With just a handful of prominent lenders in the secured loan sector and lending volumes in 2013 already looking set to top those of 2012, business seems ripe for the taking for any new entrants looking to enter the market.
Ever since the sector suffered the withdrawal of a number of high profile lenders during the credit crunch there have been whisperings of new players entering into secured loans.
But in recent times, talk in the sector around new entrants has escalated, with a number of lenders believed to be launching imminently. So could 2013/14 bring a new era of secured loan lenders? And is there enough demand from borrowers to go around?
Matt Tristram, joint managing director of Loans Warehouse, is confident the market will see new entrants this year.
“I am currently aware of three significant players entering the market in the next 12 months and there are bound to be a few surprises in the near future,” he says.
Tristram, his co-director Sam Busfield and former investment banker Garry Monaghan launched their own secured loan lender in July of this year – Cleary Loans.
It offers loans from £5,000 to £30,000, available only through its brokerage Loans Warehouse.
But what kind of lenders can the market expect to see over the next 12 months?
Steve Walker, managing director of Promise Solutions, says he would not be surprised to see more first charge mortgage lenders and bridging lenders move across into the sector.
“It wouldn’t be unreasonable to expect there to be another five lenders this time next year,” he says.
He believes a lot of the new lenders that will launch into the market will be ones that already have some form of funding in place and will offer secured loans as an add-on to their existing product range.
“Some of the new entrants and people I have been talking to are already funded and are not approaching this from a new start,” he says.
“The yields compared to the first charge mortgage market are good – first charge lenders are thinking ‘why shouldn’t we?’ The two markets are going to share the same regulator – the Financial Conduct Authority – from April 2014 anyway, so why not?
“If firms have some cash coming in from unsecured business or other areas including bridging, the secured loan sector is an attractive market to use that in,” Walker says.
Masthaven Bridging Finance was one such lender that made the transition across from bridging to secured loans last year – launching Masthaven Secured Loans.
Masthaven signed a five-year deal with Phoebus Software for its secured loans origination and servicing solutions.
Richard Pike, director of sales at Phoebus Software, says it has been working with businesses similar to Masthaven that should be launching into the secured loans arena shortly.
“The majority of lenders I have come across have been existing players in areas such as bridging etc, which have moved into secured loans as a natural progression,” he says.
“You have private businesses that are well funded on the bridging side. Bridging is a high risk lending area for a number of reasons but there are people that are doing it well, with few arrears on their books,” he says.
“There is bound to be a strategic conversation at some point with their funder about what other products might be worth looking at; and secured loans offer a decent rate of return for any investor,” he adds.
Paul Crewe, director of Smart Money Loans, believes the secured loan market could mirror the bridging sector’s success.
“There are plenty of rumours circulating and with the success of the sector, we are going to see a similar situation to what happened in the bridging market. Once it is seen that there is a market and more importantly, a healthy margin, there are going to be more new entrants,” he says.
Crewe says if lenders are looking to gain a banking licence from the FCA, secured loans is an area which could help them.
“The higher risk business they can be seen dealing with in an efficient way and keeping arrears low, when it comes to them applying for a banking licence, the FCA will look favourably at this,” he adds.
There is also talk in the sector that some old faces could be making a re-appearance.
The Paragon Group, which pulled out of the market in 2009, is one name being touted about as a possible re-entrant into the market in Q1 of next year.
It is in the process of applying for its banking licence and would not comment specifically as to whether it plans to re-launch into secured loans.
But a spokeswoman says: “Paragon is continuing to prepare for a return to new consumer finance lending, which is likely to be undertaken within a banking subsidiary. Further information on the progress of this will be provided in due course.”
Is there demand?
The latest figures from Loans Warehouse’s Secured Loans Index show that so far this year £314m has been advanced in secured loans – compared to £352m in the whole of 2012 – so the market is certainly booming, but is there enough demand for new lenders?
“It has been said that although the completion figures have been good, there is an underlying shortage of new business to support much new activity,” says Crewe.
“Personally, I think the secured loan message is getting through to brokers and that the advantages secured loans offer will generate fresh demand,” he says.
“New entrants will come from existing lenders expanding their portfolios and new small specialist type lenders. They will increase choice and, as long as no one is tempted to drive down underwriting standards to build new business, the sector will be profitable for lenders, brokers and customers,” he adds.
A number of lenders already dominate the prime space and if new lenders want to be successful they will need to offers brokers and borrowers something new.
“There’s always demand from brokers for more lenders,” says Walker.
“The challenge for any new lender is where to find their niche. There are a lot of lenders playing the mid-range sector, 70-80% LTV and looking for fairly clean business but I understand we are going see some prime and sub-prime lenders launch into the market,” he adds.
Tim Wheeldon, joint managing director of Fluent Money, agrees that lenders are currently fighting for the same space in the market.
“There is a gap in the market for a lender that is anything other than prime,” he says.
“If anyone wants to come into the prime market all they are going to do is clutter up an existing space. They either need to do something new and innovative that others aren’t doing or move more towards the near prime,” he adds.
Wheeldon says there has been a shift in the type of borrower taking out a secured loan, compared to the pre-credit crunch days, with many now borrowing out of necessity. He believes for demand to really increase in the sector it will need to see more aspirational borrowers.
Wheeldon says: “Right now we could do with educating people that secured loans are more of an option than a remortgage. I think over the next twelve months as we start to see more positive economic statements coming out, we might see the return of a number of aspirational borrowers,” he adds.
It is a tricky time for any new lender that is looking to launch into the market, with the transfer of secured loan from the Office of Fair Trading to the FCA next April.
Robert Owen, chief executive of Central Trust, says any new entrants will have to deal with two big issues – firstly how they are able to lend for 25 years and have the funding in place to do so, and secondly regulation.
He says: “We have seen from the payday lenders that it is easier to get funding for short-term lending but harder to get it for longer term. There is funding out there in the market at the moment but most of these people want to lend in the knowledge that they will get their money back quickly.”
Owen believes the forthcoming change of regulator will also play a part in a lenders’ decision as to when it launches.
“There will be a period when it is not quite clear as to what the regulation will be, so it will be a challenge for new players coming into the market to understand how the regulatory rules will play out amid a lack of clarity,” he says.
Robert Sinclair, chief executive of the Association of Mortgage Intermediaries and Association of Finance Brokers, believes that some lenders tried to get themselves regulated before the FCA took over.
“I think there was a rush to get themselves in the market before the FCA took over but I think they have found themselves talking to the FCA anyway,” he says.
It would appear that many found the transition process from the OFT to the FCA was already underway, so presumably felt it more sensible to wait until the FCA fully takes over regulation of the sector in 2014.
More lenders, more choice
There may be some debate as to whether demand in the sector is strong enough to cater for new entrants but conversely as new lenders come into the market it will inevitably increase its profile and thus demand.
New lenders alone will not boost the market overnight though, and a degree of consumer confidence will need to return for a notable increase in demand – but one thing is for sure, new entrants can only be good for the market.
I welcome the thought of new players coming to the market,” says Owen.
“You walk down the aisle of the supermarket and see 200 different types of each product. People like to see variety and choice, and having that tends to expand the market – new lenders appearing is a good sign of market confidence,” he adds.