Looking forward

11 January 2010 | By Christine Toner

January is synonymous with new beginnings - a fresh start and the chance to put any mistakes of the past year behind you and move on. But this year more than most the financial services industry will be hoping the new year heralds a new beginning for the sector after possibly the worst 12 months in its history.

In 2009 the rules changed and the world stopped making sense. Things we took for granted were suddenly not there any more. Ambition and growth were set aside in favour of survival and endurance.

The ways in which we did business no longer worked and only those willing to rethink and regroup stood any chance of continuing. Jobs were lost and companies floored. And the landscape of the financial services industry was changed beyond recognition.

Unsurprisingly, as we wave goodbye to 2009 with more of a Glasgow kiss than a farewell hug most of us will be glad to see the back of it. And while we should by no means be ignoring what happened - rather learning from it - it is time to look to the future and start afresh. But what will 2010 have to offer? More of the same - more challenges, struggles and problems? Or new beginnings, increased positivity and green shoots?
We asked the industry’s finest what they think is in store for the lending market and the wider economy in the coming 12 months.

Economy
Gary Styles, strategy, risk and economics director at Hometrack, says we have not seen the end of market transformation, with more changes still to come, but he predicts that 2010 will be better than last year.

“We are likely to look back on 2010 as the year stability and certainty returned to our key markets,” he says. “The past two years have been volatile and painful for us all. The situation was made worse by excessive gloom in early 2009 followed by too much optimism in the latter part of the year as house prices and confidence appeared to be gathering pace.

“In 2010 we must address the longer term structural problems facing the economy, namely the huge public sector deficit, the overdependence on consumer spending and government spending as engines of economic growth and highly constrained bank lending to businesses and consumers.”

Styles says if we can start to address structural issues the longer term outlook will take care of itself.

“But failure to do this will almost certainly result in the double-dip recession we all want to avoid,” he adds. “Excessive short-term growth in house prices or consumer spending will come at a price if longer term structural issues are not addressed.”

Trade bodies
Last year was tough for trade bodies. They had to find a balance between being realistic and accepting the hand dealt to the industry - regardless of who was to blame for dealing it - and remaining positive enough to encourage their members.

The need to fight their members’ corner was also offset against the desire to work with the government and with other trade bodies to find a resolution.

“Few were surprised when we forecast only a modest 6% growth in gross lending to £150bn this year, broadly in line with the consensus of sluggish recovery in mortgage and housing markets,” says Bernard Clark, spokesman at the Council of Mortgage Lenders. “Fortunately, our original prediction of a contracting market in 2009 proved too pessimistic. We now expect net lending to have totalled £8bn in 2009, and that this will rise to £5bn in 2010.”

Clark says transactions will remain weak, nudging up to perhaps 850,000 this year from a likely post-war annual low of around 800,000 in 2009.
“We foresee little improvement in remortgaging activity early this year, after which the general election will complicate matters further,” he adds.
“One area where we do expect to be busy in 2010 is in shaping the future of mortgage regulation. The industry accepts the need for change but we have time to get it right. Our goal is regulation that promotes the restoration of a healthy, competitive mortgage market from which neither borrowers nor lenders are unnecessarily excluded.”

Paul Broadhead, head of mortgage policy at the Building Societies Association, also believes regulation will be one of the biggest talking points of the year.

“Changes to the regulatory landscape, continued fierce competition for retail funds and the potential for continuing volatility in house prices will all play a part in whether the mortgage market improves this year,” he says.

“Lending in our sector is likely to remain low in 2010 as societies grapple with new capital and liquidity rules plus lower savings inflows.
“This will be even truer if government-funded banks, with their access to funding that societies are finding difficult to source, continue to attract savings with uneconomic rates,” he adds.

“No doubt some societies will make a meaningful contribution to mortgage lending in 2010 but many are likely to be forced to lie low until the savings markets improve.”

Broadhead says the fact that mutuals are owned by their members and do not answer to shareholders seeking maximum returns on their investment gives them the ability to adopt this approach until the anticipated market turnaround.

