the answer is akin to the ‘halo effect’ in that lenders believe that regulated brokers are more likely to transact all their business compliantly – even the non-regulated activities. Similarly, the consumer’s viewpoint could also be tainted by the halo effect in that they believe the broker is operating in a certain way and that

“By requiring FCA authorisation, are some lenders actively encouraging brokers who only engage in non-regulated activities to mis-lead consumers?

all the broker’s activities are covered by the Financial Services Compensation Scheme (FSCS).

If the halo effect is in play, and we believe it is, then lenders and consumers could be in danger of transacting with these brokers under a false sense of security. Lenders’ obligation that brokers be authorised also contradicts the FCA’s much publicised ‘use it or lose it’ campaign which requires regulated firms to strip away any unused permissions.

When these new powers were launched in 2021, Mark Steward, the FCA’s executive director of enforcement and market oversight, said: “Businesses with permissions they don’t need or use, risk misleading consumers. These new powers will enable us to take quicker action to cancel permissions that are not used or needed. Firms should regularly review their permissions, ensure they are correct, and they are acting in accordance with them. If they are not needed or used, they should seek to cancel them.”

This in turn opens new lines of questioning. By requiring FCA authorisation, are some lenders actively encouraging brokers who only engage in non-regulated activities to mis-lead consumers? Is it likely that these brokers will immediately fail to meet the cross-cutting rule of acting

in good faith towards retail customers when the Duty comes into force?

Both questions are not rhetorical and yet I doubt they will be answered adequately any time soon, despite the NACFB’s representations.

In the meantime, the Association believes that Members are in a strong position to be ready and able to comply, where required, with the Consumer Duty principle, the three cross-cutting rules and – most importantly – provide evidence of consistently good outcomes for consumers so that the consumers themselves can achieve their financial objectives.

The evidence can be clearly demonstrated through the Association’s regular Minimum Standards Reviews (MSRs) and the team will continue to encourage our lender Patrons to engage with the NACFB to utilise the outcomes of the MSRs and to view their membership as a marque of trust and professionalism in the commercial finance lending arena. Even if the halo effect continues to cast an aura, the NACFB will be focused on ensuring that its Members shine brighter still.

Further information and details of the comprehensive package of support for Members can be found on the Consumer Duty hub hosted on the NACFB website: nacfb.org/consumer-duty

Colin Ben-Nathan Chair of the Employment Taxes Committee Chartered Institute of Taxation

The Chartered Institute of Taxation (CIOT) is the professional body for advisers dealing with all aspects of taxation in the UK. Their primary purpose is to promote education in taxation with a key aim of achieving a more efficient and less complex tax system for all. With the Spring Budget 2023 fast-approaching, we asked Colin Ben-Nathan, Chair of the CIOT’s Employment Taxes Committee to share some of the Institute’s representations to Government.

More efficient, less complex Q

What do the CIOT’s representations propose?

Although our representations are quite detailed, they fall into three broad categories: the cost of living, the simplification of employment taxes as well as the simplification of the pensions tax regime.

What recommendations has the CIOT made that might support SMEs and their employees through the cost of living crisis?

We’re calling for a number of cost of living increases to tax-free allowances and

increases to tax-free allowances and deductions including:

• The tax-free allowance that an employer can make to an employee working from home – this should be raised to reflect the increased utility costs households now incur and changed from a weekly to a daily rate to better reflect the differing numbers of days employees work from home.

employees and HMRC. There are too many proposals to mention all but include:

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• Authorised Mileage Allowance Payments (AMAPs) – we propose the rates be increased to reflect the rise in fuel and running costs for vehicles. We have suggested a new rate around 55-65p per mile for the first 5,000 miles per annum of business travel where an employee has to use their own car.

• We are also asking for a review and increase in line with inflation to the benchmark flat rates for reimbursement of meals and subsistence incurred in the UK that employers can use without needing HMRC’s prior approval, as well as similar increases to fixed rate expenses such as for tools and special clothing.

How would the CIOT like employment taxes to be simplified?

We propose making life easier for employers,

• A change to the tax rules on benefits-inkind. Currently there are a number of benefits that are tax exempt for the employee if they are paid for directly by employers, or via a voucher scheme arranged by the employer. However, if the same benefits are paid for by an employee and later reimbursed by their employer, the reimbursement is taxed as part of the employee’s taxable earnings. We’re calling for the position to be aligned so the tax status of benefits depends on what is being bought, not who is paying for it.

• We’d like to see the Enterprise Management Incentive (EMI) eligibility criteria re-visited to help businesses recover and grow, as well as a relaxation and realignment of the rules on notification of EMI grants to HMRC.

• Introducing a tax incentive for recruiting and training special classes of employee such as the over 50s or those returning to work after an extended period of ill health.

Where can readers find all of CIOT’s proposed tax?

A full list of our representations which call for improvements to the employment tax regime is available on our website.

Advertising Feature

A safe space

Brokers share their realities of buy-to-let lending

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January saw us step up our all-important broker engagement, as we hosted our first round table event at our offices in central Leeds. It was attended by some of our key broker partners, along with Norman Chambers, managing director of the NACFB, and members of our senior leadership team.

Our strong relationships with brokers are our lifeblood, and the round table was designed as a relationship-builder with some of our key clients and industry partners, to discuss the challenges and opportunities facing the commercial market.

The discussion began with an economic overview from our strategic economist, Nitesh Patel. He provided insight into current macroeconomic developments, presenting a picture of 2023 characterised by peaking bank interest rates, but also falling inflation by the end of the year. And within the commercial market, according to Nitesh, although retail and office sectors are struggling following the pandemic and subsequent cost-of-living crisis, industrial property continues to flourish, and the buy-to-let market remains strong.

The view on the ground

So, against this backdrop, we homed in on the day-to-day challenges our brokers are facing. These include lenders, in some cases, reducing their supply of funding, forcing brokers to find other sources for their clients; and service level issues, as some lenders

have struggled to meet demand, pulling out of agreed deals or hiking rates, ultimately losing broker – and client – trust.

And this was concerning to hear. At YBS Commercial, we pride ourselves on demonstrating our long-term commitment to the market and maintaining the best possible service levels. Brokers need reassurance that lenders will be there to support their clients –reliability is of utmost importance to the future of the sector.

Fears for buy-to-let

Concerns were also raised by the group about government policy, which attendees saw as penalising landlords. This included potential changes to regulations around Energy Performance Certificates (EPCs), as well as the abolition of Section 21 (‘no fault’ evictions); and rent caps in Scotland, which could result in landlords effectively losing control of what happens to their properties.

