What would you say if I told you the sub-prime market was dead? Well the good news is it isn’t. But if we as an industry don’t start thinking about how to change the market soon the Financial Services Authority might start making some of the decisions for us, especially given its current interest in this area and some of the fines and warnings it has handed out for offences following the first and second rounds of sub-prime thematic studies recently undertaken.
If you are a lender or packager, imagine being in a position where you no longer have control over product design or the credit and risk policy.
This is not to say we should start worrying that the FSA wants to start writing policy for industry or even that it will insist that every credit and risk calculation should follow the same rules. But unless we change the way we look at the sub-prime client from start to finish it might ask us if we really are looking to treat our customers fairly, or whether we simply want to provide a high-profit quick fix.
We all have people to answer to and they all want to know the bottom-line figure. So we, with all good intentions, design policies and products around best profit for lowest risk. This is not a bad thing but we are not the US market, which appears from a distance to have a little more leeway over some of the aspects of its lending regulation.
We have the FSA as our regulator and it is not going away. So we must all learn to get used to it and start trying to work with the regulator rather than trying to find ways of antagonising it further.
I was lucky enough to be invited to a small dinner party in Portsmouth to discuss with Michael Lord, head of mortgages and credit unions at the small firms division at the FSA, and members of his senior team our views on the sub-prime market. It was a real eye opener to learn that they do have in-depth knowledge of this sector and they understand that the way the market operates means it is not always commercially viable to produce products that are heavily biased towards the customer .
What they do want to see is the industry moving towards thinking more about a client’s long-term objective of credit repair and demonstrating that it wants to embrace this philosophy.” The FSA wants us to keep in touch with our clients and help them get back to prime rates of lending”What the FSA wants is for us to start thinking more about the client today, the day after and in the future. It wants us to keep in touch with our clients and help them get back to prime rates of lending. This really should not be causing anyone in the sub-prime market a problem. I’m sure many will move towards this philosophy if they haven’t already done so, but others will carry on regardless and, as far as I’m concerned, good riddance to them if they get caught. With that attitude it will be a far better place without them and probably safer and more profitable for the rest of us.
There are some key areas of concern for the FSA. These include the type of product being chosen or offered to clients, the way in which products are sourced, the fees that are being charged on mortgages and the timing of those charges, over-use of some lenders by brokers, lack of long-term planning by brokers and the reasons certain recommendations are made by brokers.
These are just some areas touched on in a recent sub-prime thematic visit I attended in a role as CF8 but the questions asked in these areas are full and informed and the people asking them are, in general, educated and aware. This means their findings will also be full, educated, and certainly followed up on, so be prepared and start thinking about your responsibilities to your own customers their clients and to the lenders and originators of these loans, and make sure those around you start thinking about the future of the industry and not just next week’s pay packet.
I ask lenders collectively to start thinking about the clients’ long-term exit strategy and maybe plan product development around the customer, have benefits built back into the proposition offered over a longer period but also look at longer customer retention based on reward for good behaviour. Be less worried about short-term rate and look more into a balanced product range offering several options and rely on your selected business partners, be they packagers or intermediaries to provide the correct advice.
I ask the FSA to listen long and hard to those that really know, to not think every intermediary is trying to rip someone off and to realise that sometimes the obvious and best advice is not always the most practical, and to listen to the reasons why that deal was done. But in turn to be hard on those that don’t listen when told and rid the industry of those that simply don’t care.
By Terry Pritchard managing director, Freehold