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Leave sub-prime deals to the experts

Clive Briault, managing director of retail markets at the Financial Services Authority, re-cently gave a speech at the Building Societies Association that struck a chord with me.

One of the central themes of his lecture concerned firms entering the sub-prime market without properly assessing its risks.

He says: “In the UK, sub-prime is rapidly growing. The risks are high for firms that have entered it with no specialist knowledge of the market. We have seen a similar rise in the commercial market, with firms joining without a robust assessment of the risks.”

This is a timely warning. At the heart of the matter is the fact that entry into the sub-prime sector seems to be the latest craze to hit the fin-ancial services industry.

It’s also a fact that many of these entrants will have been rejecting would-be borrowers with adverse credit for decades. Therefore, it’s questionable whether they will have made the necessary cultural changes to accommodate sub-prime.

And what about consumers? With sub-prime lenders en-tering the prime market and prime lenders getting involved in sub-prime, it’s rather confusing. It’s easy to see why so many lenders are tempted by sub-prime. Higher margins, for one. Pricing for risk rolls off the tongue easily enough, but what does it mean in practice?

One of the skills central to the success of sub-prime lenders is their ability to handle the business mix and its attendant risks.

Spreading business across lending portfolios is key. But many of the new entrants that previously only worked in the prime sector will find this difficult to manage without the necessary skills.

Again, experience is essential. There are Simon biddle some areas that are not worth the risks and experienced sub-prime lenders know what to avoid.

It is also worth considering that margins are being squeezed in sub-prime. Competition is in-tense and the majority of sub-prime lenders have built up an unrivalled knowledge and understanding of the market, which puts them firmly in the driving seat.

This is not a sector for those firms without the necessary management skills and experience. Fools rush in where angels fear to tread. So to those thinking about rushing in, trust me on this – leave it to the experts.

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