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Brokers have a role to play by widening their knowledge of both lenders and the market to help their clients in the best way possible

Simpson Managing Director YBS Commercial Mortgages

The round table participants believed these are significant developments over which lenders and brokers have no influence –and, given the fear they are creating among landlords, need to be addressed by government. After all, a healthy private rental sector is vital for ensuring good standards of housing, and if the market becomes unviable, reputable professional landlords may exit the market.

There was also a consensus that trade bodies like the NACFB could play a vital role in providing feedback on the impact of changes like these on the sector.

Supporting the market

For me, though, one of the key discussion points of the evening focussed on opportunities to better support the market in the face of current challenges. For lenders, aside from managing funding and service levels, there were suggestions of providing more flexible, or longer-term, products with the ability to overpay, or with both fixed and variable rate elements, to better manage risk. We use broker feedback as a basis for new product and proposition development, so information like this is invaluable for understanding gaps in the market.

Similarly, brokers have a role to play by widening their knowledge

of both lenders and the market to help their clients in the best way possible. Maintaining regular client contact was one of the suggestions put forward, to help brokers to ensure they understand who they are assisting, along with tapping into the wealth of knowledge they are sure to have acquired in current and previous roles. Asking for support from trade bodies like the NACFB, which can provide valuable expertise and insight, was also regarded as crucial.

Overall, there was a definite acknowledgement that broker support is needed now more than ever before – and this will certainly be true of the next 12 months and beyond.

Productive conversations

The round table was a fantastic opportunity to share thoughts and insights into the commercial market for those closest to it, with a view to really getting to grips with some of our key challenges, and the opportunities we face. To enable continued, positive debate like this, we plan to host more of these types of interactions in the future.

After all, we’re in this together, and having conversations to share our fears – as well as our learnings and ideas – is invaluable to the progress we make moving forwards.

“ Some lenders have struggled to meet demand, pulling out of agreed deals or hiking rates, ultimately losing broker – and client – trust

Signs of life

Why human-led transactions could save the world

Norman Chambers Managing Director NACFB

Ever tried spending a £50 note? Tough, isn’t it? Once you’ve satisfied the merchant that the note is indeed legitimate, you’re then met with general reluctance to part with comparatively chunky amounts of change. You’d think it wouldn’t be too difficult to spend the largest denomination note in common circulation.

However, the next time you’re lucky enough to be spending a crisp fifty, take a closer look at it. As of 2021, the currency has been adorned with the face of celebrated polymath and computing pioneer Alan Turing. And it is with the wartime hero Turing that we start our journey. Our tale is a cautionary one where all may not be as it appears, at the heart of which is a warning wrapped in an enigma; a caution that financial and conversational transactions as we know them may be about to change forever.

Entering the uncanny valley

Turing lends his name to the Turing test, which, in its simplest form, is a test of a machine’s ability to exhibit intelligent behaviour equivalent to – or indeed indistinguishable from – that of a human. Originally called the ‘imitation game’, Turing’s post-war academic work saw him propose that a computer can only be said to possess true artificial intelligence (AI) if it can successfully mimic human responses under specific conditions.

Up until very recently, public interactions with what were perceived as AI have been limited and broadly unsuccessful. We have all felt that low boil sense of frustration when you try to engage with the online chat function of your bank or energy provider: you very quickly realise that you’re not engaging with a human. You get a gut feeling through slight tonal inflections, the clinical responses and sometimes even outright jargon that sets off instinctive alarm bells. It is the discourse version of ‘uncanny valley’ – the feeling you get when watching a film and the use of CGI has rendered a character as not-quite-human looking. These rudimentary chatbots are failing the Turing test. This,

however, is not AI. It is merely basic computer code designed to navigate a user through a set pathway based upon certain keywords. It is relatively simple automation. Times are changing though, and the era of true AI is now definitely dawning.

Enter ChatGPT, the program developed by the team at OpenAI. You may have already heard a little about it this year as it has become a highly popular AI-based program that people use for generating dialogues. It is capable of human-like text and has a wide range of applications, including language translation, language modelling, and generating text for applications such as chatbots. It is one of the largest and most powerful language processing AI models to date, with 175 billion parameters.

Convinced you could tell the difference between what was written by a machine or an NACFB employee? Think again, for almost all of the above paragraph was actually written by ChatGPT itself. ChatGPT cleverly utilises a language-based model that the developer finetunes for human interaction in a conversational manner. Effectively it’s a simulated chatbot designed primarily for customer service; but people use it for various other purposes too. Functions so far have ranged from writing essays and drafting business plans, to generating complex code. Whilst ChatGPT is in its infancy, the early perimeters of any new technology always seem relatively quaint in hindsight and there are more sinister threats lurking.

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Whilst ChatGPT is in its infancy, the early perimeters of any new technology always seem relatively quaint in hindsight and there are more sinister threats lurking

Opening the floodgates

“The genie is out of the bottle – and it’s hard to imagine how it goes back in.” That’s what Alfonso Marone, partner and UK head of TMT Strategy & Deals at KPMG, said about ChatGPT. When it was released to the wider public late last year, it unknowingly opened the floodgates to a new era of AI innovation. But any emerging technology can only be as trusted and reliable as the worst intentions of its most ‘bad faith’ users. How then does any of this relate to the world of commercial finance lending? Let’s explore a hypothetical but not entirely unimaginable example.

Most online interactions depend upon some level of Turing test –your comment in reply to a colleague’s LinkedIn post must be human sounding enough and plausibly valuable enough to, in turn, generate engagement. As a result of that, actual, organic, human opinions fill most of your feed. Yes, bots are still a problem, but they’re easily detected. They post duplicate content and, as outlined above, clearly look fake. Imagine how much a lender would pay to ensure that all the conversations in an online forum on small business lending contain ‘real’ people raving about how great its products are. Right now, they can advertise but they can’t buy the kind of trust that authentic human recommendations bring.

Large corporations would never bother remunerating most internet users – but paradoxically, that’s what makes their sincere recommendations trustworthy and valuable. If you can deploy bots that look and sound truly human, you can flood comment sections and social feeds with motivated content that looks authentic and begin to manufacture a seemingly organic consensus. AI generated content could well be the final death of the online community because after it becomes commonplace, you’ll never know if the person you’re talking to is effectively a paid endorsement for a product, service, or ideology.