Of course, brokers were among the hardest hit of all sectors in 2009. Dual pricing, decreased lending levels and a lull in consumer confidence put many out of business and left most of those remaining fighting a tough battle to survive. During that time the Association of Mortgage Intermediaries was at pains to remind the sector it was fighting for it.

Robert Sinclair, director of AMI, says he hopes to see more competition in the market this year.

“In 2010 we would like to think that we will see a more competitive mortgage market,” he says. “The current crop of lenders is what we have to work with and volumes in the first half of this year will match the second half of 2009. So we anticipate an intermediary share of £85bn from a total of £160bn. This will be 15% more than 2009. And we expect a few small new entrants.”

Sinclair says he expects the Financial Services Authority, via its Mortgage Market Review, to continue to protect customers by ensuring those who say they are advisers provide proper advice. He says it will protect customers who have had personal contact and think they have received advice.

“The FSA will create a market in which individuals are free to make informed choices about funding their housing choices,” he says.
But Sinclair adds that the regulator will also produce market solutions that do not advantage certain business models and will hold lenders to account for their product construction, market selection and pricing.

“AMI expects to provide a constructive challenge to any parties that propose changes to a mortgage market that has worked well for more than 95% of borrowers,” he says.

Lenders
The predictions for gross lending figures in 2010 are similar across the industry. Nigel Stockton, sales director of mortgages at Lloyds Banking Group, predicts a similar total gross lending figure for 2010 as Sinclair.

“I see the 2010 market sustaining a similar figure to 2009 - around £150bn in gross lending,” he says. “Across the Lloyds group brands we’ll continue to offer the broadest possible lending support alongside other big players such as Santander, the Royal Bank of Scotland, Barclays, Nationwide and HSBC which together account for about 75% of the market.”

Stockton says that as rates rise we could see societies and smaller lenders return to account for the remaining lending.

“The market could be boosted by a handful of new entrants although these probably won’t take more than £5bn of lending,” he says.

“I don’t think there’s likely to be a fundamental shift in the market and we should gear up for a similar year to 2009. We have all navigated our way through a number of challenges in the past 12 months and if we continue to work together we will reap the benefits in time as the market turns around.”

Barry Naisbitt, chief economist at Santander UK, says the key theme for 2010 will be the change from recession to recovery both for the UK and the global economy.

“But the record from previous recessions shows it is far too early to relax any concerns about risks and uncertainty, especially as the economy is being supported by record low interest rates and high government borrowing,” he says. “Unemployment is at a high level and is widely expected to increase further, especially if economic growth underperforms relative to its underlying trend.

“Despite the improvement in various housing market indicators during 2009 they are still at relatively low levels. For example, monthly gross lending at just over £12bn is less than half the level of two years ago and house purchase approvals are running at about two-thirds of the levels seen in recent years. This means that 2010 is likely to be yet another challenging year in the housing market.

“But if the progress made in the second half of 2009 can be upheld both market activity and gross lending should turn out to be a little higher than in 2009,” he adds.

Insurance
The credit crunch and subsequent recession may have brought chaos to many but for some it brought opportunity. One area in particular that benefited was the insurance sector as consumers finally saw the need for adequate cover.

Susan Barclay, head of marketing at Scottish Provident, believes high unemployment will see even more opportunities for insurance providers this year.

“As the economy continues to recover in 2010 it is likely that the mortgage-related sales opportunity will grow,” she says. “But with high unemployment historically lagging this recuperation, those eligible for Unemployment Benefit will be a talking point. Cost is often given as a reason not to take out cover but with downward pressure on rates cover is now more affordable than ever.

“Cost-effective options such as critical illness benefit and life cover on an income rather than lump sum basis, often known as family income benefit, will continue to be a popular choice.”

Barclay adds that 2010 will see a focus on the release of the Association of British Insurers’ statement of best practice which includes changes to the total permanent disability policy.

