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The colour of money

After a tough year, the future looks rosier for Pink Home Loans since its acquisition by LSL

Throughout the second half of 2010 there was much speculation about LSL Property Services making a swoop for Pink Home Loans.

Skipton Building Society was ready to sell the network it had backed relentlessly through the credit crunch and LSL was looking for bargains.

Clearly the property group saw the opportunities of a downturn as a way to expand and seek out great deals – at £1.59m that’s exactly what LSL did with Pink last October.

The Pink deal followed hot on the heels of buyouts of Halifax Estate Agents and Home of Choice, which then became First Complete, but these deals didn’t satisfy an insatiable desire to grow LSL’s assets.

Jon Round, financial services director at LSL, won’t rule out any further acquisitions in 2011.

“If there were an opportunity we will remain interested,” he says.

“But the market will bring some potential opportunities or it may not, we shall see what unfolds over the course of the year.”

He says that even without any further deals its financial services proposition is now substantial.

“The acquisitions were the major events for us in 2010,” says Round. “Buying the two networks along with Halifax Estate Agents has transformed our financial services business.

“We now have a very sizeable mortgage, general insurance and protection distribution organisation regardless of whether we can make any further acquisitions in 2011.

“The focus will now be on achieving the investment in each business and strengthening the proposition to our appointed representatives and directly authorised brokers in the firms even further.”

Of this sizeable proposition there are two networks, First Complete and Pink, but Round says there are no plans to merge the businesses.

Conversely, he stresses that competition will remain as healthy as between any two brands operating in a similar space.

With speculation of a buyout surrounding Pink for most of the last year Round says there was nothing unusual about it as any deal of this nature takes a long time to complete.

“Pink is a great mortgage brand and it fits very well in the LSL stable,” he says. “It increases the scale of our businesses in each of the areas of mortgages, protection and general insurance, and it’s got some great people.”

David Copland, managing director of Pink, and Round get along well, partly because they are both lifelong West Bromwich Albion fans. And despite the turmoil at their beloved Baggies – manager Roberto Di Matteo was sacked last week – it is perhaps this shared interest that helps Copland enthuse about the smooth transition it has made into LSL.

“It’s been business as usual for us and it’s had no impact on our buyers or on the staff,” he says. “It just felt like the right strategic move for Pink.

“We’ve ridden a difficult market and Skipton has been supportive financially, and we did everything we could to bring it back to an even keel.”

Indeed it was a tough time for everyone in the mortgage industry but Pink has had a more difficult ride than most. In 2009 it made a loss of £3.3m and breached its Financial Services Authority capital requirements.

It was a close shave but Round says LSL was aware of the figures and it had no effect on the purchase.

Copland says the capital breach was due to write-downs on its BDS Mortgage Group acquisition in 2008.

“Both ourselves and Skipton felt that the value of BDS wasn’t what we paid for it,” he says. “We had made write-downs the year before but we felt we had to go further.

“That put some strain on our assets which meant we would breach the FSA’s capital requirements, and for a short time we did. We let the FSA know what we were doing and issued some preference shares at Pink that Skipton bought.

“It is difficult to know when to impair or revalue your assets, and that’s what happened with BDS. We felt it was the right thing to do at the time.”

He hints that the FSA wasn’t exactly thrilled about the move but was satisfied with what the network was trying to achieve. Ultimately the breach was approved by the regulator and Pink is on a much steadier footing these days.

Copland says 2010 was also a difficult year for the firm with speculation about its future hindering normal work.

“It did take a long time from the initial interest in the market about Pink,” he says. “In the end we had six interested parties of which LSL was chosen by Skipton and ourselves.”
Despite problems, Copland says there were also some successes such as integrating the Key client management system and improving its profit and losses.
But he admits that growth last year was a bit stunted and in 2011 he is looking forward to really growing under LSL.

If the remortgage market restarts sooner rather than later lenders are going to fill their boots at 60%-65% LTV

And yet Copland says a benign mortgage market is not something investors are looking into but rather the £2.3 trillion protection gap in the UK.

As such protection is one of, if not the primary, area of AR invest-ment by Pink.

“What LSL is now doing is bringing some investment into the business,” says Copland. “We have a successful AR network predicated on the back of mortgages.

“And although our network was set up by mortgage professionals we did apply to the FSA to be a mortgage and protection network.

“The protection side is probably where we haven’t invested in the expertise needed for the business.”

Expertise in this area is something Pink may have been missing in the past, so Copland is pleased that one of the key benefits of the tie-up is gaining the protection expertise of Mark Graves, financial services director at LSL and two insurance directors.

Graves has headed Linear, which is now an AR of Pink, and brings a background in protection and life sales to the firm.