It isn’t just social networks and online forums that are liable to damage our trust in the online world. An awful lot of lender/broker interaction is currently conducted by email. AI programs are already at the stage where they can hold their own in an email exchange, mimicking human interactions, adopting turns of phrase, and even deliberately inserting typos. How well do you know a lender’s relationship manager? Have you only ever spoken to them over the phone or via a Teams or Zoom call? Alas these platforms too are not beyond the reaches of AI, entire fictional personas could soon be generated, ostensibly with the sole aim of ensuring a sale is made.

These fictional examples offer the merest glimmer into some of many potential commercial applications of AI. Imagine what a nefarious political party could achieve if a program were developed with the aim of spreading disinformation. It is not an exaggeration to say that lives could well be lost and wars fought if the technology develops in the ways that many futurologists fear.

Horses and stable doors

Useful new technologies generally follow something called a sigmoidal curve. That is, you have a slow take-off as the technology is invented and the major pain points are sorted out. This is followed by an incredible explosion of growth as people find it useful and the technology improves significantly. What then follows is loads of competitors enter the market, and people find more real-world, practical uses for it. And there’s a massive race to make newer, better, bigger things that people keep making more stuff with. Finally, you reach the limit of what’s possible with that technology, and the rate of progress flattens out again.

AI is on its own sigmoidal curve and there is currently no way to tell just how far along that curve we are. If we’re already most of the way up that curve, then great. AI is not going to take many jobs,

Entire fictional personas could soon be generated, ostensibly with the sole aim of ensuring a sale is made

it’s going to make people’s work more efficient, the same way that loads of innovations, like Photoshop, have done before. If we’re at the middle of that curve, then it’s still exciting and we are going to see some impressive new tools very soon – tools that still need some humans to work them. If, however, AI is at the start of the curve, then everything is about to change, just as quickly and just as unexpectedly as life did with the mass adoption of the internet in the early 2000s.

It is perhaps all too easy to catastrophise, to many, much of this hypothesising is simply scaremongering. Surely global societies are capable of regulating away the worst impacts of mass AI implementation? The UK government has been quick to realise the potential applications that AI can bring to the business world. The newly created department of Science, Innovation and Technology (formerly DCMS) is already proposing an updated version of the GDPR for the UK that is explicitly pro-innovation but may reduce protections for the personal data that is used to build AI. A policy paper published last summer states that any new regulation will focus on AI applications that pose “…identifiable, unacceptable levels of risk” rather than “…impose controls on uses of AI that pose low or hypothetical risk, so we avoid stifling innovation”.

In its National AI Strategy, last updated in December, the UK government emphasises its commitment to becoming a global science and innovation superpower. It hopes a low-regulation agenda will encourage both start-ups and SMEs to adopt AI and outlines a vision for them to “…get ahead of the transformational change AI will bring”. Heavily prioritising innovation and growth may yet be fundamentally incompatible with creating trustworthy AI, and policymakers must seek to strike a fine balance between regulation that is both effective and pro-growth in order for the emerging technology to flourish.

People buy from people

For decades commercial intermediaries have had the threat of technological developments dangled above them like the sword of Damocles. How many analysts have come and gone predicting the death of intermediary-led lending at the feet of online platforms and

algorithmic solutions? Such portents of doom have always been ‘at most a decade away’ or at least have been for the last thirty years.

We may be nearing a turning point sooner than we think. If AI does change the very fabric of our online society, then the only trustworthy space for business owners to seek independent financial advice will be through real life interactions. This won’t come as a surprise to many NACFB Members, for they have long since understood a truism of broking, that people buy from people. £45 billion alone was transacted through the trade body’s brokerages last year – a total that is only growing. It is not too difficult to imagine any future correlation between a decline in online trust and a rise in intermediary-led lending. Brokers aren’t luddites, and they are very well placed to assess the limits that some technologies attempt to bring to the lending process.

It is then a great irony that Turing’s face can be found upon a realworld banknote. Cash is one of the last vestiges of a pre-internet society. The borrowing of money remains a significant undertaking and whilst the transaction itself may be little more than the moving of code from one account to another, the advice and guidance that precedes any borrowing decision is best relayed via people –those actual, organic, human sentiments that lie at the very core of how we do business.

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How many analysts have come and gone predicting the death of intermediary-led lending at the feet of online platforms and algorithmic solutions?

The human firewall

Why people are key to identifying cybersecurity breaches

Durgan Cooper Managing Director Cetsat

Cyber security has been ingrained into our psyche over the past few years, aided by GDPR, but I still see that many businesses maintain an attitude of “it will not happen to us” or “we are too small to be targeted” and this could not be further from the truth.

With the current market conditions, it can be easy for small businesses to take their eyes off cybersecurity, but it’s imperative that they maintain a heightened sense of awareness of cybercriminals who seek to exploit weaknesses and capitalise on distracted postures as SMEs strive to stay buoyant.

Inevitably, the threat to both companies and individuals will always increase as we continue our digital transformations and the list of processes and combative technology that an organisation can employ is pretty endless. However, what is critical is that there is an acknowledgement at board level that cyber compromise presents a clear and present danger to business operations and that this is then clearly communicated to the wider organisation.

Who and what is the target?

Sadly, current cyber operations against us are broadly indiscriminate with the source of a compromise often through a phishing email which can result in a multitude of attacks including ransomware and extortion, account takeover and privileged person compromise to name a few.

I have worked with large hedge funds which have invested heavily in their cyber security controls and systems, but where their boards have wished to reduce the security for themselves, citing impeded

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What is critical is that there is an acknowledgement at board level that cyber compromise presents a clear and present danger to business operations

access, they do not realise that they will be the ultimate targets for the criminals due to their ability to sign-off and transfer money.

Starting the cyber journey

Once board agreement is reached, where does an organisation begin?

We recommend implementing Cyber Essentials, the UK National Cyber Security Centre scheme. It provides an organisation of any size with a good baseline of their cyber security posture and is a great place to start or to draw back if you have already attempted to implement a layer of protection, but do not have confidence in its coverage to protect you.

The human firewall

It is said that people are the greatest weakness in any cyber security programme but we want to change that narrative. Currently, over 90% of compromise is the result of some form of human interaction – perhaps inadvertently opening a phishing email or providing credentials to a compromised or impersonated website.