Nigel Payne, managing director of Assurant Intermediary, says unemployment should peak in mid-2010 and this will see a slow return of consumer confidence in the market. He also believes brokers may have seen the worst of their troubles.

“The demand that has been built up in the housing market in the past two years will start to come through but due to restricted lending criteria and the continued absence of some lenders I believe the market will only show a small increase of some 15% in transactions,” he says.

“House prices will remain subdued but are unlikely to fall, and I expect one new lender to enter the market.

“The intermediary landscape will continue to change, with further consolidation in the sector by big networks,” he adds. “We have probably seen the intermediary share of the market bottom out and the ability of brokers to generate income from non-mortgage sources will continue to grow. And finally, I firmly believe Manchester City will win some silverware in 2010.”

Equity Release
For equity release 2009 was difficult. While demand for the product did not diminish - if anything it grew, with consumers seeking to withdraw equity from their properties to help them through tough times - a number of providers were forced to leave the market due to lack of funding. But those still in the sector have high hopes for 2010.

“We expect this to be a year of stabilisation in the equity release industry,” says Dominic Fraser-Smith, group product manager for UK Life at Aviva.

“Having dealt with some unexpected turns in 2009 we think the market will see some solid growth in the next 12 months. Equity release can be considered as one of a range of retirement planning options so we expect demand to rise next year and beyond as advisers look for solutions that deal with an ageing population.”

Fraser-Smith says that as the housing market begins to recover throughout the year equity release will become more appealing as consumers see increasing equity in their properties.

“As early as next year it is possible that some of the firms that have left the industry due to funding issues could return, along with some new entrants to the market,” he says. “Overall, we expect 2010 to be a positive year and look forward to driving expansion in the market.”

Dean Mirfin, group director at Key Retirement Solutions Group, is also feeling positive about the next 12 months.

“Following a year of provider casualties 2010 could be an exciting year for the equity release sector,” says Mirfin. “This could be a year of opportunity for those considering entering the market either as a funder or a product provider.

“Old niches have been opened up to new entrants which could be profitable to those able to fill them. The challenge faced by advisers has been met in capturing business that was traditionally going direct. 2010 will provide an opportunity for those either writing or referring business in this sector to capitalise on strides made so far to capture enquiries.”

But Mirfin says that in order to do this firms will need focus and determination.

“Those dedicated to the sector will be able to increase their presence,” he adds. “Both 2008 and 2009 saw a good result for consumer demand which should continue still as confidence in the economy returns.”

Jon King, managing director of Hodge Lifetime, says innovation will be key in 2010.

“Equity release has traditionally been a slower moving market than mainstream mortgages and with the credit crunch this also proved to be the case,” says King. “So 2009 was the year when most of the shocks happened and 2010 is likely to be about consolidation, evolution and planning.

“From a lender perspective the theme is going to be about the most effective and profitable way to deploy capital. Money is likely to remain relatively tight across the market, which points towards healthy margins for new business. The market faces the challenge of designing products which remain attractive to clients but are less demanding on capital.

The market may be boosted by a handful of new lender entrants although these probably won’t take more than £5bn of lending

“I expect demand for products to improve as consumers’ debt position becomes clearer and more individuals retire. Many early,” he adds.
King says this year advice will be more of a commodity than ever but admits brokers may be viewing 2010 with trepidation.

“My response is that in troubled times consumers require more advice not less, and for those firms equipped to deal with the new world there is nothing to fear,” he says.

Commercial, bridging and secured Finance
The past 12 months have been particularly tough on the commercial finance sector. Buy-to-let business plummeted as lenders left the market and criteria constricted. And bridging finance almost ground to a halt as traditional lenders did not have the money to lend to provide an exit route. Experts in the sector are unsure about whether 2010 will see any improvement.

“It seems to me that 2009 was a harsh year to say the least for most of those involved in commercial finance,” says Eugene Esterkin, managing director of Affirmative Finance.