“Our view is to help our ARs and do more cross-selling of building and contents and life protection,” he says. “We have now invested in the expertise in protection side of the market which we haven’t done before. So we want to grow the insurance sales.”

Last year Pink lost 130 ARs – or 25% of its brokers – as part of a 1,000-plus exodus from networks in the UK.

“We didn’t lose many of our top ARs and it wasn’t as though they were joining other networks,” says Copland.

“At the tail of the credit crunch most of them had had enough and thought they couldn’t hang on any longer.

“The majority of people we lost were finding it difficult to write business in that market. As an industry we’ve gone from around 30,000 brokers prior to the credit crunch to possibly under 10,000 now. So most people would have lost mortgage brokers during that time.”

The battle to be the biggest network, a feature of the broker market a few years ago, has lost some of its edge as quality rather than quantity has become the industry norm.

“It’s about bringing quality business to our suppliers,” he says. “Pre-credit crunch, volume was the big thing and it was all that was on lenders’ agenda.

“Obviously, you always want to be the biggest but we’ve seen some of the bigger networks disappear out of the market. So you need to have both.”

Even so Copland wants to increase the number of ARs and make sure its proposition is better than anybody else’s. There are also bigger plans for its DA proposition and mortgage clubs, particularly its Club VIP.

“We want to grow the DA mortgage sales,” he says. “We have two mortgage clubs – Pink and Club VIP. Club VIP pays the best rates in the marketplace to DAs and we’ll also do it within 24 hours of completion, as long as we get commitment.

“We want to reinvigorate Club VIP and get that back out as a viable alternative to other mortgage clubs.”

The real invigoration needs to occur in the mortgage market as a whole, but predictions from the Association of Mortgage Inter-mediaries and the Council of Mortgage Lenders are for a flat year.

Copland and Round agree with the consensus that the mortgage malaise will continue this year with gross lending bouncing along at £135bn if not slightly lower. Funding is the key obstacle and Round says 2011 will be a year of restructuring to prepare for future growth.

“I think by the end of this year we’ll be nearer to the end of the mortgage malaise but that doesn’t mean any improvement this year,” he says. “So lenders’ repayment plans for the Special Liquidity Scheme and other schemes will be closer to conclusion but I don’t think it will lead to more funding in 2011 – the benefit will be seen in years to come.”

Any change in fortune, however minor, could depend on the timing of interest rate rises and subsequent boost to remortgaging.

Predictions of rate rises vary wildly and no dinner party or pub conversation is complete these days without speculation about the inner thoughts of the Monetary Policy Committee.

“This is the big pub chat everyone is having at the moment,” says Copland. “I was having a conversation with someone who wants to wait until the rate moves before remortgaging.

“But the way swap rates work is that the rate will have already moved by the time a rate rise happens. If you’re going to fix, then rates can only go up so you have to do it now.”

And for brokers remortgages are paramount in how 2011 pans out – can they start moving people off their cushy SVRs and get some movement in the market?

But Copland offers an alternative to the standard view – that an earlier rate rise will be good for boosting remortgage business.

“My concern is that if the remortgage market restarts sooner rather than later then the lenders are going to fill their boots at 60% and 65% LTV,” he says.

“In this scenario you won’t see much innovation or lenders moving up the credit curve. But if it takes a lot longer for the Bank base rate to increase, with lenders not getting their fill, then I suspect you’ll see them moving up the rate curve.”

The hopes of the mortgage industry don’t just rely on re-mortgages in 2011 but also on buy-to-let.

Mortgage Strategy has revealed that both Santander and Yorkshire Building Society are looking seriously at the market in 2011, with many others rumoured to be set to take the plunge.

Even the lenders that already service the sector, such as Platform, are increasing their presence.

“More and more lenders, big lenders, have talked about moving into buy-to-let and brokers have been waiting for a bit more competition in the sector,” says Copland.

“BM Solutions and The Mortgage Works have basically had the market to themselves for years. But we had Paragon’s return last year and more big lenders will drive competition, creating better pricing. This will either attract more people into the sector or move many people sitting on the lender’s SVR.”

Private renting is booming with Capital Economics predicting it will rise from 14% currently to 17% in five years. In the shorter-term Round adds that LSL data shows a buoyant rental market and record rents for landlords.

“For lenders moving into that space, or those looking to grow market share, it is quite a logical move if you get your criteria right,” he says. “It’s a good place for lenders to be at the moment with a buoyant rental market and a depressed purchase market.”

The repressed purchase market and average house prices eight times the average income also means first-time buyers are being forced into renting.

“The difficulty of the first-time buyers – huge deposit, £30,000 university debt and costly rented accommodation – makes it difficult to save that deposit,” he says. “The average first-time buyer is 38 and that number is moving upwards.”

Housing minister Grant Shapps is hosting a first-time buyer summit this week with the Council of Mortgage Lenders, FSA and major banks to help those wanting to buy their own home.