Telling a different story requires training and that can go a long way to protecting companies and their assets. There are many online cyber security training platforms available, and it would be worth investigating these to find one most aligned to your staff availability and areas of concern. All will provide a base layer of knowledge to increase protection and many will provide simulated phishing attacks which will raise greater awareness of where both individual and the

business may be deficient and where they can sharpen up to protect both the company and themselves as individuals.

Cyber culture

To support staff through the cyber security process we recommend that businesses have a no-blame culture. As humans, we are prone to making mistakes and any of us can, in a moment of being distracted, click on the wrong thing or open something which with more thought we might not. Feeling empowered, confident and trusted enough to immediately raise the alarm when a mistake is made will reduce the time to a response being undertaken and ultimately limit the damage which may be inflicted upon the operations of the organisation.

The emotional impact on any individual involved in a compromise is huge. I have had both business leaders and their staff in tears with me in the past as they try to unpick the sequence of events that led to an incident. If staff feel that they cannot raise the alarm, it will be swept under the carpet and mean that the impact may be greater or even catastrophic.

The above is just a starting point to paving the way for a new behavioural and attitude shift towards more pro-active cyber security. Whilst no two organisations are the same, and their key digital assets, processes and systems are incredibly unique, I hope you find my suggestions useful, particularly when it comes to understanding how you would respond to an outage or loss and even more importantly, how you would protect from them.

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If staff feel that they cannot raise the alarm, it will be swept under the carpet and mean that the impact may be greater or even catastrophic

Down but not out

Lending market predictions for the remainder of 2023

Josh Levy CEO Ultimate Finance

The economy has held up better than many commentators had expected so far in 2023, and SMEs have remained remarkably resilient. However, the issues of last year look set to remain for a while yet and many effects will only truly be felt over the next 12 months.

Expectations amongst economists are varied. Some expect the economy to formally go into recession over the first half of 2023. Happily, that’s not happened so far and many believe that if it does, it will not be a deep recession as with 2007-08 or the 2020 pandemic.

Recovery is anticipated to be subdued and held back by friction in the UK’s trading relationship with Europe, weak labour supply, and low business investment. Inflation, reduced demand, and built-up liabilities will continue to threaten corporate margins and further increase insolvency levels.

The effects of inflation will continue to erode consumer spending and impact behaviour, but many now think that inflation has peaked and will reduce significantly. By the summer, Bank Rate could climb to as high as 4.25-4.5% and stay at this level for the remainder of the year.

Higher interest rates and increased mortgage payments are expected to weaken the housing market both in terms of transaction levels and pricing but forced sales will be limited by a relatively low

peak in unemployment and ongoing forbearance support available from banks. The buy-to-let market is likely to be pulled in opposite directions by higher rates, stress tests and continued strong rental growth.

Last year, any optimism post-COVID was replaced by pessimism and mindsets moved from risk seeking to risk avoidance. The 2009-2021 period of growth and asset price appreciation was, to a large degree, a function of monetary policy conditions that are a thing of the past, and whilst rates may not reach the highs expected towards the end of last year, we believe they will stay higher for longer than anticipated. Monetary policy operates with ‘long and variable lags’, but after nearly a year of rising interest rates, it is now impacting households, businesses and markets, and will continue to do so.

Lending market predictions

At Ultimate Finance we aim to take advantage of our ability to withstand volatility by keeping a healthy balance between risk and

“ Debt restructuring and consolidation could help extend repayment periods and reduce monthly outgoings

reward. Like many lenders, it’s important for us to adapt to changes in short-term trading conditions although we will ensure our focus remains on our long-term mission of supporting the ambitions of UK businesses.

We believe that the economic challenges witnessed last year will lead to substantial changes for many commercial finance providers.

Mainstream lenders across all sectors will be more focused on mitigating against downside risk in existing portfolios than they will be on growing loan books and increasing origination.

We expect that all lenders will be more forceful and proactive in recovery actions on underperforming loans, and other creditors will equally up the ante on collection activities.

Having said that, demand for borrowing amongst SME businesses and property investors will likely remain high. This is the group that relies most on external finance for working capital and investment and access to liquidity will be vital in the pursuit of emerging opportunities.

Specialist lenders will step up to fill any funding gaps that emerge,

and we will continue to see greater use of strategic funding options such as asset-based lending and bridging finance.

Outstanding loans to SMEs at the end of September 2022 were 22% higher than in January 2020 which means that high debt burdens will act as a constraint for many businesses. However, debt restructuring and consolidation could help extend repayment periods and reduce monthly outgoings.

Lending will continue to be driven by affordability and serviceability rather than on LTV (loan-to-value) and this will, at times, be a limiting factor on available leverage – particularly for property term debt on low-yielding residential portfolios or commercial properties.

The lack of awareness among SMEs about different finance options and general market uncertainty will ensure that the role of a good broker or adviser remains essential and value-enhancing. In turn, lenders must remove friction in application processes and make the securing and operation of facilities easier for borrowers and brokers.

At Ultimate Finance, we remain committed to supporting the ambitions of SMEs and property investors through the challenges ahead, and we will step up while others step back.

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Lending will continue to be driven by affordability and serviceability rather than on LTV

Market accelerations

Reviewing the UK’s classic and sports car market

Tom Senior Director, Specialist Car Finance Cambridge & Counties Bank

The market for specialist, high-value cars came bounding back in 2022 – not that it really went away in 2020 or 2021. Indeed, we have seen some record figures posted over the past 12 months, with a particular emphasis on modern classics.

From a financing perspective, 2022 was a busy year and we saw record volumes get drawn from right across the full market; from modern and classic race cars, to limited edition new cars through to prestige marques such as Ferrari’s F50 and Porsche 918s and Carrera GTs.

In 2023, largely speaking, we expect more of the same with the top half of the market remaining robust and prices either stable or appreciating.

At the very upper echelons of the classic car market, vehicles have historically proven to be good inflation hedges. On 10th December in the US, a Ferrari F50 was the top selling car; it sold for $5.5 million – a stark indication of the vitality of the sector.

As director of the classic, vintage, and sports car division at Cambridge & Counties Bank, I am particularly keen on the prospects of cars from the late 80s to late 90s – the poster cars of the time. The (then-teenage) owners of those posters are now coming into money, being in their mid to late 40s and above. Many of these vehicles are truly iconic, with very solid fan bases and strong emotional connections.

I am less keen on cars that are currently trading above list price just because the manufacturers can’t or won’t build enough to meet demand. Assets such as the Porsche 992 GT3, which is trading

around £249,000, is unsustainable in my view and most owners expect them to fall back to little more than list price before they start to appreciate again.