“Lending is still thin on the ground and all our colleagues in the industry are busy but greatly frustrated due to the lack of financial avenues open to most of their clients. Who knows if 2010 will be any better? Unfortunately, the chances of a quick-fix recovery are slim to non-existent.”

Esterkin says regulation will increase and more failures will be seen in the wider economy.

“Interest rates are unlikely to rise unless inflation pops its head up, while unemployment will almost certainly escalate,” he says. “The government will tell us that good news is around the corner but forget to mention that the corner it is talking about is the 10th one along the path.

“Then the Tories will probably come to power, tell us that they will overhaul everything and probably just rename things while adding a veneer,” he adds.

Esterkin says that should the Tories come to power they should invest and subsidise weaker industries.

“They should get manufacturing going and the unemployed working to underpin small to medium-sized enterprises with newly acquired banking assets before these firms suffer even more,” he says. “If enterprise is not rewarded with tax breaks and incentives tax income will fall and revenue to the government will be cut.

“But will they do any of the above? No way, although the Germans and French will - and they’ll get us Brits to pay for it via the European Commission. It’s about time this country realised that the cricket we have been playing in Europe changed to rugby years ago. It’s time to get tough.”

Guy Garrard, head of business development at Tiuta, says liquidity and funding issues will remain for some time and attitudes to risk will still dictate the extent of activity in the bridging market.

“In terms of our plans we have made no secret of the fact that we are looking at areas of longer term lending as well as developing our core bridging business,” he says.

Meanwhile, Simon Stern, director at Prestige Finance, believes increased regulation will be an issue.

“Everyone knows what a challenging two years we have all had and 2010 is likely to be just as tough, especially with regard to new regulations, funding restrictions and continuing concern about the fragile property market,” he says.

In troubled times people need advice and firms that can deal with the new trading world have nothing to fear

“I believe things will improve but slowly and I hope that we, along with others, get the support we need in terms of funding which will allow us to offer brokers and consumers enhanced criteria.”

Stern says affordability will remain a key issue for lenders and consumers but with the continuing weakness in the remortgage market he argues that there will still be firm demand for secured loans as a product.

“The only concern I have is whether the regulator will allow there to be a future for secured loans,” he says. “The demand from consumers will remain but it is essential that whichever regulator ends up being responsible for secured loans understands the market from a consumer, broker and lender prospective.”

Packagers
Arguably the hardest hit sector in the past two years has been packaging. For those packagers that are still surviving there is a hope that distribution will come to the forefront in 2010.

“Lenders must recognise that distribution is key to obtaining a fair and representative market share,” says Vic Jannels, chairman of All Types of Mortgages. “How soon they have forgotten the support the packaging sector gave them when they needed it. Undoubtedly, lenders will need distribution again. We say to them - we are here to support you but please don’t ignore us in the meantime.”

Jannels says that while accepting that the regulator plays the biggest part in ensuring fair and level service delivery it must recognise the need
to support the industry too.

“A constant stream of bad news is unhelpful,” he says. “There are successes too so let’s see some details on these and look to boost confidence in the sector. There’s also a need to get real and accept that borrowers must take some responsibility for their decisions.”

Brokers
But what about the broker sector? What happens in the rest of the economy - and in particular in the lending industry - naturally has an effect on the intermediary market. So with all of the above taken into account what does 2010 have in store?

Rob Roberts, mortgage specialist at Chartwell Finance, says: “2010 is an exciting prospect as I see it. There will be a number of changes in the industry and advisers who want to flourish will need to adapt and welcome change to drive their businesses forward. Advisers need to distinguish themselves from the pack.

“The interaction between adviser and client is turning from a transactional one-off to a relationship-based presence which can only be a good thing for our industry as we strive to be recognised as professionals like our solicitor and accountant friends. This will be the year of the professional adviser.”

For many, the 2009 mortgage market was the biggest challenge in their working lives, while 2010 affords those who managed to battle through the chance of a new beginning. It may not be easy but a fresh start with renewed vigour is just what the industry needs.

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