As we approach the first anniversary of the triggering of Article 50 and thereby reach the half way stage of leaving the EU, I wonder where we stand as a lending industry, and whether we have reached the right place.
I don’t intend to enter the debate about remain and leave here; that ship has sailed (although some argue that it has not yet reached its destination and can still return to port). Rather, I want to look at some of the issues which face lenders and advisers and see whether this should be leading to a change of approach.
Whatever your personal views on its merits or otherwise, I am sure you will agree that Brexit is one of the biggest challenges that the UK has attempted to undertake in the post-war era. That this process should be undertaken against a ticking clock only serves to increase the magnitude of the challenge.
From a lending point of view, it is ironic that the biggest political topic in 75 years has not yet manifested itself in any material challenge to lenders. This is partly because we are in a fog of unanswered questions, but also it is probably the case that any changes which do ensue from Brexit will arrive further down the line.
Clearly legislation such as the Mortgage Credit Directive of 2016 will not be rescinded. And, while Brexit may stem the flow of future legislation emanating from Brussels, the current debate surrounding whether, for example, to be part of the customs union, suggests that we are likely to still see a need to comply with at least some future legislative requirements.
There are various debates about whether Brexit has already impacted on economic growth, and many more about the future impact. The emergency interest rate cut in August 2016 was undoubtedly Brexit-related, but how does the more recent base rate increase fit in? Would rates have risen faster and further without Brexit? Nobody will ever know but given that it is unlikely that they would have risen more slowly had we voted to remain, it seems a reasonable assumption that the decision to leave has worked against the desire of most lenders to return to a ‘business as usual’ environment of higher interest rates.
Possibly the biggest impact on lenders will be if Brexit leads to a slow-down in the economy and a loss of jobs. Lenders generally suffer eventually under both boom and bust scenarios, and the optimum is a middle pathway of constant moderate growth. Whilst a Remain vote may have not delivered that, and a Leave vote could lead to that in the future, it seems clear that we face a period of uncertainty and potential volatility, which is not something that lenders will welcome.
Lenders are now grappling with significant economic uncertainty on the one hand (which should always lead to caution and tighter restraints on policy) and a need to hold/grow market share on the other hand, which usually leads to innovation and relaxation of criteria.
If lenders are (so far) little affected, what is the position for brokers? It is my view that brokers are closer to the sharp-end of the debate, and that Brexit is a material factor in the decisions that they and their clients make.
Given the complexity of the debate and the uncertain outcomes across a whole variety of factors and scenarios, it is very easy to see why many brokers will take the line that the various arguments and factors cancel each other out, and that Brexit should simply be ignored in their interaction with clients. However, any advice process should always sit within the context of the external environment, and it is therefore difficult to argue that the biggest external factor (whether threat or benefit) of the last 75 years can simply be ignored.
From the perspective of being a director of a mortgage lender, I would hope that brokers would at least hold the fact of Brexit in the back of their mind, and then exercise judgement as to whether it is a factor in the specific case that they were dealing with. I would also expect the broker to put their own viewpoint on the merits or otherwise of Brexit to one side during this process – a big ask, I am aware!
Brexit will not be relevant to every client, and I would not expect it to be forced into every conversation. To give some examples though of where it could be relevant:
1) There is a debate around the future size and power of the City, with talk about business being poached by other European capitals. If your client is a city worker with skills which cannot easily be transferred into another sector, should they be borrowing at the maximum extent of their capacity? Should they be assuming all bonuses will continue at the current rate? Should they be taking a product without early repayment charges so that they have maximum room for manoeuvre?
2) If your client is a European national, have you explored their thought process around whether they want to remain in the UK in the long-term? If Brexit makes it more likely that they will return home, is a product carrying early repayment charges for several years really the right product for them?
3) If your client is in a relatively new job or for other reasons has a lower than average level of job security, is the risk of them losing that job higher than average if there is an economic downturn? If so, have you explored this with them, and advised them on appropriate unemployment insurance cover? Is it more appropriate for them to take a medium term fixed rate, so that they don’t face a perfect storm of their product expiring in two years’ time, right in middle of any transition period, and at a time when they could be out of work? Alternatively, perhaps they should be taking a product without early repayment charges, so they have greater flexibility? Maybe for them, a lifetime tracker is the perfect product.
There are many scenarios which could be relevant; too many to list here. The point I am making is that each client is unique, and Brexit should be considered afresh each time. Where Brexit could have an impact, it should be discussed and, where appropriate, incorporated into the advice process.
Your client will know whether Brexit is likely to impact them but may not wish to draw in a topic which at first glance is not relevant. They are likely, however, to recognise the appropriateness of including it and thank you for providing advice which holistically covers the whole of their life story, rather than just a part of it. If you do this, I can assure you that the lender you choose will also benefit, and for that, I would also like to thank you.
Sue Heron is marketing and sales director of Furness Building Society