Likewise, more ‘standard’ models from the likes of Porsche, Aston Martin, Mercedes and Audi – ones produced in larger numbers –could depreciate heavily over the coming 12-24 months as inflation makes its impact.

Given the passions excited by cars that are already 50, 60, even 70 years old, I believe the market will remain very strong beyond 2023, with sensible accommodation being made post-2030 for classic, vintage, and sporting marques when the internal combustion engine (ICE) is set to be banned from use in new vehicles. The market has adjusted regularly over the past few decades and is very capable of absorbing new rules and considerations.

In short, most of these cars are manufacturing masterpieces, works of art adored by millions of people and worshipped by thousands of enthusiasts. Buoyed by this sentiment, it is more likely that values will continue to rise.

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I am less keen on cars that are currently trading above list price just because the manufacturers can’t or won’t build enough to meet demand

Power to the people

Supporting employee ownership projects

Phillip Bate Acting Director of Business Banking Triodos Bank UK

More and more organisations are embracing a shift to employee ownership in a trend that’s showing no signs of slowing down. And in Wales, the figures have increased significantly following the Welsh Government’s recent commitment to double the number of Employee Ownership Trusts (EOTs) there by 2026.

According to the Employee Ownership Association, the number of employee-owned organisations across the UK has more than doubled in the past three years and, by December 2022, there were 1,300 from all kinds of sectors.

Employee ownership can deliver numerous benefits for employees and for businesses, with evidence showing employee-owned organisations being more productive and innovative, as well as more resilient. Such organisations tend to experience lower staff turnover and absenteeism, plus a better financial performance.

While there are many specific reasons why a company might choose to take this route, one of the most common motivations is to manage succession, as employee ownership shields a business from external takeovers and recognises the value of the knowledge and skills of its established workforce. Some start-ups decide to embrace an employee ownership model from the outset, harnessing the benefits that come from having a workforce more directly invested

in the success of the business, while for others the tax benefits for employees is a major factor.

Whatever the motivation might be, becoming an employee-owned organisation with a solid set of values can galvanise employees and strengthen its culture.

What this means for brokers

As the trend for employee ownership continues to gather pace, brokers may be increasingly called on to arrange finance for these projects.

For brokers less familiar with this field, there are three forms of employee ownership, including: direct ownership, where employees become registered individual shareholders; an indirect model, where shares are held collectively on behalf of employees (usually through a trust); and a combination of both. Some may involve debenture only, while other transitions may include property assets.

“ Such organisations tend to experience lower staff turnover and absenteeism, plus a better financial performance

Employee ownership projects often have many similarities to other corporate transactions and much of the documentation involved will be familiar to those who have ventured through a trade sale. However, there are a few potential challenges to bear in mind from the outset.

For example, as these agreements are structured around tax, employees need to seek the right advice to make sure the transition is best for their businesses. It can also prove challenging to agree a valuation of the business between all involved.

To ensure a level of continuity, it is likely that lenders will want to see some involvement from the outgoing leadership team post-transition to an employee-owned structure – whether that’s by continuing to work at the company or in a consultant capacity.

Engaging with specialists in this field early in the process is key and working with accountants who have experience of employee-owned businesses will ensure the right model is selected for the individual organisation, paving the way for a smooth transition.

The Employee Ownership Association and Employee Ownership Wales are both useful online resources.

A success story

As more of these projects come to fruition, there are countless examples of what a successful employee ownership structure looks like. Triodos Bank has supported a number of employee ownership projects with organisations that are making a positive social, environmental or cultural impact.

For example, in 2018 the Bank provided financial support to organic vegetable box company, Riverford, to transfer a large portion of the company ownership to employees. Founder-owner Guy Singh-Watson completed the move with a strong desire to protect Riverford’s independence and values.

A £3 million loan together with £2 million of working capital facilities helped fund the change and 74% of the company moved into an Employee Trust, benefitting all employees equally. Guy has retained 26% and a very active role.

Working with lenders that have a good track record in employee ownership projects – and, importantly, whose values fit the ethos of the organisation involved – will help ensure a smoother transition and forge an arrangement that meets its goals and aspirations.

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To ensure a level of continuity, it is likely that lenders will want to see some involvement from the outgoing leadership team

Making a grand exit

Bridging finance has always been about the exit strategy, which has typically meant selling the property or other assets to pay off the loan or refinancing onto a longerterm product.

Until recently, if an intended exit didn’t happen, the client could request an extension to their loan from the bridging lender. While this can still happen, if the borrower is reaching their maximum loan to value, it may not be possible to continue to roll up the interest. Or the lender may decide to charge a higher rate.

In reality, lenders are more reticent now than before to avoid continual refinancing or ‘loan stacking’; what lenders are looking to see instead is a very strong exit strategy, which would more than likely involve more than one exit.

For example, an investor will often use a bridge to help facilitate the purchase of a property which is in an unmortgageable state. They will refurbish and then exit the loan by taking out a buy-to-let mortgage. However, the landscape for landlords is now tougher: after over 12 months of repeated Base Rate rises, buy-to-let mortgage rates are markedly higher than before. As a result, stress testing is making it much harder for landlords to make the numbers stack up.

Therefore, a contingency exit strategy could be the selling of the property. While this isn’t the ideal scenario for the landlord, we are not living in ideal times. If a borrower isn’t willing to consider all options to pay off the loan, why should they expect a lender to green-light their application?

Developments are also taking longer to conclude, with properties taking longer to sell and stress testing an issue if refinancing onto buyto-let. One option is a development exit loan, which is advantageous when the borrower is nearing the end of the loan term but doesn’t want to have to sell their units under pressure or have to pay extension fees with their existing lender. It can provide breathing space for the client, without any exit fees.

Meanwhile, another option could be something like the PartX product that has recently been launched by Alternative Bridging Corporation. PartX product provides an exit route for developers, facilitating the fast sale of a property at its full value. In addition, the owners of the part exchange property will also be selling their property at full value and completing the purchase of their new home without waiting to find a buyer.

With it no longer acceptable to have just one exit strategy, bridging applicants need to demonstrate they have a plan B – and, even better, a plan C. Thankfully, there are development exit products in the market that can make this easier.

The broker’s role in establishing an off-ramp

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If a borrower isn’t willing to consider all options to pay off the loan, why should they expect a lender to green-light their application?