One thing the CML will want to tackle is the Mortgage Market Review and how it will affect home buying in the future.

Round too would like to see the FSA’s Responsible Lending Consultation Paper toned down but says it had little impact on LSL’s decision to buy Pink.

“I would hope that some of the proposals on the responsible lending paper would take much more account of the current market circumstances than they originally appeared to do,” he says.

“If the current feedback we’re getting is that any proposals on responsible lending may be deferred, or implementation timed so it won’t harm the market, then that’s a good thing.

“We would be concerned if the FSA weren’t taking current cir-cumstances into account. To then impose tough constraints on top of restrained funding could have unforeseen consequences.”

But Round adds that you can only make broad considerations at the moment as the FSA keeps stressing that this is a consultation paper so nothing has been decided.

He says regulatory changes are always in the pipeline. “There could be changes coming out of Europe that we can’t determine in terms of their final outcome,” he says. “We’ve developed capability over the years to allow our businesses to adapt to regulatory changes as they arise. I’m pretty confident we would be at the front of the queue when adapting our business.”

Whereas the responsible lending paper stoked controversy, the distribution and disclosure paper was warmly received by brokers.

Brokers are saying they want real professionalism in the market, they are ready for change, then the FSA pulls it

Copland says it was the only MMR paper that really recognised the role of brokers in the mortgage market.

“When I read it I was really encouraged by our future and our future within the LSL group,” he says. “I wouldn’t say it supported brokers but there was certainly an awful lot of talk about intermediaries that was missing from the first two papers – apart from the approved persons register.”

The approved persons register was one of the few areas of consensus in the MMR so naturally something had to give.

The FSA delayed introduction of the regime until an ambiguous 2012/2013 and was greeted by industry-wide condemnation.

“It’s disappointing that the register has been delayed, I think we were all ready for it,” says Copland.

“Brokers are saying that they want real professionalism in the market, they are ready for the change, and then the FSA pulls it.

“Having said that, it would have cost us money and we hadn’t yet decided whether the network or the broker would bear the cost. But I think the benefits would have outweighed the cost.”

The reason for the delay was put down to the changes to the regulatory architecture from the FSA to the Consumer Protection and Markets Authority and Prudential Regulatory Authority.

Round says the new structure in prudential banking regulation is good but there is too little detail to judge the CPMA yet.

While for Copland the sheer size of the FSA can lead to incon-sistent messages, he says that smaller organisations dealing with specific issues could help communications.

On proc fees Round does not believe there is a downward trend away from commission-based advisers.

“Proc fees have remained at broadly the same levels on prime mortgages through the funding crisis of the last few years,” he says. “So it is logical to assume they would survive as funding slowly but surely returns to the marketplace.

And the FSA does not appear concerned about commission bias in the industry and is happy to promote commission and fee-based models.

Round advocates fee-charging but says there are different models to use in the market.

Copland believes a more holistic and relationship-building approach is necessary in the current marketplace to cross sell and encourage repeat business.

“We need to get into the mindset that this is a client for life and the winners of the future will be those who do that,” he says.

Both men are convinced brokers will make up around 50%-55% of the market in the next year and that the natural restriction on distribution through branches means growth can only come through brokers.

Certainly it is a serious mark of confidence in the sector that LSL has invested so heavily in the last year.

The group is now a major player in the distribution sector and there is the possibility of further expansion in years ahead.

While other networks went to the wall Pink survived and lined up behind an ambitious heavyweight backer. The prize of that dogged survival means that when the broker market picks up it is a sure bet that Pink will be a key part of it.

David Copland CV

  • Education: University of Bath – Chemical Engineering
  • Employment history: 1983-1986 Leeds Permanent Building Society

1986-1988 Britannia Building Society
1988-1990 The Mortgage Business
1990-1992 Bear Stearns
1992-1994 West Bromwich Building Society
1994-1996 Capital Home Loans
1996-present AMF (Pink Home Loans)

  • Hobbies: Watching football and tennis. Playing golf
  • Favourite film: An American Werewolf in London
  • Mortgage: None

Jon Round CV

  • Education: Economics degree at Liverpool University and a qualified accountant
  • Employment history: 1985-97 Started as an accountancy trainee at Eagle Star and left as residential mortgage manager, ran down a residential mortgage closed book, performing litigation, arrears and risk management and customer services

1997-2004 Commercial Union, which became CGU and then Norwich Union. Ran and managed the Norwich Union mortgage club
2004 Joined what is now LSL Property Services Group with overall responsibility for Financial Services. Now chief executive of First Complete and director of LSL Financial Services

  • Hobbies: Lifetime supporter of West Bromwich Albion, overseas travel
  • Favourite film: The Outlaw Josey Wales
  • Mortgage: None

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