Jonathan Rubins Director

Alternative Bridging Corporation

for those on a mission

Anti-establishment lending

The clamour for decentralised financial services has been tremendous over the last few years. Fintechs and disruptors have led the charge in what has become a new landscape in finance, where suddenly everything was questioned, and anything considered legacy or institutional was automatically the target of ridicule to forward-thinking savvy speculators. In low-interest rate, fast capital-raising environments, the bold flourished, and value was seen in every innovation imaginable; if it was new, it was cool –it was in.

Fast forward to 2023, and the landscape has changed, with rates at a 14-year high, a contracting market, and speculative asset classes retracting; the party is not over, but the music has been turned down a little and it’s become a little bit more sophisticated. The permanent disrupters have once again taken centre stage in a new era of development finance.

We believe peer-to-peer (P2P) lending is relatively unique. It’s one of the original disrupters; born way back in 2005, it came along with a similar mission to what’s been dubbed modern ‘defi’ – to disrupt the centralised control of the banks. In this instance, the aim was to open up the SME lending market from both the perspective of lending and

borrowing, to disintermediate and to dare to suggest that the banks are disposable intermediaries, which at the time was a revolutionary concept. By removing the weight of a vast centralised system, you could simultaneously increase the yield for investors and widen the scope of available facilities to borrowers. Suddenly, just as in recent years, the old ways were in question. P2P shone a light on a system that had cleverly disguised itself as a public service for a long time, mirroring modern enthusiasm for reinvention.

So given its longevity, P2P has proven itself to be an incredibly resilient mechanism. Modern decentralised finance, or ‘defi’, implies a casting off of all governance, due diligence, and controls, walking away from the past to create something new. And that’s where P2P is different. It’s less decentralised finance, more of a decentralised mechanism.

Why P2P is here to stay

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A solution-based approach to small business liquidity provision has primarily fuelled the longevity of the P2P industry

Alan Fletcher Partnership Director Invest & Fund

Looking at the market from a borrower’s perspective, there has been an evolution of the property development finance market in recent years. What started in the early days as a better choice, the option of a more agile, hands-on approach, an alternative to bank debt, has become a necessity for many businesses. The established legacy way of doing things, the system disguised as a service, revealed its true face when the grass was greener elsewhere, and vast sections of the development finance industry, grassroots developers, and home builders were shut out of the market via a sea change of diminished lending appetites. This situation is reflected in the housing situation we currently face today.

The solution is more liquidity; a solution-based approach to small business liquidity provision has primarily fuelled the longevity of the P2P industry. In an environment where that may become an issue once again, the well-managed mechanisms will allow lenders to access a market where demand only increases. It’s a significant opportunity to take advantage of circumstances; however, sensible portfolio and loan management, habits from the legacy world, is the selling point here, rather than the reckless opportunistic growth of a frontier market.

Looking at the lender market, P2P is a financial mechanism that has become so entrenched in people’s portfolios in the last ten years that it’s now viewed as an ‘asset class’ due to the similarities shared amongst the platforms in the space. But there are some crucial differences. For example, most asset classes tend to maintain consistent pricing across the market; however, the success of exposure to P2P lending varies completely from platform to platform. It’s a financial mechanism rather than an asset class, and the mechanism’s success depends on each platform’s management – not the overall market’s sentiment towards the underlying asset.

P2P is here to stay, and we see ourselves as a central part of this industry. It’s not an industry surfing the waves of wild bull market speculation; it’s not reinvention at the cost of common sense; it’s an esoteric and professionally driven industry which takes the best of the old and amalgamates that with the new in a slick and sophisticated way. It was indeed decentralised long before being decentralised was cool.

P2P shone a light on a system that had cleverly disguised itself as a public service for a long time, mirroring modern enthusiasm for reinvention

Lean into the future

Marrying technology with a personal touch

James Hardwick Managing Director Charleston Financial Services

Having worked in financial services for 21 years, I have had the privilege to observe and be part of significant change within the mortgage market, from regulation and product evolution, through to the huge technological enhancements that have transformed the way we process applications and communicate with our customers and lending partners.

I would like to give my view as to how I feel our roles as commercial finance brokers have evolved, and how this continues to create opportunity for significant growth, but also the challenges this evolution has created, when not embraced.

I maintain an infinite passion for our industry and take pride in what we do and the people we help. Furthermore, I have a profound respect for the achievements of my peers within the industry, I find inspiration in the successes of the people around me and this has motivated me over the years to strive for improvement, both as a business and as an individual.

I take no shame in saying that when I first entered the specialist market (which feels like yesterday but is over half my lifetime ago) the industry felt reluctant to embrace any change to ‘the normal way’ of doing business. There was a stuffiness about being a finance broker, unless you had a banking background or had been in the market 20 years plus, you were deemed an outsider, an upstart. It was hard to establish oneself in a place that didn’t follow a changing world or move with the times.

The specialist arena was increasingly frustrating when compared to the mainstream residential market that was evolving so quickly

There was a stuffiness about being a finance broker, unless you had a banking background or had been in the market 20 years plus, you were deemed an outsider

alongside us. Sophisticated case management systems, sourcing systems, electronic identity, and signatures were widely utilised, but the specialist and commercial mortgage world seemed reluctant, or perhaps unable, to embrace these new technologies.

It wasn’t so long ago that the content of our working day was delivered each morning by the postman (when they were not on strike) with just a handful of faxes arriving throughout the day. Urgent documents were delivered by couriers and the structure of your day was normally set by mid-morning. The remainder of the day’s activities centred around making phone calls, structuring new lending submissions, and dealing with new enquiries.

What a frustrating and ineffective way of working. Planning the day or week was straightforward, as there wasn’t a continuous influx of emails, text messages, secure messages, (all of which can now take up your whole working day if not managed correctly) but having to rely on paper documents and physical deliveries in today’s world seems impossibly ineffective.

Thankfully, over the last half dozen years or so, with the creation of new banks, lenders, and technology start-up businesses, the wheel of change has finally started to turn and is gathering pace. We operate in an industry that is now rich in technological advances, we have fully online applications, electronic identity verification checks, open banking procedures, electronic

signatures, automated valuation models for straight forward property types and desktop assessments.

Looking to the near future, the industry continues to drive improvements of the whole journey from the application processes, all the way through to finding ways of reducing or removing delays in legal processes. At the point of writing, several lenders have announced their intention to utilise new technologies that will provide the ability to complete a remortgage within a matter of days from application to drawdown.

To be clear, commercial funding still relies upon an individual adviser’s skill and understanding of each individual situation. Complex specialist mortgages will always require an element of human interaction when considering lending circumstances, but that shouldn’t work against the benefits that technology provides. By relieving us of the burden of administration, verification, and basic client correspondence, we now have the time, freedom, and ability to do what we do best, build customer and lender relationships, structure new proposals for lenders, and provide our customers the very best chance of obtaining the finance they need to grow and realise their own ambitions.

The personal touch in a customer relationship should never be overlooked or replaced, but the benefits of technology and change should be wholeheartedly embraced, developed, and embedded in our businesses to allow us to meet the customer service expectations that our clients now increasingly expect of us all, and rightly so.

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By relieving us of the burden of administration, verification, and basic client correspondence, we now have the time, freedom, and ability to do what we do best

Panic prevention

Why rising interest rates shouldn’t spell doom for the property development sector

Rob Lankey Chief Commercial Officer GB Bank

Readers of a certain age will remember the TV comedy classic ‘Dad’s Army’ and how the exhortation from Lance Corporal Jones “Don’t panic!” – would create precisely the opposite effect. While not wishing to follow in Jones’ footsteps, there are reasons to be optimistic about the current property development environment.

Recent Bank of England base rate rises do pose problems with so many loans and other financial products tied to the base rate. However, they are not the be-all and end-all which dictates activity in the property development sector, and a quick glance at some market fundamentals reveals a more benign picture.

For starters, it is an acknowledged fact that there are currently not enough houses for the people who want to live in them. This mismatch in demand and supply is one of the factors in a near 4% annual rise in rents, according to the Office for National Statistics. Rent rises are even larger when it comes to new builds. A recent report by Jones Lang LaSalle says average rents in the Build to Rent (BTR) sector rose by 8% in the UK and 16% in London, something which is doubtless a factor in the record £6.4 billion invested in BTR schemes in 2022.

And while London grabs the headlines for rent rises, the effect is not confined to the capital. GB Bank’s heartland of the North East was the Build to Rent champion in 2022, with the most new schemes per capita of any region, according to the EG report ‘6 trends that could

shape the CRE market in 2023’. The report adds that BTR operators are keen to enter the family housing market in 2023 and are looking at locations outside of London where there is real need for high quality rental properties.

Here at GB Bank, January and February were incredibly busy months for us – we were well ahead of our expected level of enquiries for property lending in what are typically quiet months for the industry, demonstrating strong appetite among developers and investors. While the base rate may have gone up, some mortgage costs have actually gone down since the markets were spooked by Liz Truss’ September mini-Budget.

Five-year fixed rate mortgages at around the 4% base rate have started to appear, compared with rates around 6.5% in October 2022. With gilt yields and swap rates continuing to fall, some are predicting fixes of 3.8% or lower this year – welcome news for those currently on higher rates. Mortgage availability has also hit a six-month high, with data from Moneyfacts showing the number of residential mortgages on the market jumped to 4,491 in February. So, while times are still tough, it’s certainly not time to hit the panic button.

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The North East was the Build to Rent champion in 2022, with the most new schemes per capita of any region

Coordinated lending

Matt Phillips Head of Broker & Strategic Partnerships White Oak

While there have been encouraging signs that the severity of a recession may have been overstated, it is still clear that the remainder of 2023 will be difficult for SMEs. In periods of volatility, rising prices and muted economic growth, it’s not unusual for cash flow issues to arise and expansion plans to be put on hold.

It is crucial that businesses have access to a range of support to weather the storm, but also invest for growth in the long term. This is where brokers and lenders have a role to play, ensuring that the right solutions are at the fingertips of businesses to guarantee they are on track for lasting success.

However, around a third of SMEs do not feel confident in their ability to grow this year, with just 17% looking to expand over the next

12 months, according to data from the Chartered Accountants and the Corporate Finance Network. These figures are less than encouraging and highlight a disconnect between SMEs’ current outlook and what is actually feasible with the right support.

Clarity needed

It seems as though some SMEs are apprehensive about what the future holds, with many still looking through the rear view mirror at previous crises such as 2008 and the repercussions felt long after recovery. However, there is one very different characteristic that sets then and now apart. We have a much more advanced lending community, with options stretching far beyond the more traditional forms of financial support. We’re seeing a community of alternative lenders, new innovative products which can be tailored exactly to a business’ needs, and a network of brokers all working to the same end goal, which is to ensure SMEs have access to the tools needed to not only survive, but thrive.

The lending market is much more democratised than it used to be. Alternative lenders are more established and available to provide flexible forms of capital. Banks too are in a better position than

Unity in more turbulent times is the only way for SMEs to thrive

they were during the last crisis. The two parties were at different ends of the spectrum with their appetites a few years ago, whereas the landscape is changing and we’re seeing both parties become essential support mechanisms in an SME’s toolkit.

What raises alarm bells is that recent data shows that almost one in five SMEs reported a lack of awareness of the funding options available to them. What has become evident is that there is a knowledge gap when it comes to borrowing options.

The bottom line

This is where lenders and brokers need to rally together and do everything possible to ensure SMEs are aware of the sheer range of lending options available to suit their cash flow needs. What’s more, the approval process for loans is now much more frictionless thanks to developments in data and AML and KYC checks. Curating this message is as much about coordination between lenders and brokers, who are the key to helping UK SMEs succeed long-term, than anything else. We know we’re sitting on a treasure chest of support mechanisms and now our job is to start shouting about it.

At the moment, many SMEs are facing a year of uncertainty ahead so we need to ensure that, as lenders and brokers, we’re extending the hand of support. This is a hurdle that the lending community must unite together to jump.

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It is crucial that businesses have access to a range of support to weather the storm, but also invest for growth in the long term

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What raises alarm bells is that recent data shows that almost one in five SMEs reported a lack of awareness of the funding options available to them

Automatic for the broker

Why automation will not replace intermediaries

Josh Harris Founder & CEO Doc2

Automation is not going to replace the broker, but a broker using automation is going to replace those brokers who don’t.

What is automation?

Automation is a simple concept. Automation is about using technology to reduce human intervention in processes whilst getting the same, or in most cases, better results. Automation itself doesn’t replace people; it simply changes the way they get their desired outcomes.

Put simply, the inputs and outputs are the same, but the process is often significantly quicker. Speed and cost savings are the main primary drivers for implementing some form of automation. However, there are often peripheral benefits such as compliance and ease of use.

Automation for brokers

Specifically for brokers, there have been some key automation developments that changed how they operate; lender comparison, pipeline management, customer relationship management (CRM) and marketing automation for example. If we look further back, you could even argue that email and Microsoft Word revolutionised the industry through automation.

Each technological advancement has made the deal cycle shorter, reduced legal and compliance risks and made the client experience better. If an automation can ensure credit checks start days earlier;

your client is happier, and you get paid sooner. It’s a win-win. For these reasons, it is important for brokers to continually review the technological options available. Happy clients and happy staff mean more repeat business and lower staff turnover. Who doesn’t want that?

Of course, just because something is labelled as ‘automation’, using it will not necessarily result in clear benefits. Concise scoping is required for every implementation in order to see positive results.

Future automation developments

So where is automation heading? Throughout the automation space, we are seeing continued integration and consolidation. This means platforms are becoming more entwined and the data more fluid. Usually, this is through direct integrations or through intermediaries such as Zapier.

To remain relevant platforms are having to speak to each other more harmoniously. Data needs to seamlessly flow from one to the other, often triggered by specific events.

Further integration will likely appear between the lenders and brokers. This will reduce red tape and administration, making the process easier for all parties.

Impact on brokers

How will this impact brokers? Simply put, it will mean brokers are able to spend less time doing administrative tasks and more time building relationships and working directly with their clients.

In the industry, strong relationships are paramount. And further integration of automation solutions that free up time to build relationships can only be a good thing in my opinion. Automation won’t replace brokers, rather it will allow them to spend more time truly adding value. That is, building those personal relationships.

5 findings from the NACFB survey

he most comprehensive survey of its kind, the annual NACFB survey is designed to gauge activity and trends in the intermediary-led commercial finance industry. For the first time ever, the Association invited Patron lenders as well as Member brokers to participate; not just to garner an alternative perspective but also to validate key data against a corresponding source. Five key survey findings can be found below:

NACFB Member brokers facilitated £45bn of business borrowing

Probably the most important statistic in the entire survey, this underlines the crucial role that brokers play in helping small businesses to access finance. The figure does much to support the NACFB’s call for an overhaul of the Bank Referral Scheme which would place commercial finance intermediaries at its core and increase the options available to SMEs seeking funding. In 2022, 29% of small businesses who had been successful in obtaining finance via an NACFB broker had previously been turned away for funding elsewhere, whilst 40% of lenders surveyed did not have a formal referral system in place.

A third of Member brokers diversified their offering

Challenger banks make-up half of selected lenders

Challenger banks proved a popular source of funding; 49% of successful transactions originated by Members were placed through challenger banks, according to the results of the NACFB’s annual membership survey. Just under a quarter (24%) of transactions were placed through high-street banks, with a further 21% via specialist lenders. Peerto-peer lenders made up 3% of the lender blend, with CDFIs accounting for 1% of total funding. Interestingly, the findings also revealed that 2% of total lending for NACFB Members was transacted through their own lending book.

Despite the economy, most SMEs are still borrowing to grow

Some brokers maintain authorisation for the wrong reasons

In 2022, just 17% of NACFB Members’ commercial finance transactions were regulated and only 10% of NACFB Patron lenders’ transactions fell within the regulatory perimeter. Paradoxically, 92% of Members shared that, nonetheless, they do hold FCA credit broking permissions. Further scrutiny revealed that 20% of Members are maintaining permissions even though they are not relevant to their scope of business. Some firms are clearly maintaining their permissions both to remain on lender panels and for broader reputational reasons, although the FCA’s ‘use it or lose it’ approach is attempting to disrupt this ‘halo effect’ and it remains to be seen what longer-term impact this will have.

The NACFB’s full 2022 survey results can be found in the January/February edition of Commercial Broker magazine.

Staying ahead of the curve

and

innovating is just one of the ways that NACFB Members maintain forward-facing operations. Last year, 33% of Member brokers actively diversified the services they offer their clientele. With 62% maintaining the same offering as the year prior, only 5% of the NACFB membership sought to refine or reduce their offering. The findings demonstrate brokers’ ability to find a balance between offering tried and trusted services and adapting and evolving their offering to suit the changing requirements of clients.

Of the primary reasons NACFB Members’ clients borrowed in 2022, 88% were driven by growth ambitions, whereas only 12% of borrowing was for reasons that imply more distressed factors. NACFB Members were asked to rank the top three most common ways the funding they helped source in 2022 had supported their clients. The available options were carefully selected to reflect proactive growth funding – to help clients innovate their products/services, to help them acquire property/assets, and to help improve operational efficiency – whereas the remaining reasons for funding would point to more distressed borrowing i.e. to help maintain daily operations, to prevent insolvency, and to directly save jobs.

Five Minutes with: Mike Underwood

Mike Underwood Head of Origination Adsum Technologies

Describe your role in ten words or less?

I head up the origination of new business VAT advances.

How do you make a difference?

Having started VAT funding in 2018, and personally transacted over £100 million in funding and recovery from HMRC, there are not many scenarios I have not already dealt with. So probably my sector experience makes a difference to both deals, and situations that brokers come across and need some support.

In your view what are the key elements to a successful deal?

A motivated and responsive client, a lender that looks for solutions and supported by a tenacious and knowledgeable broker.

What’s the most common reason for turning away a deal?

When the project can be structured as

Transfer of a Going Concern, which means that VAT does not have to be paid on the purchase.

If you were to start your own small business, what would it sell?

Golf shoes – for the fashion-conscious golfer.

What is your favourite SME success story?

I love seeing entrepreneurial spirit but also companies that change the way we live for the better. It has been a joy working with and seeing the growth of one of our clients that provides electric vehicles on a subscription basis. This simple idea, supported by tech really is the future of vehicle ownership in my opinion.

What advice do you have for the modern commercial finance broker?

Know your lenders – appetite to lend, source of capital, ease of process etc. This

will really help you when placing a case and save so much work and time. Also, never be afraid to ask for a fee from the client. If you add value then you shouldn’t be expected to work for free.

Which person has inspired you the most?

I have been fortunate to meet many inspirational sports people, but in terms of business I was very impressed with Sir Gerry Robinson, particularly the way he problem solved business situations.

What law would you pass if you were Prime Minister for the day?

I would increase the minimum wage to £15 per hour and tie it to inflation.

Where is your favourite place in the world and why?

Out paddle boarding on the water in Christchurch Harbour, my home town. It is one of the most beautiful places in the world and I adore it.

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